The U.S. Federal Reserve should not be too sanguine in believing that the time to reverse easy monetary policy is a long way off and that it will be gradual, a top Fed official said on Friday.
A stronger rebound in the economy or inflation than some now expect could require policy actions to be taken sooner and more aggressively than many observers seem to be anticipating, Philadelphia Federal Reserve Bank President Charles Plosser, an inflation hawk, told the Harrisburg Regional Chamber, according to prepared remarks.
Allowing monetary policy to fall behind the curve would result in greater inflation and economic instability in the future, he warned.
Plosser, a voter on the Fed's policy-setting committee, did not specify when he thinks the Fed should reverse course. At its last meeting, the Fed voted unanimously to continue as planned with its $600 billion bond purchase program, designed to lower interest rates and stimulate growth, which is scheduled to end in June.
Plosser said he expects growth to pick up to about 3.5 percent annually over the next two years and the unemployment rate to gradually fall to between 7 and 8 percent by the end of 2012.
He expects inflation to be about 2 percent over the course of the year.
While some economists are concerned that oil price shocks could spill over into broader inflation, Plosser said that higher oil prices in and of themselves don't create sustained inflation.
If we look back to the lessons of the 1970s, we see that it is not the price of oil that caused the Great Inflation, but a monetary policy stance that was too accommodative, he said.
As much as we may wish it to be so, easing monetary policy cannot eliminate the real adjustments that businesses and households must make in the face of rising oil or commodity prices, he said.
He said the Fed has the tools it needs to tighten monetary policy and that it should lay out a systematic exit strategy. He reiterated that an explicit inflation target would be helpful in ensuring inflation expectations remain well-anchored.
(Reporting by Kristina Cooke; Editing by Leslie Adler)