Plosser to Fed: Tackle inflation or lose trust

The Federal Reserve "is sure to lose its credibility" doesn’t make enough of an effort to lessen inflation, said Philadelphia Federal Reserve Bank President Charles Plosser, today. "The central bank has the obligation to preserve the purchasing power of the currency so that markets are not distorted by the ravages of inflation," Mr. Plosser said, speaking at the Global Interdependence Center in Cape Town, Africa. Mr. Plosser was one of two voting members of the Federal Open Market Committee to oppose last week's 75 basis point cut in the Fed Funds rate to 2.25%. "Maintaining a stable price level allows the economy to function in a more efficient and thus more productive fashion," he said. "Price stability is not only a worthwhile objective in its own right," he added. "It is also the most effective way monetary policy can contribute to economic conditions that foster the Federal Reserve's other two objectives: maximum employment and moderate long-term interest rates." He added that price stability works to promote moderate long-term interest rates by reducing the level of compensation built into long-term interest rates and reduces the need for an additional risk premium to compensate for the risk that arises from inflation uncertainty.