Federal Reserve Bank of Philadelphia President Charles Plosser, who votes on policy this year, said central bank officials should focus on communicating the conditions under which interest rates will rise.
“I’m worried that we’re going to be too late” to raise rates, Plosser told reporters after a speech at the University of Delaware in Newark. “I don’t want to chase the market, but we may have to end up having to do that” if investors act on anticipation of higher rates.
Long-term rates could start rising and the Fed would be “forced to chase them up” with its primary policy instrument, short-term rates, Plosser said, “and then we will really be behind.”
Fed officials have said improvements in economic growth and the labor market are reasons to continue tapering monthly bond buying that has expanded its balance sheet to a record $4.1 trillion. A jobless rate dropping toward the Fed’s stated threshold of 6.5 percent may prompt policy makers to elaborate on guidance for raising the target interest rate, which remains near zero. The Fed has said rates will hold “well past the time” unemployment reaches that level.
“We have to figure out a better way to describe how we’re going to react to data,” Plosser said. Fed officials need to “let people know that we’re going to adjust our policy rates as certain variables change, and what variables are those?”
Unusually harsh winter weather over the last couple months, which has made the data “noisier than usual,” hasn’t changed Plosser’s view of the economic outlook, he said.
Payrolls rose by 113,000 in January, short of the 180,000 advance that was the median forecast of economists surveyed by Bloomberg and after a 75,000 increase the prior month. Unemployment declined to 6.6 percent, the least since October 2008, from 6.7 percent in December.
While Fed Chairman Janet Yellen was testifying before the House Financial Services Committee, Plosser reiterated points made in a speech Feb. 5, saying that he expects the jobless rate to reach 6.2 percent by the end of 2014, growth to be around 3 percent this year and inflation expectations to move toward the Fed’s goal of 2 percent by year-end.
“The trends, through the end of the year, were pretty good,” Plosser said. “Just because you get one bad number, or even two, doesn’t necessarily mean things have changed in a fundamental sense,” he said.
There’s “probably not” a number in the February payrolls report that would be so weak it should persuade him to change his mind about the need to speed up tapering of asset purchases, Plosser said. He said he thinks the Fed should end the current asset-purchase program sooner to reflect the economy’s improvement and lessen the Fed’s communication challenges with forward guidance on interest rates.