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One of the Federal Reserve's most inflation-wary officials said on Monday the U.S. central bank may have to start raising interest rates even while the unemployment rate is still high to prevent price pressures from getting out of hand.
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Charles Plosser |
"I think we will probably have to begin raising rates sometime in the not-too-distant future," Philadelphia Fed President Charles Plosser said in an interview published on the Wall Street Journal Web site.
That will probably occur while unemployment is still high, Plosser said. The Fed official said he expects the jobless rate — which spiked to 9.5 percent in June — to peak in late 2009 or early 2010.
Plosser, who is not a voter on the Fed's monetary policy-setting Federal Open Market Committee until 2011, has been among the most vocal of Fed officials in expressing concerns about inflation risks from the Fed's ultra-low interest rates and infusions of money into the banking system.
He said that while he isn't worried about inflation in the near term, he does see risks in late 2010 or 2011.
The Fed slashed benchmark interbank lending rates to near zero and has pumped more than $1 trillion of additional cash into the financial system to counter the financial crisis that exploded in mid-2007 and the painful recession that followed.
The Fed has acknowledged that high unemployment is likely to persist into 2011, but has pledged to hold interest rates exceptionally low for a long time, in part because the weak labor market could sap fragile consumer confidence and spoil a recovery.
Many observers worry the Fed may not be able to pull back its massive support for the economy or time its exit properly. Commenting on how the Fed might withdraw its stimulus before the economy is clearly out of danger, Plosser said, "I think we've got a tough road ahead" given the political pressures that officials are bound to face.
Plosser emphasized his conviction that inflation remains a concern by saying, "I also don't want to repeat the Great Inflation of the 1970s."
That comment appeared to be a response to Fed Chairman Ben Bernanke, who defended the central bank's aggressive steps to counter the crisis in a television interview on Sunday.
"I was not going to be the Federal Reserve chairman who presided over the second Great Depression," Bernanke said.
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