Red Flag on Interest Rates from The Fed
For the second day in a row, we have warnings from the Federal Reserve on a potential quick reversal of the massive quantitative easing program. Today, we have Philadelphia Federal Reserve President Plosser providing these headlines:
18:00 29Sep09 RTRS-PHILADELPHIA FED PRESIDENT PLOSSER: SIGNS ECONOMY “TURNING A CORNER”
18:00 29Sep09 RTRS-PLOSSER: FED WILL NEED TO ACT PROMPTLY, “PERHAPS AGGRESSIVELY” WHEN TIME COMES TO EXIT
18:00 29Sep09 RTRS-PLOSSER SAYS BELIEVES FED WILL NEED TO ACT BEFORE JOBLESS RATES HAVE RETURNED TO ACCEPTABLE LEVELS
18:00 29Sep09 RTRS-PLOSSER: OUTLOOK FOR INFLATION IN NEAR-TERM REMAINS SUBDUED
18:00 29Sep09 RTRS-PLOSSER SAYS SEES GREATER RISK OF HIGHER INFLATION IN INTERMEDIATE TO LONG-TERM
18:00 29Sep09 RTRS-PLOSSER SAYS WILL SEE JOBLESS RATE COME DOWN ONLY WELL AFTER ECONOMY BEGINS TO RECOVER
18:00 29Sep09 RTRS-PLOSSER SAYS EXPECTS ECONOMY TO RETURN TO GROWTH IN SECOND HALF OF 2009
18:00 29Sep09 RTRS-PLOSSER SAYS EXPECTS GROWTH TO PICK UP TO 3 PCT IN 2010, 2.7 PCT IN 2011
18:00 29Sep09 RTRS-PLOSSER SAYS ANTICIPATES UNEMPLOYMENT RATE WILL “CONTINUE TO CREEP UP A WHILE LONGER”
He went on to specify that the central bank needs to be ready for 50 or 75 basis point rate rises. This hawkish view is the first time I’ve heard a Fed president mention Volcker like rate hikes. The key is that he gives you a time frame for when the problems will occur and the potential for aggressive action: intermediate to longer term. Plosser indicates that inflation will be an issue later on, but that the Fed will have to act before the unemployment rate returns to acceptable levels. Following up on my point from yesterday, Plosser said the Fed wants to avoid the a second “Great Inflation”….
Tags: Federal Reserve, inflation, interest rates, Volcker