Fed's Plosser calls for rate hikes

Fed cannot wait for lower jobless rate: Plosser

 

The text:

"Ultimately, inflation is a monetary phenomenon and there is no question that current monetary policy is extraordinarily accommodative. The Federal Open Market Committee has maintained the federal funds rate near zero for just about a year now and the Fed has more than doubled its balance sheet in the process. Without appropriate steps to withdraw or restrict the massive amount of liquidity that we have made available to the economy, the inflation rate is likely to rise to levels that most would consider unacceptable. The great challenge facing the Fed is getting those “appropriate steps” right.

The task is made more difficult, in part, by competing views of the economic forecast and the underlying structure of the economy driving that forecast. One commonly held view is that the economy is very weak now and, more important, that during the economic recovery, high rates of unemployment and very low rates of resource utilization will prevent inflationary pressures from arising for quite some time, perhaps years. This perspective suggests there is no danger that excess liquidity will generate inflation in the foreseeable future. According to this view, the Fed need not worry about withdrawing the liquidity or raising rates anytime soon because the inflation forecast will remain quite tame.

An alternative view shared by many others is that the just-described conventional wisdom misses the mark and without a more deliberate policy of reducing liquidity and raising interest rates sooner rather than later, we could very well see inflation become a serious concern. In this view, inflationary expectations play an important role in the dynamics of inflation. It is the Fed’s credibility to keep inflation low and stable that is key to anchoring those expectations. So, the Fed must act in a way that assures the markets and the public that it will take the necessary steps to keep inflation low and stable. If it does not do this, expectations can become unanchored and inflation will rise regardless of the amount of unemployment in the economy.

This view is consistent with both theoretical and empirical evidence that finds that economic slack or low resource utilization is not a very reliable predictor of inflation. Moreover, several empirical studies have shown that economic slack is difficult to measure with any accuracy. So making policy decisions based on measures of such slack and particularly on forecasts of slack many quarters ahead becomes problematic. Indeed, the failure to act in a way that keeps expectations of inflation anchored can easily trump economic slack in determining the path of inflation. Recall that some of the highest inflation rates this country has seen in the post-World War II era occurred in the late 1970s when we had high rates of unemployment and low resource utilization.

So what’s the bottom line? While policymakers may have different outlooks for the economy and inflation over the next couple of years, our objectives are the same. The Fed does not wish to see inflation rise to unacceptable levels and I plan to act with that objective clearly in mind.

In my view, the higher levels of resource utilization in the future signaled by today’s growth implies that real interest rates will rise, which calls for the federal funds rate to increase as well — as long as inflation is near its desired levels and inflation expectations are well-anchored. Note that increases in interest rates may be appropriate before unemployment or other measures of resource slack have diminished to acceptable levels. Failure to act in this manner risks continuing to inject liquidity into a growing economy at a rate that will create inflation above desirable levels later in the cycle. If this were to happen, the Fed would lose its credibility to preserve low and stable inflation.

If expectations do become unanchored, then the Fed will have lost its credibility and either inflation or deflation could arise. Moreover, the cost of regaining the Fed’s credibility may be great. So, anticipation and forward-looking policy are essential if the Fed is to achieve its goal of low and stable inflation.

In the current circumstances, the Fed will need to withdraw the extraordinary amount of liquidity it has provided to financial markets to ensure that the public does not lose confidence in its commitment to keep inflation low and stable. If it fails to do so, rising inflation expectations could prompt workers to demand higher wages and firms to demand higher prices to head off the expectation of higher costs, thus setting off a burst of inflation. For me, this risk bears careful monitoring."

 

Currency markets don´t care...

 

Yup..they called Plossers bluff, and raised him a few more euro pips

 

What about a reraise and Bernanke repeating the "threat" ?

 

wow from me.

amazing that the market does not care and the tsy curve actually steepens!!! as really the opposite should happen.

this tell you something about the fed credibility under heliben - nobody believes them anything - everybody thinks they will never hike anyway so people buy gold/etc. like crazy...

 

Yep. It's like a drunken orgy with a small security guard yelling in the background "Hey, you guys can't do that here!"

 

The cat is out of the bag. Even Fed jawboning is becoming ineffective.

 

I fail to see where he calls for immediate rate hikes

 

He said that several times already

what will force them to raise is only surging import prices

if oil goes to 150 and stays there - they will raise and will prey to see deflation

if oil don't go there they will never raise