WASHINGTON (MNI) – The following are excerpts from the text of
Philadelphia Federal Reserve Bank President Charles Plosser’s remarks
prepared for the Greater Vineland, N.J. Chamber of Commerce Wednesday:
On the inflation front, recent data indicate some deceleration,
which has led some observers to voice concerns about sustained deflation
— that is, a prolonged decline in the level of prices. In my view,
inflation will remain subdued in the near term, but I do not see a
significant risk of sustained deflation. I anticipate that inflation
expectations will remain relatively stable and core inflation will run
in the 1 to 1-1/2 percent range this year and accelerate toward 2
percent in 2011.
Inflation in this range is not a problem — indeed, low inflation
is desirable. Most people forget, or are too young to know, that from
1953 to 1965, the average inflation rate measured by the consumer price
index (CPI) was just 1.3 percent. For the last 15 years, Switzerlands
average inflation rate has been less than 1 percent. In neither of
these episodes did low inflation lead to economic stagnation or fears of
deflation.
So I am not particularly concerned about low inflation per se, and
brief periods of lower than desired inflation or even deflation are
unlikely to materially affect economic outcomes. Yet it is important
that monetary policymakers remain vigilant to ensure that neither
disinflationary trends nor inflationary trends lead to an unanchoring of
inflation expectations, which would undermine the return to price
stability in the medium to long run. The stability of those
expectations requires the public to believe that the Fed will act to
keep inflation stable as the recovery continues.
Were deflationary expectations to materialize — and let me repeat,
I do not see much risk of this — I would support appropriate steps to
raise expectations of inflation, including, perhaps, aggressive asset
purchases coupled with clear communication that our goal is to combat
deflationary expectations. But for such a strategy to be successful,
the public must believe that the Fed can and will act to combat those
expectations. The Fed must be credible. Protecting that credibility is
why, based on my current outlook, I do not support further asset
purchases of any size at this time. As I said earlier, asset purchases
in our current economic environment can do little if anything to speed
up the return to full employment. But if the public believes that they
can and is disappointed, it may have less confidence that the Fed will
act to raise inflationary expectations if needed. Because I see little
gain at this point, and some costs, I would prefer not to engage in
further asset purchases at this time.
Similarly, if the economic recovery unfolds as I expect, the Fed
will need to begin normalizing monetary policy from its current very
accommodative stance. That will mean selling assets to shrink the Feds
balance sheet and raising the level of short-term interest rates. The
challenge for the Fed is recognizing the proper timing to ensure that
the economy remains on a sustainable path toward price stability and
full employment.
Conclusion
To conclude, after the worst financial and economic crisis that
most of us have ever experienced, a slow but sustainable economic
recovery is now underway in our region and in the nation. While the
near-term outlook has softened a bit, I expect growth in the national
economy to be around 3 to 3 percent over the next two years, with
stronger business spending on equipment and software, moderate growth of
consumer spending, and gradual improvement in household balance sheets.
The unemployment rate continues to be one of the biggest challenges
our economy faces. Although unemployment will begin to decline
gradually, it will take some time for it to return to its long-run
level. As the economy strengthens and firms become convinced that the
recovery is sustainable, hiring will pick up over the rest of this year
and in 2011. But it may take even longer to address the sectoral,
geographic, and skill imbalances that seem to plague the labor markets.
I expect inflation to remain subdued. As long as inflation
expectations remain well anchored, I see little risk of a period of
sustained deflation. Over time, I see the Fed conducting policy in a
prudent fashion so that inflation gradually stabilizes in the 1.5 to 2.0
percent range.
This has been a painful episode in our nations economic history,
and many policy challenges remain to be faced. Yet, I believe that,
over time, our economy can and will return to an environment of
sustainable growth and low and stable inflation.
** Market News International Washington Bureau: 202-371-2121 **
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