Fed's Plosser: Additional Stimulus Unnecessary

A top Federal Reserve official said Tuesday he sees no need for additional stimulus programs from the central bank at present because fear earlier this year that the economy was "at risk of falling off a cliff" has "pretty much been dissipated."

But Charles Plosser, president of the Federal Reserve Bank of Philadelphia, said in an interview with FOX Business that the Fed stands ready to launch additional stimulus moves if the European debt crisis threatens the U.S. economy and financial system.

"That is...the biggest underlying risk to the economy right now," said Plosser, a current voting member of the Fed's policy-setting body, the Federal Open Market Committee. "We don’t really know for sure how that will affect us."

​"Domestically...we’re still on this sort of steady low-growth recovery, which is not satisfactory or not very appealing--but it’s still there," Plosser said. "The underlying path of the economy of this low, modest recovery seems to be still entrained. So I don’t see anything that calls for further stimulus at this point."

Plosser cited the recent government report that the U.S. economy grew at an annual rate of 2.5% in the third quarter, up from less than 1% growth in the first half, for his position, as well as Friday's unemployment report, which found the economy created 80,000 jobs in October. The report also revised upward the number of jobs created in August and September by more than 100,000.

But Plosser said he believed the Fed would consider "more aggressive action" on stimulating the economy if deflation -- falling prices, which can destabilize an economy -- developed, or if the European debt crisis spilled over to the U.S.

"Exactly what we would have to do would depend on what happened," he said of Europe. "But we'd need to prepare to ensure that financial stability remains and banks and markets continue to function."

He did not mention continued high unemployment as a reason to adopt additional stimulus measures, but he predicted a steady reduction in the unemployment rate, falling to about 8% by the end of 2012, from 9% currently, and declining further in 2013. He projected about 3% economic growth next year and in 2013 and inflation stabilizing at about 2%.

"I feel the economy's going to continue to grow slowly," he said. "Unemployment rates are going to gradually decline."

Plosser voted against the two most recent moves by the Fed to stimulate growth--in August to promise to keep short-term interest rates low through mid-2013 and in September to step up purchases of longer-term bonds, to help push down interest rates on mortgages and other longer-term loans.

But at the FOMC meeting last week, he voted with the majority of committee members to continue current policy.

"We didn’t take any further actions," he said. "And so I felt like it wasn’t appropriate to 'relitigate,' in some sense, the decision, the previous decision that had been made. But I also would say that it’s important that the committee have credibility and that I support the committee and the function of the committee...So I didn’t see any point in changing the stance of policy.

"​I think it’s dangerous for policy to be jerked around from meeting to meeting," Plosser added. "And so I would prefer that if we weren’t taking any more action, that it makes sense to just stand pat and not dissent for that."

In a speech earlier Tuesday, Plosser pushed for more transparancy and improved communications in Fed policy, including its "forward guidance." Because "policy-making in itself, whether its Fed policy or any kind of policy, creates its own form of uncertainty," he highlighted three proposals, some of which are under active consideration at the Fed:

--the Fed should adopt a specific but "flexible" ​inflation target similar to targets used by some other central banks--he advocated 2%. "We need to sort of be explicit about what our inflation objective is, and admit that we have an objective and commit to it," Plosser said. "I think that’s an important concept, both in central banking and for policymaking to be effective."

--on "forward guidance" for Fed policy, it should "use our projections that we already collect...and use that and reveal that information instead of picking time, dates like mid-2013, or using extended language...I think that would be more effective and more transparent and important for policy."

--​The Fed should disclose more of the "factors and variables" that govern decision making. "Some people talk about rules and other things," he said. "But...when we make a decision, report to the public, well, it’s because these things did this, that or the other, and this is our view. "

"Good policy is a policy that makes that future less uncertain, reduces the volatility of future policy actions, makes it somewhat more predictable," Plosser said. "Now it's never going to be guaranteed, because the world changes, obviously, as we all know. But we can provide more guidance and more instructions as to how, at least in monetary policy, we think about those decisions being made."

"The more guidance and the more clarity you can offer about how policy, if decisions really draw off it, the economy involved, the more certain economic agents are today, they can make better plans, and it's just a better way to conduct policy," he said. "You get less volatility and more growth."