Bloomberg News

Plosser Says Fed Must Guard Against Long-Term Inflation

May 01, 2012

Federal Reserve Bank of Philadelphia President Charles Plosser said the central bank must be ready to contain inflation in the long run as it maintains record monetary stimulus to sustain the recovery.

“With the very accommodative stance of monetary policy that has now been in place for more than three years, we must guard against the medium- and longer-term risks of inflation,” Plosser said in the text of remarks in San Diego today. He repeated that the Fed may have to raise interest rates “well before” the end of 2014 “in the absence of some shock that derails the recovery.”

Fed policy makers last week upgraded their forecasts for growth, unemployment and inflation as the economy continued to show signs of improvement. Even so, the policy-setting Open Market Committee reiterated that it expects to keep interest rates low through at least late 2014 to push unemployment lower.

“Prospects for labor markets will continue to improve, with job growth strengthening and the unemployment rate falling gradually over time,” Plosser, 63, told the CFA Society of San Diego today.

The Philadelphia Fed chief added that he expects the jobless rate to decline to 7.8 percent by the end of this year from 8.2 percent in March. The economy will probably expand by about 3 percent in 2012 as well as 2013, he said.

Manufacturing expanded last month at the fastest pace in almost a year, the Institute for Supply Management’s factory index showed today.

Stocks rose after the manufacturing report, with the Standard & Poor’s 500 Index gaining 1 percent to 1,411.40 as of 1:51 p.m. in New York.

More Transparent

Plosser reiterated his call for the Fed to make its policy making process more transparent, urging the central bank to choose “a consistent set of variables” that would be used to explain policy changes to investors. That would be a better way to signal the likely course of action than using a specific timeframe, he said.

That way, the public can “form more accurate judgments about the likely course of policy -- reducing uncertainty and promoting stability,” he said.

To contact the reporter on this story: Aki Ito in San Francisco at aito16@bloomberg.net.

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net


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