By Yali N’Diaye and Brai Odion-Esene

WASHINGTON (MNI) – While pointing out that the run up in
unemployment claims “seems to have dissipated,” Philadelphia Fed
President Charles Plosser said Wednesday the economic and monetary
policy normalization he longs for “is not there yet.”

During an interview with Bloomberg Radio, Plosser also said while
inflation expectations are “well anchored,” the central bank needs to be
concerned.

He otherwise repeated his call for fiscal consolidation and reform,
especially a reform of the tax system that would broaden the base and
lower the rates and a reduction in entitlement programs.

In other comments, Plosser warned not to read “too much” into stock
market movements.

While finance and real economy are connected, “that doesn’t mean
that every movement in the stock market is also telling us something
about the economy,” he said.

Asked to pinpoint the root cause of current uncertainties, Plosser
said it was difficult to do so.

Still, uncertainties surround EMU sovereign debt, as well as the
U.S. fiscal restructuring and regulation, he said.

He also suggested the August 9 Federal Open Market Committee policy
decision did nothing to help confidence.

“The statement was too negative,” he said, and “was sending the
signal that we don’t have much confidence going forward and I’m not sure
that was helpful.”

Small businesses are especially reluctant to act given the numerous
uncertainties.

And Plosser predicted small businesses “are not going to recover
until the economy begins to improve.”

Still, he pointed out some positive signs in the labor market.

While there was a run up in jobless claims along with higher
unemployment in the spring, “That runup seems to have dissipated now and
they’re falling back down towards the 400 level,” Plosser said.

However, economic normalization is not there yet.

“I long for normalization of both the economy and the monetary
policy,” Plosser said. “But we’re not there yet.”

Yet Plosser questioned whether the Fed could do more to address
structural imbalances in the economy, noting the central bank has
already been “very aggressive.”

He underlined that since the implementation of the second round of
quantitative easing, inflation has increased.

Today, “Inflation is much higher than it was this time last year,”
he said. “We have to be concerned,” as inflation rates have been “easing
up.”

And while “expectations are still pretty well contained,” Plosser
stressed “they’re contained until they’re not. And by the end it’s too
late.”

Plosser repeated his call for inflation targeting as a “viable”
option.

“The Fed needs to be responsible for headline inflation” over a 2-
to 3-year period, he said.

He added that core inflation is not really the Fed’s objective,
although it does help him forecast headline inflation.

Plosser said while there is a relation between inflation and
employment, it is a “pretty tenuous one,” adding “it changes over time
and it’s not very reliable ultimately.”

As a result, the typical measure of output gap relied on by
policymakers is not “very useful,” he said.

And if there is a true structural shift in the output gap, it’s not
sure monetary policy can solve the problem.

In fact, he generally warned not to expect too much from monetary
policy, opposing the idea of a third mandate that would address bubbles.

“That’s a dangerous way to go.”

He also stressed the Fed has to be careful not to overreact as
“there is a price to be paid for” the Fed policy down the road. So the
Fed has to balance the consequences of its actions over the long run and
the short run.

In addition, fiscal policy must also do its part.

“We have some very serious fiscal challenges in this country,”
Plosser said, as does Europe.

“We really need to focus on the sustainability of our fiscal
policies,” he added, calling for “discipline.”

In particular, over the next few months, Plosser said it is
important to agree on a tax reform program that lowers the rates and
broadens the bases.

He also called for Congress to commit “to lower the path of
spending on the things that are in fact out of control,” namely
entitlements.

** Market News International Washington Bureau: 202-371-2121 **

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