–Must Guard Against Inflation, Rate Hike May Be Neede Before 2014

By Steven K. Beckner

(MNI) – Philadelphia Federal Reserve Bank President Charles Plosser
again argued against additional monetary accommodation Thursday and said
the Fed may well need to tighten policy before late 2014.

Although inflation is likely to remain “moderate” in the near-term,
Plosser warned that the Fed’s zero rate stance could generate both
inflation and market “distortions” in the longer run in a speech
prepared for delivery to the Rotary Club of Wilmington, Delaware,

He stressed that the Fed must not wait too long to begin
withdrawing monetary accommodation and raising the federal funds rate.

Plosser did not rule out the need for more monetary stimulus if the
economy deteriorates badly, but that is not what he expects. He projects
3.0% real GDP growth and unemployment below 8.0% by year’s end.

Inflation expectations look “stable” and inflation “moderate” for
now, but the Fed should not count on resource slack to keep inflation
below the Fed’s 2.0% target, he said.

Plosser is not a voting member of the Fed’s policymaking Federal
Open Market Committee this year but serves on an FOMC subcommittee on
communications led by Fed Vice Chair Janet Yellen.

Recalling that he dissented against past easing measures in August
and September and stressing that monetary policy “should be responsive
to economic conditions,” Plosser noted that “since that time,
unemployment has decreased, and inflation is above target.”

“I believe monetary accommodation is still called for, but I do not
believe it should be as accommodative or aggressive as it was at the
height of the crisis, when unemployment was over 10% and inflation was
just 1%,” he said.

“Now that unemployment is at 8.3% and falling and inflation is over
2% and drifting up, we should not anticipate additional accommodation,”
he continued. “Indeed, in the absence of some shock that derails the
recovery, we may well need to raise rates before the end of 2014. …

“In my view, current conditions do not warrant further
accommodation,” he said.

“Should economic conditions significantly deteriorate or the upside
risks to inflation I have stressed fall and significant risk of
deflation emerge, we should rethink our policy stance,” he said. “But
neither of these events seems likely to me at this juncture.”

Plosser warned “further accommodation at this stage of the business
cycle could lead us down a very treacherous path — one that would be
ever more difficult for us to navigate and one that would increase the
already substantial risk of higher inflation.”

“Yet, the problem is not just inflation risk down the road,” he
continued. “Prolonged efforts to hold interest rates near zero can lead
to financial market distortions and the misallocation of resources that
could lead to more, not less, economic instability.”

Plosser said he expects that “prospects for labor markets will
continue to improve, with job growth strengthening and the unemployment
rate falling gradually over time.”

“I believe inflation expectations will be relatively stable and
inflation will remain at moderate levels in the near term,” he went on.
“However, with the very accommodative stance of monetary policy that has
now been in place for more than three years, we must guard against the
medium- and longer-term risks of inflation and further distortions such
accommodation can create.”

Plosser said the Fed “should resist any notion that we can solve
all of our economic challenges simply by an ever more accommodative
monetary policy.”

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

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