Speaking at the Economic Club of Pittsburgh, Philadelphia Fed President Charles Plosser (voter) said U.S. GDP should contract somewhat more sharply in Q4 than in Q3, and that growth will likely weaken in the first half of 2009.
"Recent data - including the monthly data on housing, auto sales, consumer spending, and industrial production - have all pointed to a significant weakening of the economy," said Plosser in his opening remarks. "What's more, the stress in financial markets has now become global, weakening the prospects for growth among many of our trading partners. Since our economy has benefited substantially from strong exports over the past two years, the prospect of a global slowdown further contributes to a weaker outlook for the U.S. economy going forward."
The central banker said GDP growth is likely to be around the 2.7% mark in 2010 and 2011, and that the unemployment rate will likely surpass 7% in 2009.
Although the Fed has assumed center stage during the financial crisis, launching a variety of initiatives to ease the pain and resolve the situation, he nevertheless believes that much of the authority lawmakers would like to give the organization falls outside what central banking should be.
In particular, Plosser is concerned about a conflict of interest between financial market regulation and maintaining inflation at stable levels.
Although the decline in commodity prices has helped ease his own inflation concerns, he warns against ignoring price stability.
"This is one objective that cannot be delegated to an agency other than the central bank. No other institution can be charged with this objective, since no institution other than the central bank is capable of delivering it," he said.
Plosser concluded by expressing his preference for a regulatory approach to the financial crisis and focused on ways to prevent systemic risk and reform the system as a whole rather than at the individual level.
In a question and answer session following his speech, Plosser said consumers and businesses are in a period of "retrenchment." He added that he doesn't think the Federal Reserve has the power to provide loans to municipalities. He commented further that it would be difficult to price troubled assets in the TARP program.
By Erik Kevin Franco
©CEP News Ltd. 2008