Federal Reserve Bank of Philadelphia President Charles Plosser said an exit from stimulus measures should start “long before” a recovery in the U.S. jobs market is assured.
“Somewhat tighter monetary policy is possible by the end of the year,” he said today at a press conference, after speaking at an event organized by the Bank of Finland in Helsinki. “We will have to begin exiting from our policies long before the unemployment rate is down to what people would like to have. That’s going to be a difficult decision.”
Chairman Ben S. Bernanke and the Federal Open Market Committee, which includes Plosser, are considering the tools they would use to pull back stimulus, according to the minutes of their April meeting. One possible sequence is to end the policy of reinvesting proceeds from maturing securities and later raise interest rates and sell assets, though such moves “would not necessarily begin soon,” according to the minutes.
“The challenge of when to begin to reverse course, the challenge to pick the timing and the pace of that correctly, is the challenge that we’re going to face,” Plosser said. “We will have to figure out a way to do it at the right time, because if we wait too late, we fall into traps.”
Plosser, 62, voted to complete the central bank’s $600 billion of bond purchases and backed its decision to keep interest rates “exceptionally low” for an “extended period.” In 2008, he dissented twice in favor of less monetary stimulus.
The dollar gained 0.2 percent against the euro to trade at 1.4603 at 12:55 p.m. in London.
The “hurdle” for further quantitative easing is “very high,” Plosser said. He also warned that the government is on an “unsustainable” fiscal path.
Plosser said labor market numbers last week were “disappointing, certainly,” while adding they won’t change the Fed’s medium-term outlook.
Payrolls grew at the slowest pace in eight months and the U.S. jobless rate unexpectedly climbed to 9.1 percent in May, reinforcing signs that a slowdown in the world’s largest economy is persisting into the second quarter, Labor Department figures showed on June 3.
Employers added 54,000 jobs last month, after a revised 232,000 gain in April missed initial estimates. The median forecast in a Bloomberg News survey called for payrolls to rise 165,000. The jobless rate climbed to the highest level this year from 9 percent a month earlier.
At the same time, consumer prices rose an annual 3.2 percent in April, the fastest pace since October 2008, the Labor Department said on May 13. Core inflation, which strips out the impact of food and energy, gained to 1.3 percent, the fastest pace since February last year.
Inflation expectations need to be “better anchored,” Plosser said.
In prepared comments delivered earlier today, Plosser repeated his call for the Fed to commit to an explicit target for the rate of inflation. He also called for the central bank to reduce its balance sheet from $2.79 trillion to “less than $1 trillion.”