Philadelphia Federal Reserve Bank President Charles Plosser said that further efforts to boost economic growth could increase risks of rising prices and instability in financial markets.
“Despite the extraordinary steps taken to support the economy, many argue that monetary policy should do more,” Plosser said in a speech in Newark, Delaware. “I disagree and believe that doing so would lead us down a very treacherous path -- one that would be ever more difficult to navigate and one that would increase the already substantial risk of higher inflation.”
Plosser said he opposed the Federal Open Market Committee’s (FDTR) January announcement that economic conditions may warrant holding interest rates near zero through at least late 2014, replacing an earlier pledge to keep borrowing costs low through mid-2013.
“The problem is not just inflation risk down the road,” Plosser said. “Prolonged efforts to hold interest rates near zero can lead to financial market distortions and the misallocation of resources.”
U.S. stocks fell today as American retail sales growth trailed economists’ estimates and investors watched Greece’s attempts to tame its debt crisis. The S&P 500 slid 0.3 percent to 1,347.91 at 12:08 p.m. in New York. The yield on the 10-year Treasury fell to 1.94 percent from 1.97 percent yesterday.
The risks to the U.S. from Europe’s fiscal crisis have “diminished” thanks to efforts by European governments, Plosser told reporters after his speech.
Not ‘Solved Yet’
“I don’t think it’s solved yet,” Plosser said. “But I feel better that they’re going to deal with this and deal with the problems without having a financial implosion.”
The U.S. economy will probably grow at 3 percent in 2012 and in 2013, with inflation likely to “settle” at about 2 percent this year, Plosser said. His growth outlook for this year compares with policy makers’ so-called central tendency forecasts of 2.2 percent to 2.7 percent, which exclude the highest and lowest estimates.
Given his economic outlook, Plosser said he expects the Fed would need to raise interest rates before the late 2014 date mentioned in the Fed’s January policy statement.
“I am not suggesting any tightening any time soon,” Plosser said, while adding that he is “dubious of the necessity for further easing.”
The Philadelphia Fed chief, who doesn’t vote on the FOMC this year, dissented from the Fed’s decisions in August and September to increase monetary stimulus for the economy, citing higher inflation and lower unemployment in 2011.
“The labor market has grown stronger in recent months,” Plosser said. “Although there are still too many people unemployed in our region and the nation, I am encouraged by the most recent employment reports.”
The Labor Department said in January that the economy added 243,000 jobs and the unemployment rate fell to 8.3 percent, the lowest in three years.
“As growth continues and strengthens, I expect further gradual declines in the unemployment rate, with the rate falling to 8 percent or less, by the end of 2012,” Plosser said.
Fed Chairman Ben S. Bernanke said in testimony before the Senate Budget Committee last week that the 8.3 percent unemployment rate masks weakness in the labor market. The unemployment rate doesn’t include people who only have part-time jobs or who are out of the labor force because they have given up searching for jobs, Bernanke said.
In a Jan. 25 press conference, Bernanke said that the central bank may need to take further action to boost the economy.
“If the situation continues with inflation below target and unemployment declining at a rate which is very, very slow, then the logic of our framework says we should be looking for ways to do more,” Bernanke said.
Plosser criticized what he said were “go-stop” policies from the Fed.
“Policy makers step on the accelerator aggressively, only to slam on the brakes in order to change course,” Plosser, 63, said in his speech at the University of Delaware Center for Education and Entrepreneurship.
“It is an approach most often driven by an excessive focus on the short run and perhaps some hubris that we will be able to successfully avert the risks such a strategy poses for the economy over the longer run,” he said.
To contact the reporters on this story: Joshua Zumbrun in Newark, Delaware at email@example.com
To contact the editor responsible for this story: Christopher Wellisz at firstname.lastname@example.org