Fed should hike rates, says Phila Fed's Plosser
Inflation is the biggest threat, though unemployment will rise thru this year, Philadelphia Federal Reserve president Charles Plosser tells a business audience.
Philadelphia Federal Reserve president Charles I. Plosser tells a King of Prussia audience the economy isn't as bad as feared. Unemployment will rise. But inflation's a bigger worry, he says. Plosser speech here. Inquirer story here.
From Plosser's Q&A: Philly home market "in reasonably good shape" compared to high-foreclosure California, Las Vegas, Florida, auto-recession Michigan. "I wouldn't say it's booming," but home values are stable here, "except for the Jersey Shore," which has a hangover.
"Unemployment is going to continue to rise between now and the end of this year," following last year's business slowdown. "We will have to raise rates before unemployment peaks."
The Fed has two jobs, which sometimes conflict: "We have to keep the financial system functioning" by helping banks stay in business (= low interest rates), while also "ensuring financial stability" by fighting inflation (= high rates).
Fed money today is so cheap that "real interest rates are negative," and we haven't seen the full impact of the Fed's recent rate cuts. "They will be felt down the road" as businesses spend more, fueling inflation.
Will oil prices stay high, and the dollar stay weak? "That is the big question." Usually price swings "end up reversing themselves." Better to slow the economy with higher interest rates so other prices stay low, than to rev up the economy with cheap money and risk creating across-the-board inflation.
The $25 billion Fannie Mae-Freddie Mac bailout "is the consequence of creating institutions that create moral hazard." Fannie and Freddie enjoy taxpayer backing, so they funded too many bad home loans. "They took on extra risk because they had this backstop...Some would argue, we should never do that."
Can we afford higher interest rates? Yes: "Economic conditions have not turned out nearly as dire as some people have predicted." (Plosser's predictions here.)
The Fed has set up unprecedented funds to help investment banks; is that permanent? "At some point there'll have to be a decision: Do these go away? Or will there have to be a legislative solution? The Federal Reserve is not intentionally seeking to extend its powers." The Fed shouldn't regulate everyone; there'll always be "shadow" players who resist any system. "It's a really tricky balancing act...We're making many changes in the heat of battle. I hope we can be careful and analytical."