Plosser: Rates May have to go up Sooner vs. Later

July 22, 2008 6:49:54 AM PDT
To fend off inflation, the Federal Reserve probably will need to boost interest rates "sooner rather than later" even if employment and financial conditions haven't revived, Charles Plosser, president of the Federal Reserve Bank of Philadelphia said Tuesday. Plosser is a voting member of the Federal Open Market Committee, the group including Fed Chairman Ben Bernanke that determines the direction interest rates should go to influence national economic activity.

Out of concern about inflation, the Fed in June ended a nearly yearlong string of rate reductions aimed at shoring up the wobbly economy. The Fed left its key rate at 2 percent. Many economists predict Fed policymakers will leave rates alone again when they meet next on Aug. 5.

Possessing a reputation for being extra-vigilant about inflation dangers, Plosser was one of two members who dissented from the Fed's decision in late April to slice its key rate. That turned out to be the Fed's last rate reduction, in one of its most aggressive campaigns that started last September.

"Inflation is already too high and inconsistent with our goal of - and responsibility to ensure - price stability," Plosser said in a speech to a group assembled by the Philadelphia Business Journal.

"We will need to reverse course - the exact timing depends on how the economy evolves, but I anticipate the reversal will need to be started sooner rather than later," he warned. "And, I believe it will likely need to begin before either the labor market or the financial markets have completely turned around," he added.

Last week the government reported that consumer prices shot up 1.1 percent in June, the second-biggest rise in a quarter century. Wholesale prices also rose sharply during the month.

The Fed's worry is that lofty energy and food prices will spread inflation through the economy. They also worry that people, investors and companies will begin to brace, or expect, prices to keep rising down the road. Those expectations can make them act in ways that could aggravate inflation.