The Fed should adopt an inflation target to signal its commitment to price stability and needs to be careful in how the expansion of its balance sheet will fuel inflation, said Philadelphia Fed President Charles Plosser at the University of Delaware on Wednesday.
"I believe we need to monitor that liquidity and its composition closely so that we are able to withdraw it when the time comes or else we risk fueling inflation in the future," said the central banker, who became a non-voting member of the FOMC in 2009.
The comments come at a time when inflation targeting has become a hot topic for U.S. central bankers, who have expressed concerns over the impact of the Fed's quantitative easing strategy on future inflation.
Plosser argued that a clear target for price growth would "not only help prevent inflation expectations from rising to undesirable levels, but it can also help prevent expectations from falling to undesirable levels," and would more clearly signal the Fed's intentions at a time when interest rates are near zero.
Plosser also argues that economic conditions in the United States are deteriorating, but the current recession will likely not rival that of the 1980's, with economic growth in 2008 "well below" the 2.0% mark and a recovery expected in the second half of this year as housing bottoms.
The comments came just one day after those made by Fed Chairman Ben Bernanke at the London School of Economics, where the head central banker said that more measures are needed to combat the credit crunch and provide additional liquidity to the financial system.
While Bernanke applauded the incoming administration's intentions to deploy an ambitious fiscal stimulus package, he argued that "fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system."
By Erik Kevin Franco and edited by Nancy Girgis
©CEP News Ltd. 2009