Federal Reserve Bank of Philadelphia President Charles Plosser said the strongest U.S. economy in years, buoyed by a solid housing market, may push the jobless rate below 6 percent by year-end.
“The U.S. economy is on a firmer footing today than it has been in several years,” Plosser, who votes on monetary policy this year, said today in the text of remarks prepared for delivery in Washington.
April payroll growth of 288,000, the most in two years, is “one of the most encouraging signs for the economy,” he said. Labor-market gains may mean the Fed will need to begin raising interest rates “sooner rather than later,” he said.
Unemployment fell last month to 6.3 percent, the lowest since September 2008. “I would not be surprised if the unemployment rate moved up a bit next month, but the downward trend continues, and we are making significant improvement,” Plosser said.
Plosser also said he’s optimistic about housing, the industry at the center of the financial crisis, and that “fundamentals remain sound” even as sales have leveled off. Three months of price gains suggest “supply may be restricting sales more than weaker demand,” he told Women in Housing and Finance, a group of industry workers and government officials.
Fed policy makers last month said the economy is showing signs of picking up and the job market is improving. The Federal Open Market Committee pared its monthly asset-buying to $45 billion, its fourth straight $10 billion cut, and said further reductions in “measured steps” are likely. Officials project interest rates will probably remain low until mid-2015.
Plosser repeated his forecast that the world’s largest economy will expand 3 percent this year. He predicted the unemployment rate will fall below 6.2 percent by the end of 2014.
“If anything, this forecast may prove to be too pessimistic,” Plosser said. “Given the recent trends, an unemployment rate below 6 percent is certainly plausible.”
Plosser said he expects the recovery in construction and housing will continue, though “we should not seek to return to the heady days of last decade’s real estate boom.”
Plosser said he supports cutting asset purchases in measured steps while warning that the reductions may be too slow should the economy continue to strengthen. The central bank is buying mortgage-backed securities at a monthly pace of $20 billion and longer-term Treasuries at a $25 billion pace.
“Even after the asset purchase program has ended, monetary policy will still be highly accommodative,” Plosser said. “As the expansion gains traction, the challenge will be to reduce accommodation and to normalize policy in a way that ensures that inflation remains close to our target, that the economy continues to grow, and that we avoid sowing the seeds of another financial crisis.”