Tags: Fed | Plosser | chance | Inflation

Fed’s Plosser: US Has ‘Created the Chance for a Lot of Inflation’

Thursday, 20 Oct 2011 07:53 AM

An economic recovery in the United States would raise the risk of incipient inflation, thanks to the huge amount of dollars the Federal Reserve has put into the banking system, warns Fed Governor Charles Plosser.

“We have created the chance for a lot of inflation,” Plosser told Handelsblatt magazine in an interview. “In the banking system hangs $1.5 trillion in excess reserves,” the president of the Federal Reserve Bank of Philadelphia said.

Most people believe that the Fed can control inflation, Plosser said. But the Fed risks damaging its long-held reputation of being in control, and that in itself poses a risk.
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Credibility is a kind of currency. Once the Fed has spent it, people lose faith, he said.

“We learned something in the '70s,” Plosser explained. “If the public loses confidence in the will of the central bank to control inflation, inflation expectations begin to rise and become a self-fulfilling prophecy. “

Thus inflation expectations — what people believe will happen, rather than actual inflation — can get out of hand and actual inflation is the result.

Plosser added that he thought the economy could grow between 2.5 percent and 3 percent in 2012, if no major obstacles crop up.

If growth does continue, he said, it will be up to the Fed to drain bank reserves in a timely fashion in order to dampen inflation risk.

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Charles Plosser
(Associated Press photo)
“When the economy improves and the reserves flow as credit in the economy, then it's like fuel for inflation. If we are able to control this, and especially as long as the public believes that we are able to control this, it will not cause inflation in the future,” he said.

Food and energy prices kicked up the cost of living by 0.3 percent in September, the third monthly increase, according to Commerce Department data. Underlying inflation, which strips out volatile food and energy, rose by 0.1 percent in the period.

Separately, a benchmark used to calculate Social Security payments rose by 3.6 percent compared to 2008, a rise which will translate into an increase in retiree incomes.

It will be the first increase retirees have seen in three years as the economy has struggled to stay afloat.

About 8 million people who receive Supplemental Security Income will also receive the 3.6 percent cost-of-living adjustment, or COLA, meaning the announcement will affect about one in five U.S. residents, the Associated Press reported.

There was no COLA in 2010 or 2011 because inflation was too low.

Those were the first two years without a COLA since automatic increases were adopted in 1975. However, Social Security recipients did receive a one-time $250 payment from the economic stimulus package passed in 2009.

Monthly Social Security payments average $1,082, or about $13,000 a year. A 3.6 percent increase will amount to about $39 a month, or just over $467 a year, on average.

Advocates for seniors said the raise will provide a much-needed boost to the millions of retirees and disabled people who have seen retirement accounts dwindle and home values drop during the economic downturn. Economists say the increase should provide a modest boost to consumer spending, which should help the economy.

Still, many seniors feel like they have been falling behind.

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An economic recovery in the United States would raise the risk of incipient inflation, thanks to the huge amount of dollars the Federal Reserve has put into the banking system, warns Fed Governor Charles Plosser. We have created the chance for a lot of inflation, Plosser...
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Thursday, 20 Oct 2011 07:53 AM
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