With the economy strengthening, Federal Reserve Bank of Philadelphia president Charles Plosser Friday took the opportunity to lay out his preferred policy-accommodation exit strategy.
He said it should be implemented in the “not-too-distant future” and includes simultaneously raising rates and shrinking the balance sheet, while tying the pace of asset sales to the pace and size of interest rate increases.
“Failure to do so in a timely manner, could have serious consequences for inflation and economic stability in the future,” Plosser warned the Shadow Open Market Committee symposium,
according to a prepared text of his remarks released by the Fed.
First, Plosser said, he would “move away from the zero bound and stop the reinvesting program and allow securities to run off as they mature.” That would raise the interest paid on reserves to 50 basis points from 25 and set a funds rate target of 50 basis points.
“We would also announce that between each FOMC meeting, in addition to allowing assets to run off as they mature or are prepaid, we would sell an additional specified amount of assets,” Plosser said. That would gradually shrink the balance sheet, and thus reserves.