Price stability should remain key: Fed's Plosser

By Gordon Bell

CAPE TOWN (Reuters) - The best way for central banks to foster sustainable economic growth and prevent instability is to keep inflation under control, Philadelphia Federal Reserve President Charles Plosser said on Friday.

A broader role for monetary policy is risky, he added, because failure to deliver results could lead to a crisis of confidence in central banking.

"Price stability is not only a worthwhile objective in its own right. It is also the most effective way monetary policy can contribute to economic conditions that foster the Federal Reserve's other two objectives: maximum employment and moderate long-term interest rates," Plosser said in prepared remarks at South Africa's Global Interdependence Center.

His comments come even as the Fed widens the scope of its mandate in an effort to stem a nine-month credit crisis that began in the housing market and has since spread throughout the global financial system.

In its push to revive ailing credit markets, the Fed has already pumped hundreds of billions in liquidity and slashed interest rates by 3 full percentage points since September.

Plosser dissented on the Fed's last policy vote earlier in March, voicing his worry that yet another 0.75 percentage point rate cut was perhaps excessive.

The Fed has also fully embraced the lender of last resort role, expanding the range of collateral it accepts on loans and broadened access to emergency funds at the discount window to a wider array of financial institutions.

Some analysts fear this could eventually boost inflation, especially if the value of securities held by the Fed plummets, thereby forcing the central bank to print money to bolster its own balance sheet.