January 11, 2012 / 6:01 PM / in 6 years

Fed may need to raise rates before mid-2013: Plosser

ROCHESTER, New York (Reuters) - The U.S. Federal Reserve may need to raise interest rates before the middle of 2013, despite the central bank’s repeated forecasts that it expected to keep rates ultra low until at least then, a top official said on Wednesday.

Philadelphia Fed President Charles Plosser said that while the U.S. unemployment rate is improving, the Fed needs to monitor inflation very carefully and ”proceed with caution as to the degree of monetary accommodation we supply to the economy.

“First, given my outlook, I believe economic conditions may require the Fed to raise rates before mid-2013,” Plosser, who is not a voter on the Fed’s policy-setting committee this year, told an economics seminar here.

“Second, monetary policy should be contingent on the economic environment and not on the calendar.”

In response to a deep recession and financial crisis, the Fed late in 2008 slashed interest rates to near zero and has since bought $2.3 trillion in long-term securities to spur growth and keep the economy afloat.

In statements after its last four policy meetings, the Fed said it expected to keep rates ultra low until at least mid-2013. The comments from Plosser, an outspoken inflation hawk, show there is still robust debate within the Fed over its very easy monetary policy stance.

The Fed also revealed this month, in a big step toward a more transparent central bank, that it will now publish policymakers’ forecasts for short-term interest rates, a move that could push further into the future expectations of when the Fed finally tightens monetary policy.

The first rate projections will come along with regular quarterly economic forecasts after the Fed’s next meeting on January 24-25.

Plosser, who serves on a Fed panel that has been examining ways to improve the central bank’s communications, said the Fed’s policy-setting committee should also provide explicit numerical inflation objectives.

The committee, called the Federal Open Market Committee, should not set fixed long-term numerical objectives for employment, however, because it is largely beyond the control of monetary policy, he said.

A skeptic on the effectiveness of Fed bond purchases, Plosser dissented on the Fed’s easing last year and has warned that further stimulus could spark inflation. On Wednesday, he said he expects inflation to “moderate in the near term.”

The regional bank president also forecast “modest growth” of around 3 percent for 2012 and 2013 and a modest drop in the unemployment rate to 8 percent, or even lower, by the end of this year.

Last week, the Labor Department reported the biggest gain in nonfarm payrolls in three months and said the jobless rate dropped to a near three-year low of 8.5 percent.

Reporting by Jonathan Spicer; Editing by Padraic Cassidy

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