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Raise interest rates: Philly Fed's Plosser

As unemployment drops

Despite his past record as the Federal Reserve's worst economic forecaster, Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia, is trying to serve as the conscience of what he believes to be a wandering, inconstant Federal Reserve Board of Governors: In Plosser's brief dissent to the Fed's July 30 stay-the-course policy statement, the conservative Plosser, who is skeptical the Fed can do much more for the economy than guide interest rates, urges higher rates (to avoid credit and asset-price distortions) now that unemployment is finally falling. Excerpts:

The economy has improved significantly this year, and inflation and unemployment have moved much closer to the FOMC's longer-term goals. However, neither the pace of the reduction in [Federal Reserve] asset purchases nor its end date has been modified...

Thus, I cast a dissenting vote because I opposed retaining the statement language that reads "…it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends." I viewed such language as an inappropriate characterization of the future path of policy and so may limit the Committee's flexibility going forward.

In December 2013, the FOMC began to taper its asset purchase program, indicating that it was not on a preset course, but that the pace depended on the performance of the economy. The Committee also indicated it was likely that it would be appropriate to maintain the current range of the federal funds rate well past the time that the unemployment rate declines below 6.5 percent.

At the time this decision was made, the unemployment rate was 7.0 percent, and year-over-year PCE inflation was 1.0 percent. With the recovery appearing somewhat unsteady and with the possibility of inflation falling further, caution and patience seemed prudent.

My own assessment at that time was that the economy would gradually recover. I projected that by the fourth quarter of 2014 the unemployment rate would decline to 6.2 percent, and year-over-year PCE inflation would rise to 1.8 percent.

Consistent with that view of gradual economic recovery, I believed that an appropriate monetary policy would require the funds rate to rise to 1.25 percent by year-end 2014. Moreover, I anticipated continued progress toward economic health in 2015...

With the economy having already reached my year-end 2014 forecast for inflation and unemployment, and appearing to be well on its way toward achieving my 2015 forecasts approximately a year ahead of schedule, the funds rate setting remains well behind what I consider to be appropriate given our goals...

Given the clear progress we have made toward achieving our long-term goals over the past year, and the progress and momentum that appears to be building in the economy and in the broader labor market, I no longer believe that the forward guidance language in the statement is appropriate or warranted.