With a forecast more optimistic than that of the Federal Open Market Committee, Federal Reserve Bank of Philadelphia President Charles Plosser said asset purchases should end before the unemployment rate falls to 6.5%.
Plosser sees the jobless rate dropping to 7% by yearend and 6.5% before the end of next year. "In my view, it is important that we end purchases before we reach the 6.5 percent threshold for considering an increase in the funds rate target," Plosser said in remarks prepared for delivery to the Fifth Annual Rocky Mountain Economic Summit in Jackson Hole, Wyo. "If we don't, I believe the 6.5 percent threshold will lose meaning. Would anyone believe we would raise the fed funds rate at the same time that we are increasing the size of the balance sheet through asset purchases? Thus, consistent with my forecast and with the Committee's forward guidance, I favor starting to reduce the pace of purchases and ending the asset purchase program by year-end."
The FOMC projects ending the asset purchases in the middle of 2014 "if incoming data are broadly aligned with the central tendency of the Summary of Economic Projections."
In his systematic approach to monetary policy, Plosser wants to "wind down asset purchases by the end of 2013 in a gradual and predictable manner; commit to the forward guidance on the fed funds rate path by treating the 6.5 percent unemployment rate and the 2.5 percent inflation rate as triggers rather than thresholds; and Explain how policy will evolve after the trigger is reached by committing to a robust policy rule."
