–Retransmitting Fourth Section of Story Published 8:15 ET Wednesday

By Steven K. Beckner

Differing with many of his Fed colleagues, Plosser said it is a
mistake to assume that resource slack or so-called output gaps (the
difference between actual and potential GDP) will hold down inflation.
If anything the gap is narrower than it was a year ago, when the FOMC
launched QE2, he said, noting that unemployment is lower and inflation
higher now than then.

“I’m not quite sure I understand the view that the gaps are getting
bigger and therefore we ought to have more deflation,” he said, adding,
“most forecasters are not forecasting a rise in the unemployment rate
or even a double dip recession … . It doesn’t seem to be in the

“So even if you believed in gaps, it’s hard to see where deflation
pressures would come from.”

Besides, he said output and employment gaps are “not the be-all and
end-all of inflation.” He recalled the high rates of inflation in the
1970s in the U.S. and relatively high rates of inflation in the United
Kingdom now.

M2 money supply growth has been growing at double digit annual
rates recently, and Plosser said he is “watching it carefully.” But he
discounted its significance, saying much of it likely reflects “cash
hoarding” in wake of concerns about a government default at the time of
the showdown over raising the federal debt ceiling.

Noting that bank lending is still not growing broadly, he said,
“I’m not sure M2 growth is going to be lasting.”

“But if that proves to be wrong that would be a concern,” he added.

Though Fed accommodation is not generating much in the way of
higher inflation, Plosser said its low rate policy is having other

“It can potentially lead to distortions in financial markets” which
he said are “sometimes hard to see … . You don’t know exactly where
it’s going to crop up.”

“I do think that one of the risks of our continued policy in regard
to low rates continues to be risks of distorting asset prices and capital
flows,” he said. “We have to be very alert and cognizant of that risk.”

“There are people in financial markets saying it’s really easy to
get deals done because the cost of money is really low…,” he said.
“Are we undertaking investments that really aren’t paying off? It’s hard
to point to one or two things to be convinced about that. But it’s
something we need to be concerned about … . When you start chasing
yield you end up taking more and more risky positions, some of which
might not be altogether productive for the economy.”

(4 of 4)

** Market News International **

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