Fed’s Plosser: Must not be sanguine about tightening

NEW YORK, April 1 (Reuters) – The U.S. Federal Reserve
“should not be too sanguine” in believing that the time to
reverse easy monetary policy is a long way off and that it will
be gradual, a top Fed official said on Friday.

“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,”
Philadelphia Federal Reserve Bank President Charles Plosser, an
inflation hawk, told the Harrisburg Regional Chamber, according
to prepared remarks.

Allowing monetary policy to fall behind the curve would
result in greater inflation and economic instability in the
future, he warned.

Plosser, a voter on the Fed’s policy-setting committee, did
not specify when he thinks the Fed should reverse course. At
its last meeting, the Fed voted unanimously to continue as
planned with its $600 billion bond purchase program, designed
to lower interest rates and stimulate growth, which is
scheduled to end in June.

Plosser said he expects growth to pick up to about 3.5
percent annually over the next two years and the unemployment
rate to gradually fall to between 7 and 8 percent by the end of
2012.

He expects inflation to be about 2 percent over the course
of the year.

While some economists are concerned that oil price shocks
could spill over into broader inflation, Plosser said that
higher oil prices in and of themselves don’t create sustained
inflation.

“If we look back to the lessons of the 1970s, we see that
it is not the price of oil that caused the Great Inflation, but
a monetary policy stance that was too accommodative,” he said.

“As much as we may wish it to be so, easing monetary policy
cannot eliminate the real adjustments that businesses and
households must make in the face of rising oil or commodity
prices,” he said.

He said the Fed has the tools it needs to tighten monetary
policy and that it should lay out a systematic exit strategy.
He reiterated that an explicit inflation target would be
helpful in ensuring inflation expectations remain
well-anchored.
(Reporting by Kristina Cooke; Editing by Leslie Adler)

Fed’s Plosser: Must not be sanguine about tightening