By Ros Krasny
CHICAGO, Sept 2 (Reuters) - The U.S. economy has sustained a possibly permanent shock that could depress growth in the future, but even so the Federal Reserve may need to raise interest rates rapidly, a top policy-maker of the U.S. central bank said on Wednesday.
The Fed must engineer a careful exit from the unconventional policy programs it has undertaken to stimulate the economy, along with the possible need for higher interest rates, or open up the risk of higher inflation, Charles Plosser, president of the Philadelphia Fed, said in an interview on CNBC.
The timing of rate increases would depend on how the recovery evolves, but the Fed has to be prepared to move faster than some would expect, he said.
The start of a rate-hiking cycle would 'probably not' come in the waning months of 2009, Plosser added.
Financial markets currently see no chance for a Fed rate hike this year, but project an increase in the benchmark lending rate to 0.5 percent, from the current zero to 0.25 percent, during the second quarter of 2010.
Many economists, however, do not expect a move by the Fed before 2011.
Plosser, whose next vote on the policy-setting Federal Open Market Committee comes in 2011, said the U.S. economy should grow in the second half of 2009 and gain more traction in 2010.
'Clearly the economy is in a transition period from a very sharp contraction to an expansion,' he said, adding that volatility in economic data is typical of such a transition.
Prospects for growth over the next few months stem in part from the 'huge contraction' in business inventories that will force businesses to restock as demand picks up, he said.
But the U.S. jobless rate, which is likely to remain high for now, and pressure on the commercial real estate market could pose hurdles to a recovery.
Many small businesses are still having trouble getting credit, he added. 'We still have a ways until credit markets are functioning as smoothly as we would hope.'
Plosser said that once the recovery looks more sustained, the Fed needs to wind down its unconventional programs designed to support the economy during the deep recession.
The Fed's programs to support battered credit markets include its purchase of $300 billion in long-term Treasury debt as well as large amounts of mortgage-backed and mortgage agency debt.
The U.S. central bank has 'pushed the envelope' with its aggressive policy approach, and by doing so has 'muddied the waters between fiscal and monetary policy,' Plosser said.
'If we find ourselves in a position where we have a conflict with our role as a monetary policy-maker, we face a real challenge.'
(Editing by Leslie Adler) Keywords: USA FED/PLOSSER (Ros.Krasny@thomsonreuters.com; +1 312 408 8592; Reuters Messaging: ros.krasny.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
CHICAGO, Sept 2 (Reuters) - The U.S. economy has sustained a possibly permanent shock that could depress growth in the future, but even so the Federal Reserve may need to raise interest rates rapidly, a top policy-maker of the U.S. central bank said on Wednesday.
The Fed must engineer a careful exit from the unconventional policy programs it has undertaken to stimulate the economy, along with the possible need for higher interest rates, or open up the risk of higher inflation, Charles Plosser, president of the Philadelphia Fed, said in an interview on CNBC.
The timing of rate increases would depend on how the recovery evolves, but the Fed has to be prepared to move faster than some would expect, he said.
The start of a rate-hiking cycle would 'probably not' come in the waning months of 2009, Plosser added.
Financial markets currently see no chance for a Fed rate hike this year, but project an increase in the benchmark lending rate to 0.5 percent, from the current zero to 0.25 percent, during the second quarter of 2010.
Many economists, however, do not expect a move by the Fed before 2011.
Plosser, whose next vote on the policy-setting Federal Open Market Committee comes in 2011, said the U.S. economy should grow in the second half of 2009 and gain more traction in 2010.
'Clearly the economy is in a transition period from a very sharp contraction to an expansion,' he said, adding that volatility in economic data is typical of such a transition.
Prospects for growth over the next few months stem in part from the 'huge contraction' in business inventories that will force businesses to restock as demand picks up, he said.
But the U.S. jobless rate, which is likely to remain high for now, and pressure on the commercial real estate market could pose hurdles to a recovery.
Many small businesses are still having trouble getting credit, he added. 'We still have a ways until credit markets are functioning as smoothly as we would hope.'
Plosser said that once the recovery looks more sustained, the Fed needs to wind down its unconventional programs designed to support the economy during the deep recession.
The Fed's programs to support battered credit markets include its purchase of $300 billion in long-term Treasury debt as well as large amounts of mortgage-backed and mortgage agency debt.
The U.S. central bank has 'pushed the envelope' with its aggressive policy approach, and by doing so has 'muddied the waters between fiscal and monetary policy,' Plosser said.
'If we find ourselves in a position where we have a conflict with our role as a monetary policy-maker, we face a real challenge.'
(Editing by Leslie Adler) Keywords: USA FED/PLOSSER (Ros.Krasny@thomsonreuters.com; +1 312 408 8592; Reuters Messaging: ros.krasny.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.