With the labor market improving, the Federal Open Market Committee should step up the pace of tapering its asset purchases and stop buying before the unemployment rate dips to 6.5%, Federal Reserve Bank of Philadelphia President and Chief Executive Officer Charles I. Plosser repeated Tuesday.
"I believe a good case can be made for speeding up the pace of our taper if the economic outlook plays out as I expect," he said at the University of Delaware, according to prepared text of his remarks, released by the Fed. The unemployment rate dropped 1.2 percentage points last year, and fell in January to 6.6%. "This is a much sharper decline than anticipated when we started the purchase program in September 2012. We are now only one-tenth of a point from the 6.5 percent threshold in our forward guidance for interest rates."
While the FOMC has stated it won't raise rates just because the 6.5% threshold is breached, Plosser said, it creates "a communications challenge" since the Fed hasn't spelled out what happens once the unemployment rate is below 6.5%.
He noted the thinking was asset purchases would be halted when the jobless rate was at 7%, but that didn't happen. He asked, "What is the argument for continuing to increase monetary policy accommodation when labor market conditions are improving more quickly than anticipated and inflation has stabilized and is projected to move back to goal?"
Also, Plosser reminded, the longer purchases are made, "the more likely we will fall behind the curve in reducing the extraordinary degree of monetary policy accommodation. With the economy awash in reserves, the costs of such a misfire could be considerably higher than usual, fomenting higher inflation and perhaps financial instability."
He concluded, "My preference was, and remains, to scale back our purchase program at a faster pace to reflect the strengthening economy. Given the falling unemployment rate, our communications should be focused on how economic conditions will determine the interest rate path. Continuing to buy assets is neither helpful nor essential."
