Philly Fed Boss Warns Against Speeding Recovery

Published February 14, 2012 6:00PM (EST)

NEWARK, Del. (AP) — The head of the Philadelphia Federal Reserve Bank warned Tuesday against efforts to accelerate the nation's economic recovery, citing the threat of inflation.

Speaking at the University of Delaware, Charles Plosser said the Fed already has taken several steps to help revive the economy, and that with a very accommodative monetary policy already in place, officials must guard against the medium and longer-term risks of inflation.

"Inflation risks in the near term, I think, remain modest," he said. "However, I do remain concerned that monetary policy actions have exposed us to substantial inflation risks over the medium and longer term."

Plosser noted that the Fed has kept the federal funds rate near zero for more than three years to support the economic recovery. The Fed also has conducted two rounds of asset purchases that have more than tripled the size of its balance sheet and changed its composition from short-term Treasuries to longer-term Treasuries and mortgage-backed securities.

"Today, we are in a modest recovery from a very deep recession and a financial crisis," Plosser said. "The financial crisis has passed, however, and monetary policy should not continue to act as if the financial crisis is still upon us."

Plosser said he did not support the Federal Open Market Committee's announcement last month that economic conditions were likely to warrant exceptionally low levels for the federal funds rate at least through late 2014, 18 months longer than the mid-2013 date the Fed first signaled in August.

The FOMC also announced that the Fed intends to continue a program begun in September in which the Fed is buying $400 billion of longer-term Treasuries and selling an equal amount of shorter-term Treasuries in an effort to reduce yields from already historically low levels.

"I think economic conditions, as they have evolved even since late last year, do not call for further accommodation," Plosser said. "In fact, the economy has actually improved. Moreover, I continue to oppose using calendar dates to communicate forward guidance."

Plosser dissented from the FOMC decisions in August and September. This year, he does not have a vote on the committee, which rotates four of its 12 seats on an annual basis among 11 regional reserve bank presidents.

With job growth strengthening and unemployment rates falling, Plosser said he expects the economy to continue to grow at a modest pace, with annual growth of about 3 percent this year and next year.

But he warned that the continuing debt crisis in Europe carries significant potential risks for the U.S. economic recovery, having already imposed considerable uncertainty for global economic growth.

"I would add our own nation's inability to establish a clear plan to put our fiscal house in order continues to contribute additional uncertainty to the economic landscape," he said.

By Salon Staff

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