Plosser outlines ways easy Fed policies could backfire

SOMERSET, N.J., Jan. 11 Fri Jan 11, 2013 9:28am EST

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SOMERSET, N.J., Jan. 11 (Reuters) - The Federal Reserve's aggressive accommodation may be frustrating Americans' efforts to restore their personal wealth and may actually slow the broader rebound in U.S. consumption, a top official at the U.S. central bank said on Friday.

Philadelphia Fed President Charles Plosser, an outspoken critic of the central bank's prolonged near-zero interest rate policies, outlined the ways those policies may be undercutting the very U.S. economic recovery they are meant to encourage.

"Efforts to drive real rates more negative or promises to keep rates low for a long time may have frustrated households' efforts to rebuild their balance sheets without stimulating aggregate demand or consumption," Plosser, who does not have a vote on Fed policy this year, said in prepared remarks to a meeting of the New Jersey Bankers Association.

In the wake of the 2007-2009 recession, households will take time to restore wealth to a comfortable level, Plosser added, "and attempts to increase economic 'stimulus' may not help speed up the process and may actually prolong it."

Among a minority of so-called hawks at the central bank, Plosser also largely repeated predictions for a pick-up in U.S. economic growth to about 3 percent this year and in 2014. He also expects unemployment to fall to near 7 percent by the end of 2013, from 7.8 percent last month.

The U.S. economy grew at a decent 2.7 percent annual rate in the third quarter but is expected to have slowed in the final months of the year. Last month, Fed policymakers said they expected GDP growth of between 2.3 to 3.0 percent this year, and 3.0 to 3.5 percent in 2014.

At that same December meeting, the central bank ramped up asset purchases that are meant to spur growth. It also pledged to keep rates near zero until the unemployment rate drops to 6.5 percent, as long as inflation expectations don't climb above 2.5 percent.

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