* Plosser says Fed may tighten policy before year-end
* Says jobs data disappointing but mid-term view unchanged
* Sees volatility of inflation concerns "troubling"
(Recasts with comments on jobs data, tighter policy, changes
By Ritsuko Ando and Kristina Cooke
HELSINKI/NEW YORK, June 6 Weak jobs figures on
Friday do not change the fundamental outlook for the U.S.
economy and monetary policy could be tightened by the end of the
year, a top Federal Reserve official said on Monday.
Philadelphia Federal Reserve Bank President Charles Plosser,
a well-known inflation hawk who has a vote on policy this year,
has said he believes the U.S. economy was in a gradual recovery.
"Certainly, the employment numbers that came out in the
United States on Friday were disappointing... But I'm not seeing
anything fundamental has changed in my view of the medium term
outlook," he told reporters after a conference in Helsinki.
Asked about the chances of tighter policy in 2011, he said:
"It's certainly possible by the end of the year," though he
added much depended on how the economy performed.
U.S. nonfarm payrolls data on Friday showed employment rose
by 54,000 last month, just over a third of what economists had
expected, adding to growing concerns among economists about the
strength of the world's largest economy.
He said it was still difficult to draw consistent
conclusions on the impact of the Fed's second round of
quantitative easing to support growth, dubbed "QE2". Financial
markets have begun to discuss the chances of the Fed eventually
embarking on another such round of easing -- for now seen as a
very remote possibility.
Asked about a possible "QE3", Plosser said: "The hurdle rate
for doing more is very high."
Plosser, attending a conference hosted by the Global
Interdependence Center and the Bank of Finland, also said that
the American public's swing from deflation to inflation worries
in the past year is "troubling".
The volatility suggests people have doubts about the Fed's
ability to keep prices stable, he said, adding that confidence
in the Fed is critical if the U.S. central bank is to exit easy
policy without triggering higher inflation or hurting growth.
"It is troubling that the public's inflation concerns can be
so volatile," he said.
"It suggests that there may be less confidence in the
credibility of the Fed's commitment to price stability than we
might desire," Plosser said.
Last summer, concerns the U.S. could face a sustained period
of falling prices prompted the Fed to step in with the QE2
program, which is scheduled to end this month.
Recently, rising food and energy prices have fueled concerns
about inflation. The Fed believes commodity price rises will be
temporary and won't have a lasting impact on inflation.
Plosser said these swings in the public debate shows the
need for clear communication from the Fed. He repeated his
long-standing call for an explicit inflation target and a
systematic exit plan from the Fed's extraordinarily easy
"Given the extraordinary amount of liquidity present in the
U.S. banking system, it is reasonable for the public to be
concerned about the prospects for inflation down the road," said
Plosser, who has a vote on Fed policy this year.
The Fed cut interest rates at record lows near zero since
December 2008 and has kept them there since. It has also bought
bonds to further support the economic recovery, more than
tripling its balance sheet to around $2.7 trillion.
NO HURRY TO TIGHTEN
At its April meeting, the Fed signaled it was in no rush to
tighten monetary policy. But minutes of that meeting showed
policymakers discussed potential exit strategy options at
Plosser said as the Fed normalizes policy, it should return
to an operating framework in which the benchmark federal funds
rate is the primary instrument of monetary policy. In this
framework, the Fed's balance sheet should shrink to "probably
less than than $1 trillion" so that the fed funds rate trades
above the interest on excess reserves.
The interest on excess reserves is a new tool that Congress
gave the Federal Reserve's Washington-based Board of Governors
-- not the Fed's policy-setting committee -- during the
Plosser said he would find a "floor system" framework in
which the interest on excess reserves rate is the de facto
policy rate "troubling" as it puts no limit on the size of the
"If our operating framework divorces our balance-sheet
decisions from monetary policy, it becomes a tempting instrument
for future policymakers inside or outside the central bank to
use it for non-monetary-policy purposes," Plosser said.
"This could jeopardize the independence of the central bank
and, if abused, would be a source of many unforeseen problems."
(Reporting by Ritsuko Ando in Helsinki and Kristina Cooke in
New York; Editing by Patrick Graham)