Plosser Says Weaker Data Don’t Yet Justify More Fed Stimulus

By Scott Lanman and Craig Torres

July 26 (Bloomberg) -- Federal Reserve Bank of Philadelphia President Charles Plosser said it’s too soon for the Fed to bolster record U.S. monetary stimulus in response to slower- than-forecast gains in economic growth and employment.

“Talk of new efforts to stimulate the economy are premature right now,” Plosser said today in an interview with Bloomberg News in Washington. “I don’t think the data have been sufficiently compelling one way or another.”

Plosser’s viewpoint may help explain why Fed Chairman Ben S. Bernanke last week outlined potential steps to spur growth, including asset purchases, without saying that such actions were imminent. Europe’s debt crisis, U.S. census hiring and the end of a homebuyers’ tax credit make it tough to gauge whether the economy is truly weakening, Plosser said.

Varying economic data make it “very hard from month to month to really get a good signal as to what’s going on,” said Plosser, 61, during a meeting with Bloomberg reporters and editors. He said he hopes “the clouds will begin to clear in the next month or two,” and after that, “we’ll get a little better picture actually of where we stand.”

A government report earlier today showed sales of new U.S. homes rose in June more than forecast following an unprecedented collapse the prior month. At the same time, the 330,000 annual pace was the second-lowest in data going back to 1963 after May’s downwardly revised 267,000 pace.

The Fed has left its benchmark interest rate close to zero since December 2008 and pledged since March 2009 to keep it there for an “extended period.” The central bank also expanded its balance sheet to a near-record $2.34 trillion by purchasing $1.7 trillion of housing-related debt and Treasury securities.

‘Lot of Stimulus’

“We’ve got a lot of stimulus out there right now,” Plosser said without ruling out future action. While the central bank “is not out of bullets,” central bankers have to be sure they’re using the right tool, much as a doctor needs to prescribe the correct medicine to cure a sickness, he said.

Private employers added fewer workers to payrolls in June than economists forecast. The jobless rate has been stuck at 9.5 percent or higher since August and reached 10.1 percent in October, compared with December 1982’s 10.8 percent.

Unemployment may take as long as five or six years to return to its longer-run rate, which Fed officials judge to be 5 percent to 5.3 percent, the central bank said in minutes of its June meeting.

Biggest Bother

“The number that bothers me more than anything is unemployment,” said Plosser, who joined the Philadelphia Fed as its chief in 2006. He doesn’t vote on interest-rate decisions this year and dissented twice from Federal Open Market Committee actions to lower borrowing costs in March and April 2008. “I’m worried that we’re kind of looking at a longer slog to get through than perhaps I would like.”

In a separate interview with Bloomberg Television today, Plosser said the economy still has “underlying strength” and that the Fed has “ammunition to act if we want to.”

“But I would caution people that the Fed will look at both the costs and benefits of any action that we undertake,” he said.

For instance, “lowering the interest rates closer to zero could have very disruptive effects on the financial markets,” Plosser said. “If we bought Treasury bills we could un-anchor expectations of inflation because the public might begin to think we are going to buy up the public debt.”

The Standard & Poor’s 500 Index has declined about 8.6 percent from its 2010 peak on April 26 amid investor concern Greece might default on its debt and downgrades of other European nations’ credit ratings. The index rose 1.1 percent to 1,115.01 at 4 p.m. in New York today, the highest close since June 18.

‘Reasonable Approach’

Still, waiting for an economic trend to emerge “is a reasonable approach” for the Fed, said Ward McCarthy, chief financial economist at Jefferies & Co. Inc. in New York. “There clearly was a psychological effect from the events in Europe in April and May. The Fed is literally keeping all options open.”

Bernanke said last week that one option to aid the economy is to lower the 0.25 percent rate the Fed pays on the $1 trillion of banks’ excess reserves. Another is to enhance the Fed’s pledge for low rates for an “extended period.” Last year, Canada’s central bank made a specific time commitment.

“I don’t like the calendar time. I’d rather us focus more on what economic conditions should prevail when we begin thinking about that,” Plosser said. In February, he said he was “not a big fan” of the “extended period” phrase, which Kansas City Fed President Thomas Hoenig has voted against at each FOMC meeting this year. Policy makers are scheduled to meet again on Aug. 10.

Economy to Expand

Plosser said he hasn’t reduced his growth forecast much in recent months. The U.S. economy will expand at a 3 percent to 3.5 percent pace over the next two years, he said. Growth in U.S. gross domestic product slowed to a 2.7 percent annual pace in the first quarter, compared with a 3 percent estimate issued in May and a 5.6 percent rate in the last three months of 2009.

Business spending that was “pretty strong” earlier in the year has since slowed, possibly because of “uncertainties about tax policies and fiscal policies,” Plosser said. “When people see the prospects for higher taxes down the road, it makes a difference today about whether they choose to invest or not.”

The inflation risks are “to the upside” over the next two to three years in part because of the $1 trillion of excess bank reserves created by the Fed, Plosser said.

Inflation currently is running below Fed officials’ long- term preferred rate of about 1.7 percent to 2 percent. The core personal consumption expenditures price index, which excludes food and fuel, rose 1.3 percent in May from a year earlier. “I’m not too worried about inflation in the near term,” he said.