March 25, 2014 / 1:30 PM / 4 years ago

UPDATE 2-Fed's Plosser wants interest rates at 3 pct by end-2015

(Updates with Philly Fed spokesperson adding Plosser’s rate view for 2015, 2016)

By Ann Saphir

March 25 (Reuters) - Philadelphia Federal Reserve Bank President Charles Plosser believes the Fed should aim to raise short-term rates to 3 percent by the end of 2015 and 4 percent by the end of 2016, a Philadelphia Fed spokeswoman said.

Plosser misspoke earlier in the day in an interview with CNBC in which he said he thought a 3-percent rate by the end of 2016 would be appropriate, said spokeswoman Marilyn Wimp.

The view marks Plosser, a voting member this year on the Fed’s policy panel, as the U.S. central bank’s most hawkish member. No other policymaker sees a rate higher than 2.25 percent as appropriate as early as the end of 2015. All but one Fed policymaker sees rates no higher than 3.5 percent at the end of 2016.

Plosser also said he expects the Fed’s bond-buying program to end by November.

“Our desire, the Fed’s desire is that everything is going to go gradually and smoothly,” Plosser told CNBC. “I think we do have a gradual path rising up but my path is still above most of my colleagues.”

The Fed has held short-term rates near zero since December 2008, and has more than quadrupled its balance sheet by buying more than $3 trillion in bonds to push down borrowing costs and stimulate growth.

Plosser said the Fed’s large balance sheet poses risks as the central bank unwinds its super-easy policy, especially if the policy has caused financial distortions that are suddenly reversed, or if investors simply anticipate a faster return to normal than the Fed itself does.

“If the market gets ahead of us...then we may be faced with a situation where we’ll have to raise rates faster than we otherwise would have chosen to do, and that’s one of the great unknowns about this whole exit strategy,” Plosser said.

The Fed last week said it would reduce its monthly bond purchases to $55 billion, a move that was widely anticipated. It also reiterated its plan to trim the program in measured steps as long as the economy improves as the Fed expects.

After the policy-setting meeting, Fed Chair Janet Yellen briefly roiled markets when she suggested the Fed may start raising rates around six months after the bond-buying program ends.

Plosser said Yellen did not make a “mistake” with that comment because the time frame was in line with market expectations, and was surprised that stocks and bonds dropped in reaction. But, he added, “It’s better to get away from talking about time frames.”

The Fed will not contemplate raising rates before it ends the bond-buying program, which will be probably be November or possibly October if the Fed’s current plan stays on course, Plosser said.

“We will assess at that time what conditions in the economy look like,” he said. “It is silly for us to contemplate raising rates until we stop purchases.”

Plosser told CNBC that because he expects unemployment and inflation to be nearly back to normal by the end of 2016, rates should also be well on their way back to normal as well. (Reporting by Ann Saphir; Editing by Chizu Nomiyama)

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