WASHINGTON — Philadelphia Federal Reserve Bank President Charles Plosser Friday revealed himself as one of those Fed officials that want the central bank to begin scaling back and then conclude its current bond-buying program by the end of this year.
In remarks prepared for delivery to the Fifth Annual Rocky Mountain Economic Summit, Plosser also called on the policymaking Federal Open Market Committee to convert their current employment and inflation thresholds to triggers for policy action.
"My view is that the time has come for us to exit our current asset purchase program and commit to a way forward that seeks to normalize monetary policy," Plosser said.
"I favor starting to reduce the pace of purchases and ending the asset purchase program by year-end," he added.
Why? Plosser said he expects the unemployment rate to approach 7% by the end of this year 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. If we don't, I believe the 6.5 percent threshold will lose meaning," he said.
Plosser warned that the Fed faces some significant challenges going forward when time comes comes to unwind it's massive balance sheet.
"Failing to execute a graceful exit and falling behind the curve could risk significant inflation or a rapid increase in interest rates that may be counterproductive," he said, adding that, "The recent volatility in interest rates may be a taste of things to come."
Plosser said the FOMC's repeated changes of its forward guidance on future policy has created "more confusion than illumination," and called on the body to introduce more clarity into its policy.
Toward this end, Plosser said the FOMC should "commit to its forward guidance on the fed funds rate path, that is, to begin treating the 6.5% unemployment rate and the 2.5% inflation rate in the guidance as triggers rather than thresholds."
The FOMC had said it would not raise rates so long as unemployment remained above 6.5% and inflation did not threaten to exceed 2.5%. However, since then officials have said interest rates will probably not rise significantly even after the unemployment rate falls below the 6.5% mark.
Plosser argued that his suggestions "embody clarity and commitment."
"By helping the public and market participants form more accurate judgments about the future course of policy, systematic policymaking can improve the efficacy of monetary policy," he added.
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