Bloomberg News

Plosser Says He Didn’t Back Fed’s Late 2014 Rate Pledge

February 02, 2012

(Updates with comments on easing in eighth paragraph.)

Feb. 1 (Bloomberg) -- Philadelphia Federal Reserve Bank President Charles Plosser said he didn’t support the central bank’s decision last month to extend the time frame for low rates at least through late 2014.

“Economic conditions have modestly improved since our December meeting, especially on the employment front,” Plosser said today in a speech to the Main Line Chamber of Commerce in Gladwyne, Pennsylvania. “I saw little justification to further ease monetary policy.”

The Federal Open Market Committee on Jan. 25 extended its commitment to keep rates low by at least 18 months as moderate rates of economic growth have failed to reduce unemployment below 8.5 percent since the 18-month recession ended in June 2009.

The Fed said in December that economic conditions were likely to warrant low rates “at least through mid-2013.” The central bank has held the benchmark lending rate in a range of zero to 0.25 percent since December 2008.

Fed officials also published their economic forecasts after the January meeting, which showed lower expectations for growth for the next two years compared with their November projections.

“I was not supportive of the most recent decision to extend the time frame for exceptionally low rates through 2014,” Plosser said. He also didn’t support the practice of “offering forward policy guidance by saying economic conditions are likely to lead to low rates through some calendar date.”

Not FOMC Voter

“Monetary policy should be contingent on the economic environment and not on the calendar,” said Plosser, who is not a voting member of the FOMC this year.

“Continuing to signal that we want to try to ease more raises into question our confidence in the economy,” Plosser told reporters after the speech.

The economy is “on firmer footing” now than in 2011, Plosser said, adding that unlike some of his colleagues he isn’t concerned about the prospect of disinflation, or the risk that prices rise at a pace slower than the Fed’s goal of 2 percent.

“It’s clearly not true that elevated unemployment is a sufficient condition to keep inflation low,” Plosser said, noting that in the 1970s persistent inflation and high unemployment occurred simultaneously.

The Philadelphia Fed chief said he expects the economy to grow around 3 percent during both 2012 and 2013. Business sentiment is improving, he said, adding that while housing markets should stabilize, he doesn’t expect “much improvement.”

Reduced Forecasts

Fed officials lowered their central tendency forecasts for growth this year to 2.2 percent to 2.7 percent, down from a projection of 2.5 percent to 2.9 percent in November. Central bankers predicted the economy next year will expand 2.8 percent to 3.2 percent, down from a previous forecast of 3 percent to 3.5 percent.

Residential real estate prices fell more than forecast in November, showing distressed properties are hampering improvement in the U.S. housing market. The S&P/Case-Shiller index of property values in 20 cities declined 3.7 percent from November 2010 after decreasing 3.4 percent in the year ended in October.

Plosser said he expects “further gradual declines” in unemployment, with the rate falling to around 8 percent or a little less by the end of this year. Fed officials last month forecast a fourth-quarter average unemployment rate for 2012 in a range of 7.8 percent to 8.6 percent.

Risks to Outlook

Risks to the outlook include an economic slowdown in the euro area that could restrain U.S. exports, Plosser said. The central bank “must continue to monitor inflation measures very carefully,” he said.

The Fed’s $2.3 trillion of bond purchases in two rounds of so-called quantitative easing haven’t stoked inflation. A gauge of consumer prices tied to personal expenditures, excluding food and energy, rose 1.8 percent last year.

U.S. financial institutions have “gone a long way to reducing their exposures but that’s not to say they’re not exposed at all” to the European debt crisis, Plosser said in response to audience questions. The Fed is “very attuned” to the crisis in Europe, he said.

--Editors: James Tyson, Vince Golle

To contact the reporters on this story: Craig Torres in Washington at; Joshua Zumbrun in Gladwyne, Pennsylvania, at

To contact the editor responsible for this story: Christopher Wellisz at

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