–Expects Unemp Rate To Cont Trickle Down Slowly; Sees 3% Growth In 2012
–Would Like Fed To Transition Away From Late-2014 Calendar Date

By Brai Odion-Esene

WASHINGTON (MNI) – Philadelphia Federal Reserve Bank President
Charles Plosser Thursday voiced his concern over the size of the
challenge the Fed will face once it decides to begin trimming down its
bloated portfolio, warning of a strong backlash from the public.

Speaking to reporters after a speech to the National Economists
Club in Washington, Plosser also said he expects the unemployment rate
to continue to trickle down slowly and that the Fed has backed itself
into a corner with regards to its declared expectation that interest
rates will likely stay low through 2014.

“One of my concerns about our large balance sheet … is that it’s
going to complicate our exit, it’s going to make it more difficult,”
Plosser said.

Still, the Fed has to tools to manage its way through the process,
he added.

But, when the time comes for the Fed to begin selling its holdings
of mortgage-backed securities — while keeping inflation and interest
rates where they need to be — “there’s going to be a pushback from the
public undoubtedly,” Plosser predicted.

He noted that such a reaction always occurs when the central bank
raises rates, but the direct MBS sales “may end up making that even more
poignant or pointed than it might otherwise be.”

For the Fed to be successful in winding down its balance sheet and
withdrawing monetary stimulus may require “a lot of fortitude to do what
it needs to do and have its independence to do what it needs to do to
get policy right,” Plosser said.

Plosser said he is not too concerned about inflation in the
long-term, but that he is more worried about the impact once it is time
for the Fed to begin unwinding its balance sheet and whether
“circumstances allow us to be able to do it in a manner that keeps
control of inflation — that’s the ultimate challenge that we’ll face.”

Plosser did not provide an economic outlook in his prepared
remarks, but he told reporters that he sees the economy growing by about
3% this year and in 2013.

Inflation will come in at 2% in 2012, he added, while “I think the
unemployment rate is going to continue to trickle down slowly.”

Asked if he has made any recent changes to his forecasts, Plosser
said he prefers to focus on the medium- to longer-term, and tries to
avoid being too responsive to “monthly swings.”

He said his 3% growth forecast is based on what he sees as the
natural evolution of a U.S. economy that is gradually making adjustments
which take a long time.

“As just adjustments get made, the consumer will gradually return,”
he predicted, although it will not necessarily occur evenly.

During the audience q&a, Plosser had said he still objects to the
late-2014 calendar date in the FOMC statement, as “it is not a good way
to conduct monetary policy.”

“I’d like to get us away from that and substitute it with something
that’s a little more systematic and coherent about how it depends on the
economy,” he told reporters.

Otherwise, the Fed at some point will either have to change the
date, or not, “but we are going to have to deal with it one way or
another,” he said.

“I think it’s as much a communications problem as it is anything
else,” Plosser said. “And some point we are going to have to unwind from
that.”

Plosser said his concern is the Fed will not be able to stick to
its late-2014 projection for when the first interest rate hike will
come. “It may be that by the time we get there we’ll either want to
extend it or it’ll be shorter than that,” he said.

He noted that FOMC participants’ projections of the likely future
path of monetary policy, now published on a quarterly basis along with
their economic forecasts, is more informative regarding how policy will
evolve.

“If you are really trying communicate clearly about how policy is
evolving, I believe the so-called ‘dot chart’ can be very useful and
informative about offering information about forward guidance,” Plosser
said. And as it evolves over time, “it’s going to reveal views about how
the committee’s views are evolving.”

“We could have utilized that as a way to help us out of this
calendar date problem,” he said. Instead, “we’ve still got to face this
at some point.”

Plosser also stressed the importance of not valuing the projections
of officials that are voters on the FOMC over those that are not,
calling it “a red herring.”

“Implicitly, if they are making a commitment about something that’s
going to happen three years from now, they are making a commitment on
behalf of a different set of voters,” Plosser said.

“So it’s a little tricky to rely on the voter/non-voter distinction
I think,” he added.

“Who votes doesn’t matter that much in conveying this sort of
information,” he said, adding that the vote only matters when it comes
to the statement released by the FOMC at the end of its meeting.

** MNI Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$,M$$FI$]