NEW YORK – If the economy continues trudging along, the Fed will need to start exiting from its accommodative monetary policy in the “not-too-distant future,” according to Federal Reserve Bank of Philadelphia President Charles I. Plosser.
“If the economy continues to make progress, then monetary policy will need to exit from its extraordinary accommodation in the not-too-distant future. As always, we will study the incoming information on the state of the economy,” Plosser told the New Jersey Bankers Association, according to prepared text of his speech, which was released by the Fed. “While my expectation is that oil price increases will level off and that the currently elevated inflation measures will reverse, the risks to the inflation outlook are tilted to the upside. In this environment, we must have a plan in place to begin normalization of monetary policy. Depending on how economic conditions evolve, we must be prepared to act as aggressively as necessary if we are to promote effectively our long-run goals of price stability and maximum employment.”
Plosser added, “I believe we can be most successful in exiting from this period of extraordinary accommodation and nontraditional policies if we communicate a systematic plan that describes where we are headed and how we will get there. Such a plan would be strengthened if the FOMC adopted an explicit numerical objective for inflation, which would help ensure that inflation expectations remain well anchored.”
He repeated that the Fed has the tools to exit “from its extraordinary positions,” adding, “The question is not can we do it, but will we do it at the right time and at the right pace. Since monetary policy operates with a lag, the Fed will need to begin removing policy accommodation well before unemployment has returned to acceptable levels. It is imperative that we have the fortitude to exit as aggressively as necessary to avoid undesirable consequences down the road.”
