By Steven K. Beckner
(MNI) – Projecting moderate growth and warning of upside inflation
risks, Philadelphia Federal Reserve Bank President Charles Plosser said
Tuesday the Fed may have to start gradually raising the federal funds
rate “well before” the date envisioned by the Fed’s policymaking Federal
Open Market Committee.
Plosser acknowledged downside risks from Europe and from oil
prices, but said neither is likely to put a big dent in economic growth.
Describing himself as “more optimistic” than many of his colleagues, he
projected 3% real GDP growth this year and next and predicted the
unemployment rate will be 7.8% by year-end.
He warned that high oil prices pose more of an inflationary threat
than a stumbling block for growth and said price pressures will need to
be carefully monitored by the FOMC, which will have to responded to as
appropriate .
Last Wednesday, the FOMC reaffirmed its expectation that the funds
rate will likely need to stay near zero “at least through 2014″ as part
of what a “highly accommodative” monetary policy.
The 17 FOMC participants also updated their funds rate forecasts,
as well as their economic projections, and Plosser observed that “only
four participants” now think that the first funds rate hike will occur
after 2014, compared to six in January.
Plosser, who dissented twice against easing actions in August and
September 2011 when he was an FOMC voter, did not specify when he thinks
the funds rate will need to be raised. But he said in remarks prepared
for delivery to the CFA Society of San Diego that “since that time,
unemployment has decreased further, and inflation is above target.”
“While I believe monetary accommodation is still called for, in the
absence of some shock that derails the recovery, we may well need to
begin to gradually scale back the level of accommodation well before the
end of 2014,” he added.
There are limits to what monetary policy can do, he said. Noting
that the economy continues to suffer from the bursting of the housing
bubble, he said, “monetary policy does not create real wealth so it
cannot eliminate or offset these losses, nor should it try to do so.”
And Plosser expressed his usual caution about inflation.
“I believe inflation expectations will be relatively stable and
inflation will remain at moderate levels in the near term,” he said.
“However, with the very accommodative stance of monetary policy that has
now been in place for more than three years, we must guard against the
medium- and longer-term risks of inflation and further distortions such
accommodation can create.”
A member of Fed Vice Chairman Janet Yellen’s subcommittee on
communication, Plosser renewed his call for changing the format of the
FOMC’s “forward guidance” on the funds rate.
Rather than announcing a calendar date for the period of zero
rates, he said “the FOMC should strive to provide information about the
factors that will influence our policy decisions.”
Plosser said such a “reaction function” would “not only enhance
transparency but also impose an important discipline on policymaking.”
“If policymakers choose to deviate from the guidelines, they are
forced to explain why and when they anticipate returning to more normal
operating practices,” he elaborated. “Requiring this type of
transparency raises the bar policymakers face to engage in discretionary
policies in the first place.”
Plosser said FOMC participants “may not be quite ready to agree on
a specific policy rule or reaction function because they use different
models and have different loss functions.”
“However, I do believe it will be possible to provide assessments
of the evolution of the key variables influencing our policy choices and
then communicate our policy decisions in terms of the changes in these
key variables,” he continued. “If policy was changed, then we would
explain that change in terms of how the variables in our response
function changed.”
“If we choose a consistent set of variables and systematically use
them to describe our policy choices, the public will form more accurate
judgments about the likely course of policy — reducing uncertainty and
promoting stability,” he added.
Although Fed Chair Ben Bernanke, among others, has said the FOMC
must be prepared to provide more monetary stimulus to support recovery,
Plosser gave a forecast that would make that unnecessary.
Although GDP grew just 1.6% last year as a whole, he noted that
growth accelerated quarter by quarter, and he predicted that growth will
accelerate this year from the disappointing 2.2% first quarter pace,
reaching at least 3%.
“That outlook puts me in a slightly more optimistic camp than some
forecasters,” he said.
Plosser observed that “growth in manufacturing has proven to be a
bright spot for the economy over the last six to nine months, and it
continues to be a reason for optimism going forward.” And the
Philadelphia Fed’s monthly Business Outlook Survey of manufacturers has
found that “manufacturers are optimistic about the future.”
He also said consumer spending “continues to improve, as the drag
from household deleveraging lessens.”
Plosser was even upbeat about housing, saying, “I expect to see
stabilization and maybe slight improvement in 2012.”
What’s more, “conditions in the labor markets continue to improve
modestly, though monthly numbers do bounce around a bit,” he said,
adding that the smaller-than-expected 120,000 March non-farm payroll
gain “may represent some payback” from stronger weather-related
increases in prior months.
“I prefer to average the quarter’s monthly numbers to infer the
underlying trend,” he said. “Doing so, we see that average monthly gains
in the first quarter outpaced those in the fourth quarter by nearly
50,000 jobs per month.”
“So, we continue to make slow, steady progress, as evidenced by an
unemployment rate that fell to 8.2% in March, down almost a full
percentage point from the 9.1% in August,” Plosser said. “I expect
further gradual declines in the unemployment rate, with the rate falling
to about 7.8% by the end of this year.”
Plosser cast a wary eye on Europe and remarked that its debt crisis
“continues despite the efforts of European leaders. Many who thought
that preventing sovereign default by a euro country would prevent the
crisis from spreading have been proven wrong.”
But he does not envision a large spillover into the U.S. economy,
saying that “the turmoil has resulted in an economic slowdown in the
euro zone that will likely cause a small drag on U.S. exports.”
As for oil, “unless the price of oil rises substantially from
current levels, this is not likely to derail our recovery,” he said.
He warned that “the larger risk from higher energy prices is not to
growth but to inflation and expectations of inflation….”
While the oil price spike “may prove to be temporary as oil prices
stabilize, there is a risk that the oil price increases we’ve seen so
far this year will not reverse as anticipated, which could put
additional pressure on prices and inflation expectations,” he said.
“Thus, we must continue to monitor these inflation trends with some
care and be prepared to take appropriate action as necessary.”
** MNI Washington Bureau: 202-371-2121 **
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