As inflation increases and more jobs are available, it may become necessary for the Federal Open Market Committee to start tightening rates "sooner rather than later," Federal Reserve Bank of Philadelphia President and Chief Executive Officer Charles I. Plosser said Tuesday.
"My own view is that, as we continue to move closer to our 2 percent inflation goal and the labor market improves, we must be prepared to adjust policy appropriately," Plosser told a Women in Housing and Finance conference in Washington, D.C., according to prepared text released by the Fed. "That may well require us to begin raising interest rates sooner rather than later."
While tapering moves policy "in the right direction," the measured pace "may leave us behind the curve if the economy continues to play out according to FOMC forecasts," Plosser warned. Once the Fed is no longer buying assets, "monetary policy will still be highly accommodative."
When expansion takes off, he said, "the challenge will be to reduce accommodation and to normalize policy 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 continues to show moderate improvement, he said, noting he expects growth in the 3% range for the remainder of the year, while the unemployment rate drops to 6.2% or less by year's end. "I also believe that inflation expectations will be relatively stable and that inflation will move up toward our goal of 2 percent over the next year."
While housing and construction will show improvement, Plosser said, it will not be like "the heady days of last decade's real estate boom."
Plosser decried the recent trend of central banks turning "much more interventionist," saying, "I do not think this is a particularly healthy state of affairs for central banks or our economies."
With the financial crisis in this country past, "now is the time to contemplate restoring some semblance of normalcy to monetary policy," Plosser said. "While the motivations may be noble," he said, "we have created an environment in which 'it is all about the Fed.'"
The problem with that is the market focuses "entirely too much" on possible changes to monetary policy, "and central bankers have become too sensitive and desirous of managing prices in the financial world. I do not see this as a healthy symbiotic relationship for the long term."
