On Air Now

Current Show

The WSAU Polka Party   5:00 AM - 7:00 AM

9am-Jeff Heinz 10am-Polkatime America

Show Info »

Upcoming Shows

Program Schedule »

Listen

Listen Live Now » 550 AM Wausau, WI 99.9 FM Stevens Point, WI

Weather

Current Conditions(Wausau,WI 54403)

More Weather »
70° Feels Like: 70°
Wind: ESE 3 mph Past 24 hrs - Precip: 0”
Current Radar for Zip

Today

Cloudy 79°

Tonight

Mostly Cloudy 65°

Tomorrow

AM Clouds/PM Sun 85°

Fed may fall 'behind the curve' if GDP keeps growing: Plosser

Philadelphia Federal Reserve President Charles Plosser speaks at an Economics21 event in New York, March 25, 2011. REUTERS/Brendan McDermid
Philadelphia Federal Reserve President Charles Plosser speaks at an Economics21 event in New York, March 25, 2011. REUTERS/Brendan McDermid

(Reuters) - The Federal Reserve may find its monetary policies quickly becoming overly easy if it sticks to the current pace of reductions to its bond-buying program in the face of a growing U.S. economy, a top Fed official said on Thursday.

"If the economy continues to improve, we could find ourselves still trying to increase accommodation in an environment in which history suggests that policy should perhaps be moving in the opposite direction," Philadelphia Federal Reserve Bank President Charles Plosser said in remarks prepared for delivery to the Official Monetary and Financial Institutions Forum in London.

"Reducing the pace of asset purchases in measured steps is moving in the right direction, but the pace may leave us well behind the curve if the economy continues to play out according to the (Fed's) forecasts."

Since the onset of the Great Recession and throughout the more than four years since its end, Fed has kept interest rates near zero and has bought trillions of dollars of long-term assets in order to suppress borrowing costs and boost investment and hiring.

Late last year, in a nod to the improving economic and labor market outlook, the U.S. central bank took its first step toward easing up on the monetary gas pedal by trimming its current round of bond buying and signaling it could end purchases altogether later this year.

But the hawkish head of the Philadelphia Fed worries the wind-down will take too long, if, as he expects, the economy grows about 3 percent in 2014, pushing down the jobless rate to at least 6.2 percent by the end of this year and "plausibly" even below 6 percent.

Plosser's forecast for growth falls squarely inside the 2.8 percent to 3.2 percent forecast range from the majority of Fed officials.

"As the expansion gains traction, the challenge will be to reduce accommodation and to normalize policy in a way that ensures that inflation remains close to our target, that the economy continues to grow, and that we avoid sowing the seeds of another financial crisis," Plosser said.

"While there continues to be some downside risk to growth, for the first time in years, I see the potential for more upside risk to the economic outlook. We need to consider this possibility as we calibrate monetary policy."

The economy grew at a 2.4 percent pace last quarter, and recent soft economic data suggests growth may have since slowed. But Plosser cautioned against reading too much into recent weakness, chalking most of it up to severe winter weather.

That's a view shared by many at the Fed.

Most investors expect the central bank to look past the soft data and continue to reduce its bond-buying program by $10 billion per month at each meeting, setting it on course to end the program before the year is out. The Fed next meets to discuss policy in less than two weeks.

But Plosser, who votes this year on the Fed's policy-setting meeting and is among the most hawkish of the nation's central bankers, wants to ratchet back super-easy policies more rapidly than most of his colleagues.

Unlike many of his colleagues, who predict it could take years for inflation to return to normal levels, Plosser said Thursday he sees upside risks to inflation, now languishing at just above half of the Fed's 2-percent target.

Plosser also called for the Fed to remake its guidance to markets for how long it will keep rates low, because the current promise, to keep them low until well beyond the time the unemployment rate falls to 6.5 percent, has lost any usefulness.

The U.S. unemployment rate stands at 6.6 percent.

He reiterated his view that the Fed should strive to follow monetary policy rules, reduce its reliance on discretionary decisions, and pull back from the aggressive intervention that has marked its actions since the financial crisis.

(Writing by Ann Saphir; Editing by Andrea Ricci)

Comments