The economy is in a recovery that should be sustainable, even with stimulus programs beginning to be wound down, Federal Reserve Bank of Philadelphia president and chief executive officer Charles I. Plosser said yesterday, adding that the federal funds rate should be allowed to rise as real interest rates grow.
But not all is rosy. “Uncertainty still looms large,” Plosser told the 31st Annual Economic Seminar in Rochester, N.Y., according to prepared text released by the Fed.
“Large fiscal deficits and the prospects for significantly higher taxes to fund new programs have made many businesses reluctant to undertake new investments or to rehire workers,” he said. “This may not diminish until greater clarity is offered by Congress and the [Obama] administration about the prospective path of fiscal policy. This policy uncertainty could contribute to a weaker-than-otherwise recovery and its resolution may affect longer-term prospects for the economy.
“Setting policy that is appropriate for where the economy is today, or has recently been, is not likely to deliver the kind of economic outcomes we desire,” he said. “Anticipating where the economy is headed is important because monetary policy actions affect the economy with long and variable lags. The major impact of policy often comes only after several quarters, or sometimes several years.”
