Phila. Fed chief hints interest rate is low
In remarks, he said it might need to be raised when the economic downturn ends.
Federal Reserve Bank of Philadelphia President Charles Plosser said yesterday that the benchmark interest rate is now below the level recommended by "many" monetary-policy theories and should be raised when financial markets stabilize.
"We are now, perhaps, in a period of extraordinary circumstances and have deviated from the benchmarks suggested by simple rules," Plosser said in a speech in Arlington, Va. "Such deviations should be temporary and limited and promptly reversed when conditions return to normal."
Plosser's remarks indicate he may agree with the assessment of some Fed officials at their January policy meeting that the central bank might need to raise rates at a "rapid pace" when the economy recovers from this downturn.
The Fed has cut rates nearly in half - to 3 percent - since September to try to boost economic activity. The danger is that lower rates typically prompt rising prices.
Chicago Fed President Charles Evans said three days ago that taking back rate-cut "insurance" can make clear that the Fed is committed to containing inflation.
The Philadelphia Fed president told reporters after yesterday's speech that inflation expectations were "creeping up" and that policymakers must be "very alert" to monitoring them.
Last month, Plosser, who votes on interest rates this year for the first time since taking office in 2006, said the central bank's recent cuts, the steepest since 1990, were "necessary and appropriate" to revive economic growth.
"The current turmoil in financial markets has already had a significant impact on the economy and has the potential to continue to restrain economic growth going forward," Plosser said in the speech to the National Association for Business Economics, known as NABE.
NABE economists said in a survey released yesterday that the Fed was wrong to lower rates while inflation was a threat and that it should not bail out investors who made wrong-way bets.
Plosser said he anticipated a pickup in growth in the middle of the year, with the expansion returning toward its trend rate into 2009.
The Philadelphia Fed chief said "monetary policymakers should continue to pursue their efforts to develop and put into practice more rulelike behavior" for setting interest rates. Having clear rules helps keep the public's expectations for inflation stable, he said.