Non-Voting Philly Fed Head Charles Plosser Says The Fed Must Hike Rates Preemptively To Retain Inflation Credibility

Youtube Video: Charles I. Plosser, the Federal Reserve Bank of Philadelphia's president and CEO spoke to SIEPR Associates at Stanford University on "Monetary Policy in a Tough Environment."  October 26, 2009

Clip is from last month when Plosser spoke at Stanford.  The headline making quotes are from a speech yesterday that we have linked inside.  Plosser is concerned about the Fed's reputation and credibility.  With time, he will learn that deflation is the demon running the show (hello Tokyo) and the weapons for it's demise are not so subtle -- printing money.  Say bye-bye to our currency in the process.  Hello world, this is Rome, and we're currently burning.

Watch  (don't click unless your coming from our daily newsletter)

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ROCHESTER, New York (Reuters) - The Federal Reserve must be prepared to raise interest rates if necessary before the jobless rate has fallen to "acceptable levels", or risk losing its inflation-fighting credibility, a senior Fed official said on Tuesday.

Philadelphia Federal Reserve Bank President Charles Plosser said he has become more confident in the sustainability of the U.S. economic recovery even once government stimulus fades, and stressed the Fed must take a forward-looking approach.

Plosser, who will not have a vote on the Fed's policy-setting committee until 2011, said he expects the U.S. economy to grow at around three percent over the next two years.

"Looking ahead, I see an economy that will be growing over the next two years, which means real interest rates will be rising," he said in remarks prepared for delivery at the University of Rochester, New York.

"As they do, the federal funds rate should be permitted to rise with them" to ensure the Fed can promote stable inflation expectations and sustainable growth.

The Fed cut the federal funds rate -- the benchmark U.S. interest rate -- to near zero last December and has kept it there since.

The central bank's policy-makers, after their last meeting in November, repeated a pledge to keep rates exceptionally low for "an extended period" and most analysts do not expect the Fed to raise rates until the second half of 2010.

The Philadelphia Fed chief, who is known as an inflation "hawk", said 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," he said.  "If this were to happen, the Fed would lose its credibility to preserve low and stable inflation."

The U.S. jobless rate is currently at a 26-1/2 year high of 10.2 percent and Plosser said he expects it to edge higher before beginning a gradual decline.

Continue Reading On Reuters > >

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