Fed official: Economy trumps inflationIn a speech given to economists, the president of the Philadelphia Fed said monetary policy needs to fix the economic slump and worry about inflation later.
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NEW YORK (CNNMoney.com) -- Despite the risk of inflation, further rate cuts may be appropriate and necessary amid a struggling economy, a Federal Reserve official said Monday. In a speech delivered to the National Association for Business Economics in Washington, the president of the Philadelphia Federal Reserve, Charles I. Plosser, said inflationary worries can be put aside in certain unique situations. "There will inevitably be special circumstances or shocks that fall outside the scope of our economic models that will warrant monetary policy action," Plosser said. Plosser, a member of the key interest rate-setting Federal Open Market Committee, argued that the current economic downturn warrants further action to avoid falling into a recession. "I believe we are in a situation where monetary policy cannot be made by focusing solely on inflation," Plosser said. "The current turmoil in financial markets has already had a significant impact on the economy and has the potential to continue to restrain economic growth going forward." But Plosser said that once the markets turn around, significant action needs to be taken to stem the tide of inflation. "Such deviations should be temporary and limited and promptly reversed when conditions return to normal," Plosser said. The Federal Reserve, in its minutes released in mid-February, said that it would prepare for a "rapid reversal" of rate cuts if market conditions begin to cool, as inflation concerns mount. The central bank has cut its key interest rate to 3% in an attempt to avoid a recession. But recent inflation gauges have suggested prices have increased at an annual pace above 2%, slightly higher than the 1% to 2% range for that measure that the Fed is believed to prefer. |
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