The president of the Philadelphia Fed, Charles Plosser, is tough on inflation. He is not a member of the FOMC until 2008, and is breaking rank with the official Fed view in expressing his worries about the risks of permissive monetary policy.
Plosser argued prior to the Fed rate cut that a reduction wasn’t necessary; the Fed could provide any needed liquidity through its open market operations. That wasn’t the conclusion of the FOMC.
While giving lip service to the Fed’s rate cut in some remarks yesterday, Plosser was surprisingly direct in saying that inflation needed to be higher on the Fed’s list of priorities.
Federal Reserve Bank of Philadelphia President Charles Plosser said last week’s interest-rate cut could cause inflation to accelerate and that policy makers must be ready to reverse course if needed.
“Cutting the funds rate has the potential for aggravating inflation, there’s no question about that,” Plosser told the New Jersey Technology Council late yesterday. Should inflation or price expectations rise in coming months, “the outlook will be affected and policy may have to be adjusted,” he said.
Plosser, who doesn’t vote on rates this year, is the first official to express concerns about the Fed’s Sept. 18 decision to lower the benchmark interest rate by a greater-than-forecast half-point. The reduction, while “appropriate” because of slowing job growth and falling home prices, shouldn’t lead to further moves unless data become “much weaker,” he said.
“I will not be surprised to see weaker statistics,” Plosser said in the speech in Mount Laurel, New Jersey. “But weaker numbers will not lead me to revise my outlook or my view of the appropriate funds rate target unless they are much weaker than already anticipated and accumulate sufficiently to generate another downward revision in my outlook.”…..
“A slower economy means that real interest rates must decline to bring about the appropriate adjustments to restore growth,” Plosser said. “In recognition of this, I believe last week’s action to lower the fed funds rate target was appropriate.”…
Plosser’s remarks contrast with comments by other Fed officials since the Sept. 18 decision. Chairman Ben S. Bernanke and Vice Chairman Donald Kohn didn’t mention risks from the rate cut in remarks last week.
Bernanke told lawmakers the move was designed to “try to get out ahead of the situation, try to forestall potential effects of tighter credit conditions” on the economy. Kohn said in Frankfurt that the central bank was motivated by the potential for asset-price shifts to affect growth and inflation.
Plosser, whose anti-inflation remarks have been among the Fed’s toughest since he joined the central bank last year, had expressed skepticism about the economic risks from financial turmoil 10 days before the Fed meeting….
Plosser, who votes on rates for the first time in 2008, emphasized that “price stability is and should be the primary focus of monetary policy.” Officials “must resist the temptation to respond to short-term, transitory disturbances” unless they affect the Fed’s long-term goals, he said.