Fed’s Plosser Sees Growth Exceeding 2.4% Amid More Job Gains

Federal Reserve Bank of Philadelphia President Charles Plosser said he’s “fairly optimistic” economic growth will exceed 2.4 percent for the remainder of this year and next amid steady growth in jobs.

The expansion will probably slow to a 2.4 percent trend rate after 2015, Plosser, who votes on monetary policy this year, said today in to the Economic Club of New York.

“The rebound after the bad winter seems to be progressing, the outlook for unemployment is a bit better, and the inflation rate appears to be firming,” Plosser said. “Current data suggest economic strength is fairly broad-based, as witnessed by recent performance and the optimism expressed by firms in many manufacturing and service sectors.”

Plosser and his colleagues on the Federal Open Market Committee are debating how long to keep the main interest rate near zero after completing asset purchases that are on pace to conclude by the end of the year. Officials on June 18 trimmed purchases by $10 billion for the fifth straight meeting while repeating that they plan to keep rates near zero for a “considerable time” after buying ends.

“The inflation rate appears to be firming,” Plosser said, predicting it will “stabilize” next year at about 2 percent, which is the FOMC’s target. In an interview with Fox Business Network, he said he’s not worried about short-term inflation.

PCE Rising

The personal consumption expenditures index, the Fed’s preferred inflation gauge, rose 1.6 percent from a year earlier in April, the most since November 2012.

The central bank is “not very good at forecasting inflation,” Plosser said in response to audience questions, emphasizing the importance that the Fed anchor expectations for price increases.

Chair Janet Yellen, speaking at a news conference after the FOMC decision last week, dismissed concern about accelerating inflation, calling recent data on prices “noise.” Plosser, who has consistently warned that record stimulus may eventually fuel inflation, backed the FOMC statement. The central bank has quadrupled its balance sheet since 2008 to $4.37 trillion.

The Fed will eventually need to ensure that money banks now hold on deposit at the Fed doesn’t flood the financial system, fueling inflation. “Our biggest challenge is going to be trying to kind of control that flow of those deposits,” he said.

The yield on the 10-year Treasury note fell 2 basis points, or 0.02 percentage point, to 2.61 percent at 12:19 p.m. in New York. The Standard & Poor’s 500 Index rose 0.2 percent to 1,966.41 after a report showed new-home sales increased by the most in 22 years.

‘Very Low’

Financial-market volatility “is very low,” Plosser said in the Fox interview. “We are concerned about that.”

The Fed last week revised its 2014 economic growth forecast, reducing its gross domestic product projection to 2.2 percent in 2014 from 2.9 percent. The world’s largest economy shrank at a 1 percent rate in the first quarter after harsh winter weather stalled hiring and consumer spending.

Consumption will probably rise as household balance sheets improve and unemployment declines to 5.8 percent by the end of this year and 5.6 percent by the end of 2015, Plosser said.

Plosser, 65, said his growth projection “was generally in line with” those of his colleagues.

Separate forecasts by Fed officials last week predicted the Fed’s main interest rate will be 1.13 percent at the end of 2015 and 2.5 percent a year later. In March, they forecast 1 percent at the end of next year and 2.25 percent in 2016.

The difference in the March and June projections “just reveals greater confidence that the economy is improving,” Plosser said. “We’re getting closer on our goals,” Plosser said to reporters.

“We haven’t adjusted any of our signaling about how the funds rate will have to change,” he said, adding that the FOMC statement last week doesn’t “reflect the improvement we saw in the economy.”

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