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"Fed's Plosser calls for rate increases
The Philadelphia reserve bank's president cautions about inflation.
Posted by Elizabeth Strott on Wednesday, December 2, 2009 8:46 AM
The Federal Reserve needs to raise interest rates in tandem with the rise in market rates, according to Charles Plosser, president of the Philadelphia Federal Reserve Bank.
"To conduct monetary policy, we need to be forward-looking, and looking ahead, I see an economy that will be growing over the next two years, which means real interest rates will be rising," Plosser said late Tuesday in a speech at the business school at the University of Rochester.
"As they do, the federal funds rate should be permitted to rise with them."
Inflation could become a serious concern, Plosser said, "without a more deliberate policy of reducing liquidity and raising interest rates sooner rather than later."
Plosser said rate increases "may be appropriate before unemployment or other measures of resource slack have diminished to acceptable levels," because otherwise the Fed risks "continuing to inject liquidity into a growing economy at a rate that will create inflation above desirable levels later in the cycle," which will cause "the Fed (to) lose its credibility to preserve low and stable inflation.
Plosser also said the Fed needs an exit plan for the "massive amount of liquidity that we have made available to the economy."
Plosser does not vote on the Fed's interest rate policies until 2011. " |
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