Fed’s Plosser Says Slowing Inflation No Concern for Policy

Federal Reserve Bank of Philadelphia President Charles Plosser said a slowing in U.S. inflation to the lowest rate in more than three years doesn’t warrant a Fed policy response.

“Should inflation expectations begin to fall, we might need to take action to defend our inflation goal, but at this point, I do not see inflation or deflation as a serious threat in the near term,” Plosser said today in a speech in Stockholm.

Central bank officials including St. Louis Fed President James Bullard said last month persistent disinflation may require the Fed to provide stimulus beyond $85 billion in monthly bond purchases. Consumer prices rose 1 percent in March from a year earlier, the lowest level since October 2009, according to the Fed’s preferred gauge of inflation.

The Federal Open Market Committee said on May 1 it will keep buying bonds at the current level and would be prepared to increase or reduce the pace in response to changes in the outlook for inflation and the labor market.

Plosser reiterated that he believes the Fed should begin to curtail its purchases as early as its next gathering, scheduled for June 18-19.

The U.S. central bank’s zero rate policy “is increasingly troubling to many people on the Fed,” he said in response to questions after the speech at the SNS Center for Business and Policy Studies. “We’re very conscious of the fact that keeping rates at zero for very long periods of time can distort decision making in various ways.”

The Philadelphia Fed leader said he expects the U.S. economy to grow 3 percent this year and in 2014. Consumer spending has made a “solid contribution,” while a deadlock over fiscal policy has inhibited business spending, he said.

“Labor market conditions warrant scaling back the pace of purchases as soon as our next meeting,” he said. “Moreover, unless we see a significant reversal in current trends that jeopardizes my forecast of near 7 percent unemployment rate by the end of this year, then I anticipate that we could end the program before year-end.”