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Fed ‘should change language to pave way for rate hike’

FLORIDA — Philadelphia Federal Reserve Bank president Charles Plosser, the lone dissenter at the Fed’s July policy meeting, has continued his push for the United States central bank to change its language on monetary policy to reflect an improving economy and pave the way for a sooner-than-expected interest rate hike.

FLORIDA — Philadelphia Federal Reserve Bank president Charles Plosser, the lone dissenter at the Fed’s July policy meeting, has continued his push for the United States central bank to change its language on monetary policy to reflect an improving economy and pave the way for a sooner-than-expected interest rate hike.

His remarks, made on Saturday, came after a report by two top Fed researchers said that monetary policy accommodation to help the economy may backfire by creating conditions that could undermine financial stability and cause sharp downturns.

Mr Plosser, who is known for his longstanding warnings about potential inflation risks, said his dissent has given voice to others on the Fed’s policymaking committee who feel the central bank’s steady, accommodative language had fallen out of step with a strengthening US economy.

The Fed’s policy committee next meets later this month in a session that may see Mr Plosser’s call for change to the Fed’s guidance satisfied.

In a recent speech at the Fed’s annual economic conference, Fed chair Janet Yellen acknowledged the arguments of those, such as Mr Plosser, who feel the economy may be stronger than expected. Other policymakers have also said they expect the central bank’s policy stance to begin shifting soon.

“We must acknowledge and thus prepare the markets for the fact that interest rates may begin to increase sooner than previously anticipated,” Mr Plosser said in remarks prepared for delivery to a group of Pennsylvania community bankers who gathered for their annual convention at a seaside resort on Amelia Island.

“I am not suggesting that rates should necessarily be increased now,” said Mr Plosser, who is a voter on the Fed’s main policy-setting committee.

“But our first task is to change the language in a way that allows for lift-off sooner than many now anticipate and sooner than suggested by our current guidance.”

The data the Fed is examining in its policy debate remain ambiguous: Growth has rebounded, for example, but the job report for last month, which was released last Friday, was a disappointment and offered fodder for policymakers who feel US labour markets are not fully healed.

US employers hired the fewest number of workers in eight months last month and more Americans gave up the hunt for jobs, providing a cautious Fed with more reasons to wait longer before raising interest rates.

But Mr Plosser said it was difficult for economists to know the true state of the labour market and dangerous for the Fed to weigh employment issues too heavily in its rate decisions.

“If monetary policy waits until it is certain that the labour market has fully recovered before beginning to raise rates, policy will be far behind the curve,” he said. A preliminary paper released last Tuesday by the two top Fed researchers said central banks should consider effects on both financial conditions and financial stability when setting monetary policy. The paper was written by Mr Tobias Adrian, an economist at the Federal Reserve Bank of New York, and Ms Nellie Liang, director of the Fed’s Office of Financial Stability Policy and Research in Washington.

They wrote that the basis for their argument is a growing body of research advancing a risk-taking channel of monetary policy.

“Accommodative monetary policy eases financial conditions, but may also contribute to the build-up of financial vulnerabilities and hence increase risks to financial stability,” the paper said. AGENCIES

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