Fed’s Plosser Says Keeping Rates Low Is ‘Risky Strategy’

Washington (Sept 7)  Federal Reserve Bank of Philadelphia President Charles Plosser said the economy has “moved much closer” to the Fed’s goals and keeping rates near zero until achieving them is a “risky strategy.”

The central bank can’t be certain whether full employment has been reached, and waiting for the labor market to fully heal before raising the main rate risks a sharper increase in borrowing costs later, Plosser said in a speech today in Amelia Island, Florida.

“I would prefer that we start to raise rates sooner rather than later,” Plosser said. “This may allow us to increase rates more gradually as the data improve rather than face the prospect of a more abrupt increase in rates to catch up with market forces, which could be the outcome of a prolonged delay in our willingness to act.”

Plosser dissented from the Federal Open Market Committee’s statement July 30 that borrowing costs would probably stay low for a “considerable time” after the Fed completes its asset-purchase program, which is set to end late this year.

“This language is no longer appropriate or warranted,” he said in today’s speech to the Pennsylvania Association of Community Bankers.

He said the statement doesn’t reflect “significant progress” toward the Fed’s goals of full employment and price stability and “limits the Committee’s flexibility to take action going forward.”

Next Meeting

Speaking to reporters after the speech, Plosser said changing the language of the statement will probably be a topic of discussion at the next FOMC meeting on Sept. 16-17.

“I am not sure there needs to be anything to replace” the “considerable time” phrase, he said, because the statement already indicates the timing of an interest-rate increase will depend on progress toward the Fed’s employment and price goals.

Inflation is “gradually moving” toward the Fed’s 2 percent target, he said, and job creation has “improved markedly” despite “somewhat softer” data for August.

Payrolls increased by 142,000 last month, the smallest gain of the year, even as the jobless rate fell to 6.1 percent from 6.2 percent, yesterday’s Labor Department report showed.

Plosser, 65, said he expects a 3 percent pace of growth for the rest of the year. Gross domestic product expanded at a 4.2 percent rate in the second quarter after contracting 2.1 percent in the first.

Mester Comments

Plosser’s view of the FOMC statement was echoed this week by Cleveland Fed President Loretta Mester, who urged the central bank to “reformulate” its guidance on the future path of monetary policy.

Fed officials in June forecast that the benchmark rate would rise sometime next year. It has been held near zero since December 2008 as the Fed battled the deepest recession since the Great Depression and later sought to keep the recovery going.

Fed Chair Janet Yellen has urged patience in tightening policy because “underutilization of labor resources still remains significant” even after unemployment fell faster than Fed officials expected.

A former professor and dean of the business school at the University of Rochester in New York, Plosser joined the Philadelphia Fed as its chief in 2006. The bank’s district covers eastern Pennsylvania, southern New Jersey, and Delaware.

Source: Bloomberg