Plosser, Lacker: Inflation May Prompt Fed to Raise Rates in 2011



Federal Reserve



Moneynews.com

April 1, 2011

Federal Reserve Bank of Philadelphia President Charles Plosser and Richmond Federal Reserve President Jeffrey Lacker said Friday the central bank might raise interest rates before the end of the year in response to a growing economy and rising inflation.

“It wouldn’t surprise me if we need to act before the end of the year,” Lacker said today in a CNBC television interview. “Inflation is the bigger risk this year. That is what you have to keep your eye on.”

Meanwhile, Plosser said an increase in growth or inflation could require the Fed to begin withdrawing record monetary stimulus and possibly raise its main interest rate by the end of this year.

“Signs that inflation expectations are beginning to rise or that growth rates are accelerating significantly would suggest that it is time to begin taking our foot off the accelerator and start heading for the exit ramp,” Plosser said today in a speech in Harrisburg, Pennsylvania.

“It’s certainly a possibility” that the Fed will need to raise rates before the end of 2011, Plosser told reporters after the speech. “In my mind it’s definitely on the table but it will depend on how things play out over the next few months.”

As Fed Chairman Ben S. Bernanke and the Federal Open Market Committee near the completion of a $600 billion bond buying program, some central bankers are focusing on the strategy and timing for shrinking the Fed’s record $2.63 trillion balance sheet and eventually raising interest rates above the zero to 0.25 percent range that has been in place since December 2008.

“We should not be too sanguine in believing that such a time is a long way off or that the process will only be gradual,” he said. “A stronger rebound in the economy or inflation than some now expect could require policy actions to be taken sooner and more aggressively than many observers seem to be anticipating.”

At the FOMC’s last meeting on March 15, Plosser, 62, joined the rest of the committee in unanimously reaffirming plans to buy Treasuries while saying the recovery is gaining strength and that the effects of higher energy prices will be “transitory.”
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