The recent Fed actions will help the economy, but won’t fix all financial market problems, Federal Reserve Bank of Philadelphia president Charles I. Plosser said yesterday. He noted that monetary policy decisions will be made based on “how the economy unfolds.”
“I believe the recent reductions in the level of the federal funds rate target will be supportive of the economic adjustment process and a return to trend growth near the end of this year and on into 2009,” he told the Birmingham Rotary Club, according to text of the speech released by the Fed. “The Fed has been aggressive in making this adjustment in rates, which will mitigate some, but not all, of the problems the economy and financial markets are facing. Some problems will simply take time for the financial markets to work out.”
Specifically, Plosser mentioned “the bad debt problems in the mortgage market” and “the risks of securities backed by subprime loans.” He added: “The markets will have to solve these problems, as indeed they will.”
But, Plosser warned, the Fed must stay vigilant of its other mandate: price stability. “We cannot be confident that a slow-growing economy in early 2008 will by itself reduce inflation. I am also convinced that we need to keep our eye on both headline as well as core inflation in assessing how well we are doing in achieving our goal of price stability.”
Plosser said the economy’s resilience to recent shocks gave him pause about revising his economic outlook “based on just one or two pieces of economic news,” but “the string of weaker than anticipated numbers released in late December and in January” made him rethink his 2008 outlook.