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%, "which is likely during the first half of the year," Federal Reserve Bank of Philadelphia President and Chief Executive Officer Charles I. Plosser said Wednesday.
Pointing to the 1.2-percentage point drop in the unemployment rate last year, "we will soon be at the 6.5 percent threshold in our forward guidance for interest rates," Plosser said, according to prepared text of his remarks in Rochester, N.Y., released by the Fed. "Although the FOMC has indicated that it doesn't anticipate raising rates when the economy crosses that threshold, I do believe that we will have complicated our communications if we are still purchasing assets at that point."
Slowing the pace of adding monetary accommodation "should have started sooner and proceeded more expeditiously," Plosser said, calling the first taper "a very modest step."
The FOMC suggested similar cuts to the buying program in the future, and former Fed Chairman Ben Bernanke suggested the program would be concluded late in 2014, assuming the economy cooperates.
"Notice that even though we are reducing the pace at which we are purchasing longer-term assets, we are still adding monetary policy accommodation," Plosser said. "As I noted earlier, I believe the economy has already met the criteria of substantial improvement in labor market conditions, and the economic outlook has improved as well. So my preference would be that we conclude the purchases sooner rather than later."
Plosser said that while he wanted more aggressive action to end QE3, he backed the second taper "as a step in the right direction. I reasoned that by following through with another measured step to reduce purchases, the Committee was strengthening the signal that the process would continue and thus it was reducing policy uncertainty. While I may have preferred a more aggressive scale-back, I was pleased that the FOMC has taken the first two steps on the path toward ending the program."
The risk of taking too long to end QE3 "when labor market conditions are improving rapidly, inflation has stabilized, and the outlook is for it to move back to goal" is falling "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."
Plosser said he expects "slightly above-trend" 3% growth in 2014 and he's not worried about a spike in unemployment, with the return of some of the many discouraged workers that have left the work force. While "far from the robust," such growth would "represent steady progress and an improving economy."
The unemployment rate, he estimated, will fall to "about 6.2 percent by the end of 2014." Plosser added, "I also believe that inflation expectations will be relatively stable and that inflation will move up toward our goal of 2 percent over the next year."
