NEW YORK – The Federal Reserve should start selling some non-Treasury assets since the financial markets have recovered somewhat and the sales wouldn’t disrupt the markets, Federal Reserve Bank of Philadelphia President and Chief Executive Officer Charles I. Plosser said today.
“My own view is that we should begin to sell some of our non-Treasury assets sooner rather than later,” Plosser told a Blair County Chamber of Commerce breakfast, according to prepared text of his remarks, which were released by the Fed. “Despite recent volatility in markets due to fiscal deficit problems in Europe, financial markets are now functioning much better than they were during the height of the financial crisis, and I believe the Fed could begin to liquidate its positions gradually without market disruption.”
He added, “If we do not exit from this strategy in a timely manner, we could be sowing the seeds of another round of uncomfortable and costly inflation in the intermediate term.”
Noting that “the time will come” for the Federal Open Market Committee to raise rates, Plosser reiterated that it will be “well before the unemployment rate has fallen to acceptable levels.”
The recovery “is on a sustainable path, and I expect further progress even as we unwind the accommodative monetary and fiscal stimulus put in place during the crisis,” Plosser said. “Although the recovery so far has been quite mild given the recession’s severity, I believe that it is becoming more broad-based. Nonetheless, it will take some time before the severe effects of the recession are fully reversed.”
He compared recovery to a roller coaster: not “entirely smooth,” with “some ups and downs, but it will eventually come around.”
While housing has stabilized in many areas, it is at depressed levels. ”Going forward, the large inventory of unsold houses will likely limit growth of housing starts for some time,” Plosser said.
Business investment spending seems to be trending upward, while consumer spending has also strengthened recently, he said. Job growth has begun, he said, “although May’s numbers, released last Friday, were somewhat disappointing.”
But, he noted, “Changes in the unemployment rate typically lag output growth. While I believe the unemployment rate will gradually decline, it will take some time before it returns to a more acceptable level. Businesses must be comfortable with their prospects in the recovery before they start hiring in earnest. With improved real GDP growth over the next few quarters, I expect payroll growth will strengthen over the rest of this year and next.”
The Fed is closely watching events in Europe, Plosser said. “To minimize the risk that strains abroad could spread to U.S. markets and to improve liquidity in global money markets, the Fed has reopened temporary swap lines with the European Central Bank, the Bank of England, and the Swiss National Bank, making it easier for them to supply U.S. dollar funding to institutions in their areas.”
