Fed's Plosser Slams Decision to Keep Rates Low Through 2014

A top Federal Reserve official sharply criticized the U.S. central bank's decision last week to telegraph ultra low interest rates for nearly three more years, saying on Wednesday the move undermined confidence and caused confusion.

The Fed's policy-setting committee, citing a bleak outlook for the fragile economic recovery, said last week it expected to keep rates "exceptionally low" at least through late 2014. The forecast, which was contingent on economic conditions, pushed the target date some 18 months later than a previous forecast and it sparked a rally in stocks and bonds.

"Such statements are, in my mind, particularly problematic from a communications perspective," Philadelphia Federal Reserve President Charles Plosser told a business audience here. "Monetary policy should be contingent on the economic environment and not on the calendar."

There is currently "little justification to further ease monetary policy," Plosser said, adding that the statement about late 2014 threatened confidence just as the economy showed signs of improvement.

The statement has been misinterpreted in some media as a commitment, which it is not, he said. "(T)here continues to be confusion and the confusion stems from our statement."

The comments come a week after a Fed meeting in Washington in which Chairman Ben Bernanke left the door open to more stimulus in the form of asset purchases if unemployment remains high and inflation remains subdued.

Plosser is in a hawkish minority of the Fed's 17 policymakers, at odds with Bernanke's core group of moderate doves.

The Fed in late 2008 lowered rates to near zero and has kept them there to try to pull the U.S. economy out of a brutal recession. It has also bought some $2.3 trillion in long-term securities to drive interest rates lower, an unprecedented step whose efficacy is fiercely debated both inside and outside of the central bank.

Plosser sits on the Fed's communications committee but does not have a vote this year on its policy-setting Federal Open Market Committee (FOMC). He is uneasy with the Fed's super-easy policy stance, and on Wednesday he again warned about ignoring inflation.

"Given the very accommodative monetary policy that has been in place for more than three years, I believe we must continue to monitor inflation measures very carefully," he said at a breakfast meeting of the Main Line Chamber of Commerce.

Yet core inflation is running at about 1.7 percent and is below the Fed's newly-set target of 2 percent. Inflation has slowed the last couple of months and Fed policymakers, including Plosser himself, expect it to ease this year, which could pave the way for more asset purchases.

The Fed declined last week to set a target for its other mandated concern, unemployment, citing the weak direct link between monetary policy and the labor market. U.S. unemployment has eased but remains high at 8.5 percent.

On Wednesday, a report showed that the pace of job creation by private employers slowed in January after a sharp gain the month before. The sector added 170,000 jobs last month, shy of economists' expectations for 185,000 jobs.

Plosser, who dissented twice from FOMC decisions last year, said he backed the new inflation target as well as the other big step toward a more transparent central bank: publishing the rate projections of individual policymakers.

Earlier this week, Plosser confirmed that he projected a rate rise this year.