The economy has reached the "significant improvement in labor market conditions" that the Federal Open Market Committee set as the criteria to end quantitative easing, and the start of tapering is a positive move, Federal Reserve Bank of Philadelphia President and Chief Executive Officer Charles I. Plosser said Tuesday.
"On monetary policy, the reduction in asset purchases from $85 billion a month to $75 billion a month is a step in the right direction," Plosser said in prepared text of a speech to be delivered at La Salle University. "I believe the economy has met the criteria of significant improvement in labor market conditions for ending the program and that further increases in the balance sheet are unlikely to provide appreciable benefits for recovery. Even after the asset purchase program has ended, monetary policy will still be highly accommodative."
He noted that accommodation is still being added, but "at a slightly slower pace." With the FOMC noting that if condition "evolve as expected," it will continue to taper asset purchases in the future.
"The December employment report has not changed my belief that the economy has already met the criteria of substantial improvement in labor market conditions," Plosser said. "So my preference would be that we conclude the purchases sooner than this, but I am glad that we have taken the first step on the path to ending the program."
But, Plosser noted, the Fed has more to do and "considerable challenges" to monetary policy remain. "The task should be to return to a framework in which a market rate is our primary policy tool, to reduce the size of our balance sheet, and to restore our portfolio to all Treasuries. The challenge will be to do so in a way that ensures that inflation remains close to our target, that the economy continues to grow, and that we avoid sowing the seeds of another financial crisis."
The economy is "on firmer footing" in 2014 "than it has been for the past several years," he said. Personal spending grew at a 2% rate in the third quarter, he noted, and while some would bemoan that level, there has been little fluctuation in spending during the recovery.
"I am encouraged by the U.S. consumers' persistence in the face of many challenges, including a payroll tax hike last January, a government shutdown, significant uncertainties about future tax policy, and the implications of health-care reform," Plosser said.
Plosser sees growth near 3% this year, slightly above trend, but "far from the robust growth that many would like to see."
Dismissing the below-expectations 74,000 gain in jobs for December, Plosser cautioned that one month's number can be discounted. "December's number was likely affected by the unseasonably cold and snowy weather, although it is not yet clear by how much. The number is also subject to revision, and such revisions can be significant."
Addressing the charge that the employment rate has fallen largely because of labor force participation declines, Plosser said the rate of participation has been falling since 2000, mostly as a result of demographics, "including the aging of the baby boomers. This trend is ongoing and was expected to accelerate."
Plosser sees the unemployment rate falling to 6.2% by year end. "This makes me somewhat more optimistic than most of my FOMC colleagues, who reported a central tendency of 6.3% to 6.6% by the end of 2014."
