Fed's Plosser: Accommodative monetary policy is changing
The Federal Reserve's move away from accommodating monetary policies — including QE2 — is in the "not-too-distant future," said Charles Plosser, president and CEO of the Federal Reserve Bank of Philadelphia. Plosser made that statement while speaking at the 20th Annual Hyman P. Minsky Conference in New York. The Fed enacted QE2 last November to green light the Fed's purchase of $600 billion in Treasury debt. The Treasury's purchases are expected to end mid-summer. "The apparent strengthening of the U.S. economy suggests that, in the not-too-distant future, monetary policy will have to begin reversing course from a very accomodative policy stance," said Plosser. "As we choreograph that exit, I believe that the Fed should do all it can to underscore its commitment to maintaining price stability." While QE2 has been a hot topic for months, Plosser's speech shows a heightened focus on price stability as Americans witness higher gas prices, compounding fears of another 1970s-type inflationary period. "Now we are experiencing sharp increases in oil and other commodity prices. While such price increases are typically associated with changes in relative supply and demand, we must not be too sanguine that high unemployment and output gaps will guarantee that these relative price shocks won’t pass through to higher general inflation rates, particularly in an environment where monetary policy is very accomodative," Plosser said. "By declaring an inflation objective, the Fed can underscore its commitment to keep inflation low and stable and protect against a loss of credibility, which, in turn will keep inflation expectations anchored despite volatile commodity prices." Write to Kerri Panchuk.