October 8, 2013 / 5:24 PM / 6 years ago

Plosser says time has come for Fed to phase out bond buys

JOHNSTOWN, Pennsylvania (Reuters) - The Federal Reserve should start reducing its asset purchase stimulus program as soon as possible given that economic growth is already firm and will become stronger next year, a top Fed official said on Tuesday.

Charles Plosser, president of the Philadelphia Fed, told a local chamber of commerce meeting that he disagreed with the central bank’s decision last month to hold off on reducing the $85 billion current monthly pace of bond-buying.

“The time has come for an expeditious phase-out of the purchase program,” said Plosser, an inflation hawk who is not a voting member this year on the policy-setting Federal Open Market Committee.

Plosser said he expects U.S. economic growth to register 2.5 percent this year but then pick up steam to 3 percent in 2014, blaming part of this year’s weakness on what he described as a significant drag from tighter fiscal policy in Washington.

“We missed an excellent opportunity to begin this tapering process in September,” he said. “This illustrates just how difficult it is going to be to wean ourselves off the extraordinary process of increasing accommodation we have embarked upon and begin to normalize monetary policy in a timely manner.”

Plosser said that, unlike some of his colleagues, he was not worried about inflation being too low, given that it has been running below the central bank’s 2 percent target for several years. Plosser pointed to stable inflation expectations and said transitory factors appeared to be keeping inflation down for now.

“I do not perceive that we will have a deflation problem,” Plosser said. “I do see some upside risk to inflation in the intermediate to longer term given the large amount of monetary accommodation we have added and continue to add to the economy.”

The U.S. economy expanded 2.5 percent in the second quarter, but the annual pace of expansion has slowed in the latter half of the year. Unemployment, meanwhile, remains elevated at 7.3 percent.

A recent government shutdown has raised fears that the Fed’s forecasts for rosier growth next year may not materialize. In particular, analysts are worried the failure to raise the country’s legal debt ceiling in a timely manner could lead to another financial crisis.

In response to the recession of 2007-2009, the Fed cut interest rates to effectively zero and just about quadrupled its balance sheet to $3.7 trillion.

Plosser has voiced concern that the large balance sheet could lead to future inflation by making it harder for the Fed to orchestrate an orderly withdrawal of stimulus.

Reporting By Pedro Nicolaci da Costa; Editing by Andrea Ricci and Chizu Nomiyama

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