Fed's Plosser Warns Against Keeping Rates Low For Longer

A top policymaker at the U.S. central bank decried the "accelerationist approach to monetary policy" among some of his colleagues, pointing to signs of economic improvement as reason enough for the Federal Reserve to stand pat for now.

AP Charles I. Plosser, President and CEO of the Federal Reserve Bank of Philadelphia

Philadelphia Fed President Charles Plosser on Tuesday stepped up his long-standing opposition to the Fed's ultra-easy policies, warning that any further steps to spur the U.S. recovery would be "treacherous" and risk sparking inflation down the road.

"I think that economic conditions, as they have evolved since late last year, do not call for further accommodation," Plosser told a University of Delaware audience. "In fact, the economy has actually improved."

Central bank policymakers are increasingly split about what if anything to do about a delicate economic recovery that has gained traction in the last couple of months, including surprising drops in the still-high unemployment rate.

The Fed , stretched thin after battling the brutal U.S. recession , sketched a difficult road to a full recovery last month and its chairman, Ben Bernanke, left the door open to more large-scale asset purchases if unemployment remains high and inflation eases.

The central bank completed two such "quantitative easing" programs since 2009, known as QE1 and QE2, in which it bought a combined $2.3 trillion in Treasuries and mortgage-backed securities. The purchases, as well as near-zero interest rates since late 2008, were meant to encourage borrowing, investment and U.S. growth.

Plosser, though not a voter this year on the central bank's policy-setting committee, is among a minority of top Fed officials who opposed a policy statement last month that said the Fed expected to keep rates "exceptionally low" at least through late 2014.

He and others have highlighted data that have since shown a pick up in the manufacturing and service sectors, and a drop in the unemployment rate to 8.3 percent in January, from 8.5 percent in December and 8.9 percent in October.

"I am encouraged by the most recent employment reports," Plosser said.

He called employment gains since October "a clear positive trend" - despite those who downplay such good news as a possibly fleeting snapshot.

Some of the other 17 current Fed policymakers, including San Francisco Fed President John Williams and Jeffrey Lacker of Richmond last week, have said the recent job-market rebound  dampens prospects for more stimulus measures.

However, late on Monday, Williams said it "is vital that we keep the monetary policy throttle wide open" to reduce unemployment and bring inflation back up to more desireable levels.

The mixed messages can confuse investors, and underscore the difficulty Bernanke faces in assuring markets that the Fed is committed to support the economy for as long as it takes, even while some of its members disagree on how long that will be.

Plosser, among the most vocal of policy hawks, said the "accelerationist approach" to policy dangerously sets up the economy for either a nasty bout of inflation or an abrupt distortion of financial markets and misallocation of resources.

More policy easing actions "would lead us down a very treacherous path — one that would be ever more difficult to navigate and one that would increase the already substantial risk of higher inflation," Plosser said.

He said that the United States, the world's largest economy, is in a "modest recovery" at the moment, adding he expects inflation to settle this year around 2 percent, which is the Fed's formal price target.