Mon, Sep 08, 2014 - Page 15 News List

Plosser says keeping US interest rates low is risky

BORROWING COSTS:The Philadelphia Fed president said that maintaining interest rates at near zero could lead to an increase in the cost of credit and limited flexibility

Bloomberg

Federal Reserve Bank of Philadelphia President Charles Plosser speaks at the American Economic Association’s annual meeting in San Diego, California, the US on Jan. 4 last year.

Photo: Bloomberg

US Federal Reserve Bank of Philadelphia President Charles Plosser said the economy has “moved much closer” to the Fed’s goals and keeping interest rates near zero until achieving them is a “risky strategy.”

The US central bank cannot be certain whether full employment has been reached, and waiting for the labor market to fully recover before raising the main interest rate risks a sharper increase in borrowing costs later, Plosser said in a speech on Saturday in Amelia Island, Florida.

“I would prefer that we start to raise rates sooner rather than later,” Plosser said. “This may allow us to increase rates more gradually as the data improve rather than face the prospect of a more abrupt increase in rates to catch up with market forces, which could be the outcome of a prolonged delay in our willingness to act.”

Plosser disagreed with the Federal Open Market Committee’s statement on July 30 that borrowing costs would probably stay low for a “considerable time” after the Fed completes its asset-purchase program, which is set to end late this year.

“This language is no longer appropriate or warranted,” he said in the speech to the Pennsylvania Association of Community Bankers.

He said the statement does not reflect “significant progress” toward the Fed’s goals of full employment and price stability and “limits the committee’s flexibility to take action going forward.”

Speaking to reporters, Plosser said changing the language of the statement would probably be a topic of discussion at the next committee meeting on Tuesday and Wednesday next week.

Inflation is “gradually moving” toward the Fed’s target of 2 percent. Job creation has “improved markedly” despite “somewhat softer” data for last month, he said.

Payrolls increased by 142,000 last month, the smallest gain of the year, even as the jobless rate fell to 6.1 percent from 6.2 percent, a US Department of Labor report on Friday showed.

Plosser, 65, said he expects the economy to grow by 3 percent for the rest of the year.

GDP expanded at a 4.2 percent rate in the second quarter after contracting 2.1 percent in the first.

Plosser’s view of the commission’s statement was echoed last week by Cleveland Fed President Loretta Mester, who urged the central bank to “reformulate” its guidance on the future path of monetary policy.

Fed officials in June forecast that the benchmark interest rate would rise sometime next year. It has been held near zero since December 2008 as the Fed battled the deepest recession since the Great Depression and later sought to keep the recovery going.

Fed Chair Janet Yellen has urged patience in tightening policy because “underutilization of labor resources still remains significant” even after unemployment fell faster than Fed officials expected.

A former University of Rochester professor and business school dean, Plosser joined the Philadelphia Fed as its boss in 2006. The bank’s district covers eastern Pennsylvania, southern New Jersey and Delaware.

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