NEWARK, Del. - Philadelphia Federal Reserve President Charles Plosser Tuesday said he expects interest rates will have to rise before 2014, sooner than the Federal Open Market Committee's current expectation of how long short term interest rates will need to remain at very low levels.
"It's more likely that we will be raising rates before then than after then," Plosser said during a question and answer session after a speech to business leaders at the University of Delaware.
Plosser, who has dissented from FOMC policy of keeping rates low for a specific period, also said policymakers sent an excessively negative signal about the economy in August 2011 when they said conditions are likely to warrant exceptionally low levels for the federal funds rate till at least mid-2013.
"I thought we were sending a much more negative signal about the economy than was justified," Plosser said.
Plosser said he is "dubious" about the case for further monetary easing, and said his own "cost-benefit analysis" on any further easing of policy "doesn't pass muster."
The Fed's outlook on the economy last summer turned out to be "pretty wrong," he said. "Things look better now than they did in August."
He described the current stance of monetary policy as having "the throttle wide open", and said there are "some people who want to cut a hole in the floorboard to give it some more gas."
And he reiterated his view that it's wrong to set monetary policy on the basis of what might happen in two years' time.
"I have very little confidence that we know much about what the economy's going to look like in 2014," he said.
Plosser reiterated his views that monetary policy is limited in its ability to stimulate the economy. "Many people have come to expect that monetary policy can do more than it can do," he said.
"We have to understand that there is no silver bullet," he said. "If we continue to act that way we sow the seeds for another problem further down the road."
Plosser dissented from the FOMC's statements that it was holding rates low until mid-2013 and now late-2014, respectively, and repeated his view that rates should be set according to economic conditions, not calendar dates.
Despite his criticism of policy, Plosser said the Fed will keep inflation in check.
"I believe that the Fed will ultimately control inflation but that doesn't mean that you can continue policy in a way that generates inflation," he said. "If we are not going to have another 70's inflation we will have to act."
Asked by reporters about the dangers of 1970's-style stagflation, Plosser said it was a mistake to assume high unemployment would keep inflation down. He cited the current example of the United Kingdom where inflation is around 5% while the jobless rate is between 7% and 8%.
Plosser said he watches inflation expectations as an important indicator of the future path of price pressures, and was encouraged by a show of hands among business leaders at the event indicating few expect a resurgence in inflation.
Asked to comment on signs of price pressures among Philadelphia-area manufacturers, Plosser said both prices paid and prices received are showing signs of upward movement, as recorded in the Philly Fed's January survey.
"Both those measures are drifting upward so they bear watching," he said.
Plosser expressed confidence the European authorities will resolve their debt crisis without a "financial implosion" although a solution will be "expensive."
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