The Federal Reserve may need to slow or stop its purchases of U.S. Treasurys in response to an accelerating U.S. economy next year, Philadelphia Fed President Charles Plosser said.
“If the growth rate of the economy continues to strengthen and looks sustainable, then I am going to be looking for the Fed to react to that,” Plosser said today in an interview on Bloomberg Radio’s “The Hays Advantage,” with Kathleen Hays. “That may be to cut back on the degree of accommodation in a gradual way. One way would be to begin stopping some of the purchases or slowing them down.”
Plosser, 62, who votes on monetary policy next year, said he might have dissented from the Fed’s affirmation last week of a plan to buy $600 billion in Treasurys, asserting the purchases may spark inflation and damage the central bank’s credibility.
Chairman Ben Bernanke is trying to boost growth after near-zero interest rates and $1.7 trillion in securities purchases helped pull the economy out of recession without bringing down joblessness close to a 26-year high.
Asked how he would have voted, Plosser said, “It would have been a close call. The stronger the economy gets, the more attention I am going to be paying” to whether to “begin reducing the amount of accommodation.”
As part of next year’s rotation, Plosser and the heads of the Dallas, Chicago and Minneapolis Fed banks will cast votes. The leader of the New York Fed has a permanent vote.
Plosser, in an interview at the Philadelphia bank, forecast that the U.S. economy will expand 3 percent to 3.5 percent next year, with inflation accelerating to as much as 2 percent.
“The economy is still in the midst of a modest recovery,” Plosser said. “My confidence in the fact that it is sustainable is growing and has been over the course of the year. In a fundamental way, I think it is sustainable, but it is not going to go like gangbusters.”
Plosser indicated he was sympathetic to the position of Kansas City Fed President Thomas Hoenig, who last week voted against Fed policy for the eighth straight time. Hoenig reiterated his view that the “continued high level of monetary accommodation” may eventually “destabilize the economy,” according to a statement by the Fed after a Dec. 14 meeting by the Open Market Committee.
Bond purchases by the Fed “could be destabilizing in a couple ways,” Plosser said. While Hoenig has cited concern over “bubbles and distortions in the economy,” the Philadelphia Fed leader said excessive inflation could disrupt the economy as much as it did in the early 1980s.
“That can be very destabilizing to the economy if we lose our credibility,” he said. “That is what we need to keep uppermost in our mind because the consequences of losing our credibility can be very destabilizing.”
Plosser said he didn’t believe quantitative easing would do much to reduce unemployment. It is “dangerous” for central bankers to be overly focused on short term goals when policy affects the economy with a time lag, he said.
Plosser dismissed concerns about the risk of a broad-based decline in prices. Policymakers including St. Louis Fed President James Bullard have warned of a risk of Japanese-style deflation in the U.S.
“I am not really concerned about deflation,” he said. “Inflation is not in a bad place right now. Low inflation is not a bad thing.”
The Fed’s preferred price measure, which excludes food and fuel, was up 0.9 percent from a year earlier in October, the smallest gain since records began in 1960. Fed policy makers have a long-run goal of 1.6 percent to 2 percent inflation they see as consistent with achieving legislative mandates for maximum employment and stable prices.
Plosser said he hasn’t made big adjustments to his growth estimates recently because he always expected the slowing growth in the middle of 2010 to be a “soft patch” that wouldn’t last. “I think we are seeing ourselves coming out of that,” he said.
Economists in the past two weeks have boosted projections for fourth-quarter growth after the government reported better- than-projected retail sales for November and the Obama administration reached a compromise with congressional Republicans to extend Bush-era tax cuts and introduce new reductions.
Economists Michael Feroli of JPMorgan Chase & Co. and John Silvia at Wells Fargo Securities LLC now expect 3.5 percent growth in the final quarter. The economy expanded at a 2.6 percent pace in the third quarter, according to revised Commerce Department data.
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