NEW YORK – When discussing the exit from monetary policy accommodation, the question isn’t whether the Fed has the tools, the more important aspects are the timing and the pace, Federal Reserve Bank of Philadelphia President and Chief Executive Officer Charles I. Plosser said Friday.
Calling the exit from an accommodative policy “very tricky,” Plosser told the Harrisburg Regional Chamber & Capital Regional Economic Development Corporation, that since “nontraditional actions” were used, this removal will be more tricky.
“The question is not can we do it, but will we do it at the right time and at the right pace,” Plosser said according to prepared text of his remarks, which were released by the Fed. “Since monetary policy operates with a lag, the Fed will need to begin removing policy accommodation before unemployment has returned to acceptable levels. It is imperative that we have the fortitude to exit as aggressively as necessary to prevent a spike in inflation and its undesirable consequences down the road.”
Exiting will require “raising interest rates, shrinking the balance sheet, and altering the composition and maturity of the assets we hold. Some would start with raising interest rates; some would begin by shrinking the balance sheet; others would do both,” Plosser said.
Perhaps most important, he said, is having a plan and communicating it so there in little uncertainty.
“As to when to begin exiting from accommodative policy, I will continue to look at the data on output and employment growth and on inflation and inflation expectations. Signs that inflation expectations are beginning to rise or that growth rates are accelerating significantly would suggest that it is time to begin taking our foot off the accelerator and start heading for the exit ramp,” he said. “I would add that we should not be too sanguine in believing that such a time is a long way off or that the process will only be gradual. A stronger rebound in the economy or inflation than some now expect could require policy actions to be taken sooner and more aggressively than many observers seem to be anticipating. Allowing monetary policy to fall behind the curve can only result in greater inflation and more economic instability in the future.”
