Philadelphia Federal Reserve Bank President Charles Plosser on Wednesday said more interest rate increases may be needed to keep price rises in check as the economy resumes growth.
“With growth prospects of the economy improving, there is some risk that we may not see a return to price stability unless monetary conditions are further tightened,” Plosser said in a speech on the economic outlook.
The Fed kept benchmark interest rates unchanged last week for a fifth straight meeting after 17 consecutive rate hikes that ended last June.
Plosser, known as one of the more hawkish Fed policy-makers, is not a voting member of the rate-setting Federal Open Market Committee this year. He will have his first vote in 2008.
Speaking to reporters after his speech, Plosser said he hoped that core inflation would come down below 2 percent this year, but was not sure if it would.
Core inflation remaining above 2 percent in 2007 “would be discouraging,” he said. “That is our concern. I hope it’s not.”
Policy-makers have said they are comfortable with 1 percent to 2 percent for the price index for core personal consumption expenditures (PCE), which excludes volatile energy and food costs. Core PCE rose 2.2 percent in December from year-ago levels.
In his speech, Plosser said inflation remains his primary concern in 2007, and that a recent tapering off of price rises may be the temporary effect of declines in oil prices.
“While I think it is possible that the recent moderation of inflation will continue ... I believe it is too soon to declare victory,” he said, noting that many forecasters do not expect inflation to decline much over the next year or two.
But Plosser said he did not see the recent strength in wage gains as necessarily inflationary.
“The important point is that increases in wages matched by productivity gains are not indicative of any inflationary pressure,” he said.
Stronger-than-expected fourth-quarter productivity data released on Wednesday were encouraging, although the numbers “bounced around a lot,” Plosser said after the data was released.
Even when taking into account weaker figures from previous quarters, “productivity is growing pretty strongly,” he said.
U.S. productivity, which measures workers’ output per hour, gained a stronger-than-expected 3.0 percent annual rate in the fourth quarter from a revised 0.1 percent third-quarter decline.
The rise in productivity helped moderate unit labor costs, which is a gauge of profit and inflation pressures that takes into account the pay and worker hours behind output. Unit labor costs grew at a 1.7 percent annual rate in the fourth quarter, compared with a 3.2 percent rise in the previous three months.
Plosser reiterated his expectations that the economy would grow about 3 percent this year, and that would hold the unemployment rate “just below 5 percent.”
“My best guess is the economy will continue to perform well in 2007,” he said.
The housing sector slump remained a source of uncertainty for the economic outlook, but there were signs of stabilization, he said.
Any spillover effect from the housing slump — either from a downturn in the sector or a decline in the so-called “wealth effect” — has not materialized and was unlikely to do so, Plosser said.
Strength in consumer spending stemming from more jobs and higher wages and improvements in the U.S. trade balance will help buoy the economy, he said.