July 23 (Bloomberg) -- Federal Reserve Bank of Philadelphia Charles Plosser said higher mortgage costs and continued declines in house prices pose no bar to raising interest rates.

Policy makers must increase borrowing costs before inflation expectations become ``unhinged,'' Plosser said in an interview with Bloomberg Television today at his bank's headquarters.

The Philadelphia Fed chief joins Gary Stern, head of the central bank's Minneapolis branch, in judging that policy makers shouldn't wait for an end to the housing recession before acting. Plosser spoke after the central bank's Beige Book survey of regional business conditions showed all 12 districts reported ``elevated or increasing'' price pressures.

``The question becomes how long are we willing to allow the pressure from a fairly accommodative monetary policy stance'' to last ``before it begins to feed broad-based inflation,'' Plosser said in a separate interview with Bloomberg News today.

Plosser and Stern have said raising rates before the housing slump ends isn't out of the question, while Dallas Fed President Richard Fisher dissented from the Fed's June 25 decision to leave the benchmark rate at 2 percent. Asked whether three dissents at the next Federal Open Market Committee meeting would be a concern, Plosser said ``no.''

``Dissents serve a purpose,'' he said today. ``They help communicate the sense of the committee. They help communicate where the hard choices are, where the uncertainty lies.''

Rates `To Go Up'

Plosser said in a speech yesterday that the Fed should raise rates ``sooner rather than later'' to contain prices and prevent inflation expectations from spiraling higher. Record oil prices and rising food costs this year have increased investor expectations for the Fed to raise rates.

```Interest rates are low, I don't think there is any debate about that,'' Plosser said today. ``At some time these rates are likely to go up. Challenge is determining when.''

Asked if the Fed can act even as home prices are still falling, Plosser said: ``I wouldn't rule that out.'' On whether the rise in home-mortgage rates this year would stand in the way of increases by the Fed in the benchmark interest rate, Plosser said, ``I don't think so.''

Questions about capital needs at the two largest U.S. mortgage companies, Fannie Mae and Freddie Mac have made the Fed's ``task more difficult,'' Plosser said. The ``uncertainty'' caused by the worst housing slump since the Great Depression raises questions ``about the stability of the financial markets and the risks we face,'' he said.

Housing Rescue Plan

U.S. lawmakers reached a deal on legislation that authorizes Treasury Secretary Henry Paulson to bail out the mortgage-finance providers while placing few restrictions on the companies.

Investors see about a 90 percent chance the Fed will boost the target rate for overnight loans between banks at least a quarter-point by year-end, based on futures prices. The FOMC next meets Aug. 5 in Washington.

``Most of us agree that inflation expectations are OK,'' Plosser said. ``I think it's important that we act before those expectations become unhinged.''

Plosser dissented from the FOMC's March 18 decision to lower the main rate by 0.75 percentage point. He also voted against the April 30 quarter-point cut to 2 percent. At the last meeting, June 24-25, he supported the decision to leave the rate at 2 percent, a pause after seven straight reductions.

``You've got to stop cutting rates before you start raising them,'' Plosser said of his June vote.

``The mistakes of monetary policy have been in not acting fast enough, in getting behind the curve,'' Plosser said in today's interview. ``We have to be forward looking. We have to remember monetary policy works with a lag.''

The Beige Book report today indicates that ``the economy really hasn't changed its character a whole lot,'' Plosser said. ``The most changes have come about in prices being paid by consumers and by businesses,'' Plosser said.

To contact the reporter on this story: Anthony Massucci in Philadelphia at amassucc@bloomberg.net; Kathleen Hays in Philadelphia at khays4@bloomberg.net.

Last Updated: July 23, 2008 16:51 EDT