By Yali N’Diaye

WASHINGTON (MNI) – The U.S. economic recovery is now on a
sustainable path and given the lagging impact of monetary policy actions
on the economy, the central bank will need to withdraw stimulus and
raise interest rates “well before the unemployment rate has fallen to
acceptable levels, ” Philadelphia Federal Reserve Bank President Charles
Plosser said Friday.

In that regard, the Fed “should begin to sell some of our
non-Treasury assets sooner rather than later,” he said in remarks
prepared for the Blair County Chamber of Commerce Breakfast Club in
Altoona, Pennsylvania.

On the interest rate front, Plosser noted that even if the fed
funds rate is raised to 1%, monetary policy, which is currently
“extraordinarily accommodative,” would still be accommodative.

He also stressed that the Fed’s exit strategy should be executed in
a timely manner to avoid “another round of uncomfortable and costly
inflation in the intermediate term.”

For now, however, the outlook for inflation is rather positive, as
Plosser expects it to remain subdued in the near term — around 2% this
year and 2.5% in 2011.

“However, in the medium to longer run, I believe there are some
upside risks to inflation,” he said.

On financial regulatory reform, Plosser, a voting FOMC member this
year, repeated his support for amending the bankruptcy code rather than
expanding the resolution process to address the issue of
too-big-to-fail, “one of the most important objectives of financial
regulatory reform.”

He also urged Congress to not politicize the central bank by
increasing political appointments and concentrating authority in
Washington and Wall Street instead of throughout a regional bank
structure.

While giving an upbeat assessment of the economy, Plosser stressed
the need to carefully watch developments in the U.S. commercial real
estate and labor markets, as well as conditions in Europe.

“We are keeping an eye” on the commercial real estate sector, he
said, although he expects the sector to stabilize as the economy
recovers.

“We are also watching the economic situation in Europe carefully,”
he said.

In the labor market, Plosser highlighted some positive signs in
jobs creation, which he expects to strengthen during the remainder of
2010 and in 2011 as the economy recovers.

However, following May’s employment report, that showed less
private sector job creation than expected, “We will need to watch
developments closely in the coming months,” he said.

Plosser anticipates that “it will take some time before it
(unemployment) returns to a more acceptable level.”

The central bank, however, should start tightening its policy
before that happens, especially since the recovery is on a “sustainable
path” and becoming “more broad based.”

Plosser expects the fourth quarter 2010 and the fourth quarter 2011
GDP growth to be about 3.5% year-over-year, slightly above the
underlying trend growth of 2.75%.

He said many housing indicators have stabilized, albeit at
“depressed levels.”

Both business and consumer spending seem to be improving, he
continued, with easing credit conditions likely to support business
spending going forward. On the consumer side, spending growth should be
“moderate,” as the weak job market is likely to “restrain” purchases.

The financial markets are also improving compared with the height
of the crisis, allowing the Fed to start selling assets “without market
disruption,” he said.

“Despite recent volatility in markets due to fiscal deficit
problems in Europe, financial markets are now functioning much better
than they were during the height of the financial crisis, and I believe
the Fed could begin to liquidate its positions gradually without market
disruption,” Plosser said.

He added that unwinding the monetary and fiscal stimulus should not
prevent the economy from recovering.

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

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