More rate hikes may be needed, Plosser says

'Too soon to declare victory,' according to Philly Fed chief

By Greg Robb, MarketWatch
Last Update: 8:50 AM ET Feb 7, 2007

WASHINGTON (MarketWatch) -- The Federal Reserve may have to hike short-term interest rates in coming months to ensure that inflation continues to decline, said Charles Plosser, the president of the Federal Reserve Bank of Philadelphia.

Late last year, Plosser said he thought the current federal funds rate of 5.25% might be sufficient to keep inflation in check.

But as the economy has strengthened in recent weeks, "that scenario becomes less likely," Plosser said in a speech prepared for delivery to the Greater Philadelphia Chamber of Commerce.

"Additional monetary policy action may be needed to keep us moving along the path to price stability," Plosser said. Read full speech.

The Philadelphia Fed bank chief said inflation remains his primary concern.
"While we got some encouraging inflation numbers toward the end of last year, I am not convinced that underlying inflation is on a downward trend," Plosser said.
"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.

He forecast U.S. economic growth at a 3.0% annual rate in 2007, which should hold the unemployment rate below 5.0%.

"My best guess is that the economy will continue to perform well in 2007," Plosser said.
Plosser also said he expects gradual improvement in the housing sector over 2007.
With growth prospects for the economy improving, "there is some risk that we may not see a return to price stability unless monetary conditions are further tightened," he said.
Plosser said that market interest rates tend to move higher when economic growth's strong, adding: "If the Fed does not allow short-term interest rates to rise with the market, it sets the stage for even higher inflation."

Fed policymakers voted to hold overnight interest rates steady at 5.25% for their fifth straight meeting last week but said they remain concerned over inflation. Read comprehensive Fed coverage.

Plosser, who joined the Philadelphia Fed last August, has been consistently warning since that time that more rate hikes may be needed.

Greg Robb is a senior reporter for MarketWatch in Washington.

Blogger's Note:
I'm still struggling with the way the Fed determines rates and when to change them. The past few years the market was hot and inflation was growing so the Fed raised rates to slow it down. However, not only have the prices in my area not gone down, people are actually leaving the area because they can't afford to live here anymore. By the way I live in South Florida, land of high taxes and absurdly high insurance rates.