November 13, 2014 / 5:30 PM / 5 years ago

Plosser urges caution in lowering neutral Fed rate

PHILADELPHIA, Nov 13 (Reuters) - It is “near impossible” to identify a permanent slowdown in U.S. economic growth so the Federal Reserve should only very cautiously make changes to what it sees as the neutral level of long-term interest rates, a top Fed official said on Thursday.

At a conference here, Philadelphia Fed President Charles Plosser addressed the possibility that the U.S. economy is experiencing a so-called secular stagnation of permanently lower rates of growth following the deep recession.

The U.S. central bank has already formally said that its key interest rate, the federal funds rate, may stay below normal longer-run levels for some time after employment and inflation return to target levels. If secular stagnation has taken hold, that rate may yet fall more from historic levels of about 4 percent.

“Distinguishing short-run or transitory fluctuations from more permanent or persistent movements in growth and real interest rates is a tricky and difficult task (and) near impossible in real time,” Plosser said.

So “policymakers should take great care in making significant adjustments in their view of the neutral policy rate.” (Reporting by Jonathan Spicer; Editing by Meredith Mazzilli)

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