U.S. should let interest rates rise: Philly Fed boss

Philadelphia Federal Reserve Bank president Charles Plosser, a conservative who doesn't believe the central bank has the power to do much more than try to control inflation, told a crowd at the University of Delaware this morning he's worried Fed chief Ben Bernanke's cheap-money policy risks over-stimulating the (election-year) U.S. economy. Speech here. Excerpts:

"In January, the Federal Open Market Committee announced that economic conditions were 'likely to warrant exceptionally low levels for the federal funds rate at least through late 2014'— that’s almost three years from now... 

"You may know that I dissented from the FOMC decisions in August and September because it was not clear to me that further monetary policy accommodation was appropriate. After all, inflation was higher and unemployment was lower" than in 2009 or 2010.

"Yet, despite the extraordinary steps taken to support the economy, many argue that monetary policy should do more. The argument is that while inflation may be close to our target, unemployment remains elevated, and thus, monetary policy must act more aggressively if it is to meet its mandated employment objective.

"I disagree and believe that doing so would lead us down a very treacherous path... The problem is not just inflation risk down the road. Prolonged efforts to hold interest rates near zero can lead to financial market distortions and the misallocation of resources..."

Cheap money is as risky as driving too fast in fog past your I-95 exit, Plosser warned: It leaves you "faced with two very unattractive options. One option is to slam on the brakes to make the exit...  The second option is to continue down the road to the next exit, turn around, and then backtrack... 

"Failing to slow down and exit at the right time risks excessive inflation (and) the misallocation of resources and capital, and perhaps even credit bubbles or other distortions... It is an approach most often driven by an excessive focus on the short run...

"The U.S. economy is continuing to grow at a moderate pace. I expect annual growth of around 3 percent in 2012 and 2013... with job growth strengthening... gradually over time... We must guard against... risks of inflation... and the potential for distortion," Plosser concluded. No more bubbles.

"Finally, I believe we must also guard against an accelerationist approach to policy — one that calls for monetary policy to do more and more in an attempt to get to our objectives that much faster. The risks to economic stability of such an approach over the medium term could be quite high and could jeopardize our ability to achieve our longer-terms goals."