Thursday, June 12, 2008

Plosser is Right on the Money

Is there a July Fed action coming to take back a one-quarter rate cut? I think so. That would put up the target to 2.25%. It would be a shot heard round the world, strengthening the dollar and attracting new liquidity and capital flows into the US economy. Bullish for containing inflation, keeping down the unindexed capital gains tax and helping stocks and the economy to recover. Plosser is right on the money.

And then: Drill, drill, drill.


Fed's Plosser: Rates Will Have to Rise to Curb Inflation

The Federal Reserve's leading inflation hawk told CNBC that interest rates will have to rise soon in order to keep a lid on rising prices.

"We need to take steps to ensure that inflation does not get out of control," Philadelphia Fed President Charles Plosser said in a live interview. "It is certainly clear that rates will have to rise. The question is when."

Plosser comments are the latest in a series of speeches by Fed officials about the dangers of inflation, though the messages have been somewhat mixed.

On Wednesday, Fed Vice Chairman Donald Kohn hinted that the central bank is inclined to leave rates steady despite rising inflation worries among US consumers.

Kohn said that when the economy is hit with an oil price shock as it has been this year, the "appropriate" Fed policy will permit -- temporarily -- both higher inflation and higher unemployment.

And on Monday, Fed Chairman Ben Bernanke said the centeral bank would work to restrain consumer expectations of higher prices, hinting that the Fed may be inclined to boost rates if inflation worsens.

The Fed is hoping tough talk on inflation will do the job of moderating recent price increases, giving it room to avoid raising interest rates as the economy remains fragile.

Plosser, however, stressed that the Fed may need to act soon against inflation.

"We can't control the price of oil directly, but we can control the underlying inflation pressures for the economy," he said.

Plosser also said he and his central bank colleagues must work to lessen the effects of the crisis in the financial system as well as inflation.

"I think they're both real threats, and I think we have to manage both of them," he said.

Plosser said the Fed has taken aggressive steps to counter both problems, but he urged continued vigilance, saying the base of inflation is broadening, and the Fed is in a unique position to act.

Plosser feels the Fed mishandled inflation in the 1970s by acting too late, allowing a relative price shock in oil to translate into higher inflation.

Plosser endorsed Fed efforts to tackle the credit crunch -- such as opening the discount window -- with some reservations.

"I think the Fed has been very creative and aggressive in trying to contain the crisis in the financial markets and the turmoil, and we've done some very interesting, innovative things," he said. "Those decisions and choices we've made have cost some benefits. They contain some risk and challenges."

He also expressed reservations about government efforts to stimulate the economy through tax-rebate checks.

"I am not counting on that having substantial impact on the economy going forward," he said.