Philadelphia Federal Reserve Bank President Charles Plosser warned of inflation pressures from record stimulus, while saying unemployment will probably fall to between 7 percent and 7.5 percent by the end of next year.
“I see the inflation risks in the U.S. as being clearly to the upside,” Plosser said today in a speech in London. “We must carefully watch for signals of inflation and altered expectations to ensure that monetary policy stays ahead of the curve.”
The district bank chief, echoing June 7 comments by Fed Chairman Ben S. Bernanke, said economic growth will probably quicken this year and the Fed needs to maintain the credibility of its commitment to price stability and ensure expectations for inflation don’t become unmoored. The economy expanded at a “steady pace” in most of the U.S., while slowing in four of 12 regions including Plosser’s district, the central bank said yesterday in its Beige Book survey of the economy.
“My forecast is for the economy to continue to expand at a moderate pace and for inflation to move back down from its current level as oil prices stabilize,” Plosser, 62, said in remarks to the Society of Business Economists. Policy makers “need to do all we can to ensure that the public’s expectations of inflation remain stable.”
Plosser is a voting member of the Federal Open Market Committee this year.
The economy will probably grow at a 3 percent to 3.5 percent rate for the rest of this year and next, and unemployment is likely to fall from a “disappointing” 9.1 percent level as of May to about 8.5 percent by December, Plosser said.
Any acceleration of growth in the coming months may spur the Fed to speed up any exit of emergency stimulus, though if the economy “continues to show weakness, that may push it off,” Plosser told reporters after the speech.
Meanwhile, there are signs that “firms are likely to be testing their pricing power,” he said. “It is somewhat troubling to me that expectations of inflation in the medium to longer term are moving up and down as much as they are.”
The Fed’s preferred price measure, which excludes food and fuel, was up 1 percent from a year earlier in April. Including all items, prices rose 2.2 percent. A separate measure from the Bureau of Labor Statistics shows prices rose 3.2 percent in April, the most since October 2008.
Plosser said he favors faster tightening of monetary policy if possible. “My predilection is to normalize faster rather than slower,” he said.
Fed officials next meet June 21-22 in Washington. Bernanke is scheduled to hold his second press conference following the FOMC’s statement on June 22, just a week before the scheduled end of the central bank’s $600 billion bond purchase program.
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