While inflation should be moderate in the near-term, the length and magnitude of monetary policy accommodation mean risks for inflation in the medium and long term, according to Federal Reserve Bank of Philadelphia President and Chief Executive Officer Charles I. Plosser.
Plosser expects growth near 3% this year and next, with unemployment falling to near 7% by the end of 2013. "However, with the very accommodative stance of monetary policy in place for more than four years now, we must guard against the medium- and longer-term risks of inflation," he told the New Jersey Economic Leadership Forum, according to prepared text released by the Fed. "How the economy and the standard of living of our citizens ultimately fare over the longer run will be determined by the policy choices we make in the aftermath of the Great Recession. Some of these policies could increase the quality of the country's labor force and make us more competitive; others, while they may reduce volatility, might also reduce our long-term growth prospects. It behooves us to choose wisely."
Plosser said, "monetary policy is likely to tighten more quickly than the Committee anticipated in its latest statement."
Plosser noted that consumption won't pick up until consumers are comfortable with their personal balance sheets. "This is likely to take some time, and attempts to increase economic 'stimulus' may not help speed up the process and may actually prolong it," he warned.
And, lower rates won't get firms to hire until "the uncertainty" of U.S. fiscal policy, including tax rates and government spending "has been resolved."
"Here, too, in my view, monetary policy accommodation that lowers interest rates is unlikely to stimulate firms to hire and invest until a significant amount of the uncertainty has been resolved. Firms have the resources to invest and hire, but they are uncertain as to how to put those resources to their highest valued use."
As a result, Plosser said recovery will remain "moderate… over the next couple of years."