Federal Reserve Bank of Philadelphia President Charles Plosser said an early end to the central bank’s plan to purchase $600 billion in U.S. Treasury securities may be required to help limit inflation pressures.
“Should economic prospects continue to strengthen, I would not rule out changing the policy stance to bring QE2 to an early close,” Plosser said in a speech in Birmingham, Alabama. “If the growth rates of employment and output begin to accelerate or if inflation or inflation expectations begin to rise, then it may be time to begin taking our foot off the accelerator.”
Plosser and Richmond Federal Reserve President Jeffrey Lacker have urged the central bank to review its plan to purchase $600 billion in U.S. Treasurys by June in light of a strengthening economy and concern over potential inflation. Dallas Fed President Richard Fisher has said he may oppose any additional easing after the purchases conclude in June.
Fed policy makers raised their estimates for growth at their meeting last month, while continuing to “express disappointment” in improvements in the labor market, according to minutes of the Jan. 25-26 meeting released Feb. 16. The Fed was divided over whether further evidence of a strengthening recovery would warrant slowing or reducing the purchases.
The Fed “said that it would review its planned purchase program on a regular basis, and I take that promise to review seriously,” Plosser, a voting member on monetary policy this year, said to the Rotary Club of Birmingham.
The head of the Philadelphia Fed said that while inflation has been less than the central bank’s target of 1.5 percent to 2 percent, there are indications pressures are building.
“My forecast is that inflation will accelerate toward 2 percent over the course of the next year,” he said. “Indeed, we are beginning to see some increasing price pressures.”
While rising oil and commodities prices don’t necessarily cause broader inflation, they can when central banks keep policy very accommodative, he said.
“My sense is that as the recovery continues to pick up steam and firms become more convinced that demand increases will be sustained, they will feel more confident that they can put through price increases and have them stick,” Plosser said.
The Fed official forecast the U.S. economy will expand at about 3.5 percent annually this year and next, bringing the unemployment rate to 7 percent to 8 percent at end of 2012. Consumer spending has picked up and business purchases are strengthening, while housing remains weak, he said.
The central bank’s most closely watched inflation gauge, the Commerce Department’s core personal consumption expenditures price index excluding food and energy, rose 0.7 percent in December from a year earlier, the smallest advance since records began in 1959.
Plosser, 62, a former professor and business-school dean at the University of Rochester in New York, joined the Philadelphia Fed as its chief in 2006. Plosser is a native of Birmingham.
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