Fed Official Suggests Rate Hikes Soon, Stocks Drop in Response

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/ Source: Reuters

A strengthening U.S. economy may force the central bank to hike rates "sooner rather than later" to stay ahead of inflation, Philadelphia Federal Reserve President Charles Plosser said on Tuesday.

In a speech in Washington, he said the Fed is at risk of falling "behind the curve" in its control of inflation if policy stays at its current loose level as the economy grows and the labor market continues to improve.

He said he sees growth at 3 percent this year, despite a dim first-quarter that he, along with many Fed members, have attributed to severe winter weather. Overall the U.S. economy "is on the firmest footing it has been on since the recovery began," Plosser said.

Philadelphia Federal Reserve President Charles Plosser suggested interest rates be raised sooner rather than later.BRENDAN MCDERMID / Reuters

He dismissed the first-quarter reading as an aberration and said the "underlying details are...encouraging.

"As we continue to move closer to our 2-percent inflation goal and the labor market improves, we must be prepared to adjust policy appropriately," said Plosser, who currently serves as one of the regional bank members on the Fed's main policy-setting committee. "That may well require us to begin raising interest rates sooner rather than later."

The markets reacted to his comments negatively. The Dow Jones Industrial Average, which had been down about 80 points before his speech, dropped sharply further and was down 160 points in afternoon trading.

Plosser has staked out a position as among the most concerned about the risk that inflation may become unmoored as a result of the Fed's extended period of loose monetary policy. Interest rates have been effectively zero for five years, and a series of stimulus programs have seen the central bank buy up $1.4 trillion in assets.

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- Reuters