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Fed’s Plosser sees high bar for change in tapering pace

By Mark Deen and Steve Matthews
Bloomberg News
US GROWTH PLOSSER
Sam Hodgson - BLOOMBERG
Federal Reserve Bank of Philadelphia President Charles Plosser, who votes on policy this year, said recent encouraging economic data isn’t enough to change the pace of the central bank’s asset purchases.

PARIS Federal Reserve Bank of Philadelphia President Charles Plosser, who votes on policy this year, said recent encouraging economic data isn’t enough to change the pace of the central bank’s asset purchases.

“It would have been nice, from my perspective, had we started at a faster pace,” Plosser said Monday in a Bloomberg Television interview with Manus Cranny in Paris, referring to the Fed’s reduction of its stimulus program in $10 billion increments at each policy meeting.

“Given the fact that we’ve embarked on measured reductions, it’s important to give some certainty or at least clarity to the markets on what we’re doing,” Plosser said. “It’s OK to continue at 10 billion. The hurdle rate for change is pretty high in either direction.”

The Fed is trying to determine whether the economy has shown recent signs of weakness because of severe winter weather or fundamental obstacles to growth. The policy-setting Federal Open Market Committee meets March 18-19 in its first gathering led by Chair Janet Yellen since she succeeded Ben Bernanke last month.

Chicago Fed President Charles Evans echoed Plosser’s comments in a speech in Columbus, Ga., saying growth will probably accelerate to 2.5 percent to 3 percent this year after winter weather impeded the economy in the first quarter.

“We have got a pretty high hurdle for altering the tapering plan,” Evans said to reporters after his speech at Columbus State University. He doesn’t vote on policy this year.

While weather has slowed growth, “I am still in the camp that thinks this is transitory. We have got better momentum ahead of us,” he said.

New York Fed President William Dudley said March 7 he sees a “reasonably favorable” outlook for the economy, even as high unemployment and low inflation warrant stimulus for a “considerable time.”

U.S. employers added more workers than projected in February, data last week showed, indicating the economy is starting to bounce back from a weather-induced setback. The 175,000 gain in employment followed a revised 129,000 increase the prior month that was bigger than initially estimated.

Improvement in the labor market is one reason the Federal Open Market Committee trimmed monthly bond purchases by $10 billion in each of its past two meetings. The central bank in January reduced monthly bond purchases to $65 billion.

Policy shouldn’t be “whipsawed from month to month,” Plosser said when asked about the jobs numbers. The numbers were “encouraging,” though they follow other data in the previous two months that were “weak,” he said.

Yellen has pledged to press on with gradual reductions in so-called quantitative easing so long as the economy continues to show signs of improvement.

The FOMC is discussing changing its pledge to keep the main interest rate at zero well past the time unemployment falls below 6.5 percent, Evans said to reporters. Labor Department figures showed that joblessness rose to 6.7 percent in February from 6.6 percent the month before as more people entered the labor force and couldn’t find work.

The rate could linger at 6.7 percent as the labor force grows, Evans said.

“We are going to have to come up with a different language formulation that doesn’t mention 6.5 percent,” he said. “That is why I say I expect it will be a qualitative description. It ought to be something that captures the fact that it is going to continue to be low well past the time that we change the language because that is what we currently say.”

Yellen in some speeches has focused on multiple labor market indicators, such as payroll employment, unemployment and job openings, Evans said. Such data better depict the overall labor market than a single indicator, he said.

“Inflation continues to be very low,” Evans said to reporters.

The Fed’s 2 percent inflation target shouldn’t be thought of as a ceiling, Evans said, predicting a 1.5 percent increase in prices this year.

With assistance from Jennifer Ryan in London.

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