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Fed Bank presidents clear the air

Charles Plosser sees need for rapid rate rise

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The Fed bunker mentality that avoids unpleasant discussions about the uncertainty of monetary policy was nowhere to be found at the Federal Reserve on Friday, as several Fed Bank presidents and Ben Bernanke appeared on a speaker’s schedule for the AEA/ASSA Annual meeting in Philadelphia.

The views of one Fed Bank president in particular made it through the business media’s echo chamber loud and clear, with MarketWatch reporting that Philadelphia Fed Bank CEO Charles Plosser believes a strong lifting of interest rates is needed to follow market rates higher.

MarketWatch reported on Plosser’s statements noting that Plosser believes expectations of a Fed funds rate below 2% in 2016 is too low, and he admits the central bank is likely to face pressure not to lift rates.

Right now, the Fed is focused on asset prices and leverage to ensure the market doesn’t overheat, Plosser added.

But these views – while made in light of the Fed’s decision to finally taper its monthly purchases of mortgage-backed securities and Treasurys – are certainly not new to Plosser.

The Fed Bank CEO told the market two years ago that he feared the long-term impact of the Fed buying mortgage-backed securities.

In a speech published back in 2012, Plosser painted the negative implications of more QE.

"These credit allocations have not only breached the traditional boundaries between fiscal and monetary policy, they have generated pointed public criticisms of the Fed," Plosser said at the time. He warned having a concentration of housing securities on the Fed's balance sheet is a type of credit allocation and pushes the Fed well beyond the boundary of monetary policy into fiscal policy.

Two years later, his hawkish speech in Philadelphia shows his ongoing reticence toward quantitative easing continues, but now he seems to be saying the taper should be more hawkish and less dovish in its approach.

Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, also shared his taper views when speaking at a Maryland Bankers Association event on Friday. Lacker agreed with Plosser on the pace of tapering, saying, "I expect further reductions in the pace of purchases to be under consideration at upcoming meetings."

His outlook on the economy showed a reluctance to lean too much on the idea of a housing recovery, even though he acknowledged improvement in that portion of the economy.

Lacker said data shows some forecasters predicting 3% GDP growth in the latter part of 2014, but he is forecasting a more modest 2% growth. Why? For starters, consumers and lenders are both reluctant, especially with new mortgage lending rules hitting the marketplace this month.

"In addition, policy uncertainty has led some businesses to postpone possible investments. Although residential investment has increased significantly, it makes up only a small portion of GDP," Lacker explained.

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