By Jon Hurdle

AVONDALE, Pa (MNI) – Philadelphia Federal Reserve Bank President
Charles Plosser Thursday warned that U.S. fiscal policy is in an
unsustainable position but will eventually be restored to a more
sustainable path because of public pressure.

“I think the country will demand it, and we will accomplish that,”
he said in a question and answer session after a speech to the Southern
Chester County Chamber of Commerce.

He urged political leaders to put fiscal policies in place that are
unlikely to be reversed by their successors so that national finances
can be placed on a more sustainable footing.

Asked about the consequences of the Fed trying to unwind the huge
asset purchases it has made during successive rounds of quantitative
easing, Plosser said there’s a risk that it could take losses if it
sells assets in an environment of rising interest rates.

“It could reach a point where our remittance to the Treasury could
shrink rapidly,” he said.

In buying financial assets, the Fed is trying to avoid become too
big a player in any market, he said.

Speaking to reporters afterwards, Plosser dismissed claims that the
unexpected decline in the national jobless rate in September was the
result of manipulation ahead of the presidential election.

He said he “can’t imagine” that the jobless figures could have been
tampered with because of the integrity of federal statisticians. “I
don’t find that a very productive way to look at what’s going on,” he
said, in a reference to accusations that the data had been skewed to
reflect well on the Obama administration.

Plosser noted the two surveys that make up the monthly employment
report have diverged in recent months but are now both indicating an
improvement in the labor market.

“It’s pretty hard not to take it mostly as good news,” he said.

Lending is picking up “slowly” he said, although credit expansion
for entrepreneurs is hampered by the decline in the value of real estate
which had often been used as collateral in previous economic upturns.

“Bankers have got money to lend,” he said. “They are competing over
good credits.”

Asked about the health of the Philadelphia-area manufacturing
economy — sometimes seen as a national bellwether — Plosser said many
small businesses are doing very well but larger companies are avoiding
investment and permanent hiring until the domestic economic and
political situation is clearer.

Larger companies are also skittish about expansion because they are
more likely to be exposed to the slowing international economy than
smaller firms, he said.

Plosser reiterated his opposition to the Fed declaring how long it
will keep interest rates low. In declaring that short-term rates will
stay very low until at least 2015, the FOMC has sent the unintended
message that the economy will “stink for a long time,” he said.

“That was really not the intent of the communication,” he said. “We
shouldn’t be too quick to try new things until we have thought through
the consequences.”

** MNI **

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