NEW YORK – With inflation in check, and little risk of deflation, Federal Reserve Bank of Philadelphia President and Chief Executive Officer Charles I. Plosser said today the fed funds target rate will have to go up “well before” the labor market fully recovers.
Plosser called on the Fed to sell the agency mortgage-backed securities it holds as part of an exit strategy.
“As the economic recovery strengthens, the FOMC will need to withdraw monetary stimulus. As in past cycles, the decision about when to begin raising the federal funds rate is conditional on the evolution of the outlook for economic growth and inflation,” he told the Delaware State Chamber of Commerce. “Given the lags in the effects of monetary policy on the economy, we will need to begin withdrawing stimulus well before the unemployment rate gets down to its long-run level. Our intent will be, as it always is, to set monetary policy consistent with achieving our long-run goals of price stability and maximum sustainable economic growth.”
The Fed, he said, is working on its exit strategy. “We are carefully considering all aspects of our strategy for exiting this period of extraordinary policy accommodation as we monitor the evolution of the economic outlook.”
And inflation shouldn’t be a problem, running around 2% percent in 2010 and near 2.5% percent in 2011, Plosser added, noting “Despite the recent low numbers, I do not see much risk of deflation — that is, a sustained declined in the level of prices. Indeed, I believe that the risks to inflation in the medium to longer run are on the upside. In order to keep inflation expectations well anchored and prices stable, monetary policymakers will have to carefully communicate and implement an exit strategy from the very accommodative monetary policy now in place.”
Turning to financial regulatory reform, Plosser said, “...we must avoid reforms that have unintended consequences. We must preserve the independence and regional nature of the Federal Reserve System. Proposals that threaten to politicize monetary policymaking or centralize power in Washington and on Wall Street, to the detriment of the many Main Streets throughout our nation, will harm the economy by jeopardizing the Fed’s ability to set monetary policy to meet its dual mandate of price stability and maximum sustainable economic growth.”
