Fed's Plosser: Must Hike Early To Protect Credibility, Prices

inspector_monkfish

17:20 01Dec09 - FED'S PLOSSER: MUST HIKE EARLY TO PROTECT CREDIBILITY, PRICES

17:20 01Dec09 - FED'S PLOSSER: ECONOMY RECOVERING, 3% GROWTH FOR NEXT 2 YEARS

17:20 01Dec09 - FED'S PLOSSER SEES REAL INTEREST RATES RISING WITH RECOVERY

17:20 01Dec09 - FED'S PLOSSER: FED'S RATE MUST FOLLOW RISING REAL MARKET RATES

17:20 01Dec09 - PLOSSER: HOUSING STABLE BUT RISKS IN COMMERCIAL REAL ESTATE

17:20 01Dec09 - PLOSSER: DIFFICULT TO FORECAST CONSUMER SPENDING

17:20 01Dec09 - PLOSSER SEES JOB GROWTH IN 2010, JOBLESS RATE FALL BY YEAR END

17:20 01Dec09 - PLOSSER: EARLY 2009 DEFLATION FEARS WERE EXAGGERATED

17:20 01Dec09 - PLOSSER: BASING WEAK POLICY ON 'SLACK' IS FLAWED

17:20 01Dec09 - PLOSSER: MADE NEED HIKES BEFORE UNEMPLOYMENT 'APPROPRIATE'

17:20 01Dec09 - Fed's Plosser: Must Hike Early To Protect Credibility, Prices


ROCHESTER, New York--Federal Reserve Bank of Philadelphia President Charles Plosser reiterated Tuesday that the Fed must act preemptively to withdraw its extraordinary monetary stimulus in order to protect its credibility and anchor price expectations.

"Since expectations play an important role in the dynamics of inflation, it is important that policy act in a manner that keeps expectations well-anchored near the Fed's inflation objective," Plosser said in a speech in Rochester. "If expectations do become unanchored, then the Fed will have lost its credibility and either inflation or deflation could arise...So, anticipation and forward-looking policy are essential if the Fed is to achieve its goal of low and stable inflation."

In making this argument, the Philadelphia Fed president referred, as he has in the past, to his concern about flaws in the commonly held view that "slack" in the economy means that inflation is not a real risk.

"Several empirical studies have shown that economic slack is difficult to measure with any accuracy," Plosser said. "So making policy decisions based on measures of such slack and particularly on forecasts of slack many quarters ahead becomes problematic."

Arguing that the U.S. economy has entered sustained recovery and forecasting growth rates of 3% for next year and 2011, Plosser said the Fed must take "appropriate steps to withdraw or restrict the massive amount of liquidity that we have made available to the economy."

This could include hiking rates from their current level near zero even "before unemployment or other measures of resource slack have diminished to acceptable levels."

Plosser said he expects the economy to beginning adding jobs in 2010 but that the unemployment rate could continue to rise beyond its current 10.2% level before starting to fall toward the end of next year.

As recovery continues, he said, real interest rates in the market will begin to rise. It's important, he added, that the Fed's targeted federal funds rate rise with them.

Plosser said activity in the housing market had improved with home prices bottoming and in some cases rising. And while he warned that the commercial real estate market "has not turned the corner and poses some risk to small- and medium-sized banks," his view is that "these risks will lessen as the economy recovers."

A recovery in consumer spending is harder to predict, he said, in part because government incentives such as the "cash-for-clunkers" rebate for new car purchases have distorted its trends.

"The recovery of financial markets from this crisis," Plosser said, "is not complete and more time will have to pass before we can be fully confident in the health of the financial sector. Indeed, we probably will not be able to determine how well the financial system has healed until the Federal Reserve withdraws the extraordinary amount of support it has provided."

purch

"The recovery of financial markets from this crisis," Plosser said, "is not complete and more time will have to pass before we can be fully confident in the health of the financial sector. Indeed, we probably will not be able to determine how well the financial system has healed until the Federal Reserve withdraws the extraordinary amount of support it has provided."

I guess they can always chuck it all back in again, if the system hasn't healed by then :rolleyes:

inspector_monkfish

purch wrote: »

"The recovery of financial markets from this crisis," Plosser said, "is not complete and more time will have to pass before we can be fully confident in the health of the financial sector. Indeed, we probably will not be able to determine how well the financial system has healed until the Federal Reserve withdraws the extraordinary amount of support it has provided."

I guess they can always chuck it all back in again, if the system hasn't healed by then :rolleyes:

in? out ? shake it all about......

Generali

inspector_monkfish wrote: »

in? out ? shake it all about......

The guy that wrote the Hokey Cokey died last week.

The undertakers tried to put him on the coffin so they put his left leg in. That was when the trouble started......*






More seriously, since Australia started increasing her interest rate, there seems to have been a recognition by Central Banks that there needs to be a normalization of economic policies and that it needs to happen soon. You can't just have a massive emergency situation that drags on for decades like Japan has had (the Lost Decade is now well into its 20th year).


*With thanks to many, many posters on fool.co.uk for the joke.