The Federal Reserve is currently buying USD85 billion in assets such as Treasury holdings and mortgage debt a month from banks to keep interest rates low, a monetary policy tool known as quantitative easing designed to jump start economic recovery.
The Federal Reserve has suggested such easing policies will stay in place until the unemployment rate approaches 6.5% from its current level of 7.6% provided inflation stays below 2.5%.
Those goals should serve as "triggers" and not "thresholds," Plosser said, meaning the Federal Open Market Committee (FOMC) should be ready to act ahead of reaching those targets to ensure prices remain in comfort zones.
"The central tendency of the FOMC projections describes an economy accelerating in the second half of this year and into 2014. They anticipate growth of 2.3% to 2.6% for 2013 and accelerating to 3.0% to 3.5% in 2014," Plosser said in prepared remarks of his speech at 5th Annual Rocky Mountain Economic Summit.
"The central tendency projects that the unemployment rate will decline to 7.2% to 7.3% by the end of 2013 and reach 6.5% to 6.8% by the end of 2014. This is a faster pace of decline than previous FOMC projections anticipated."
Fed Chairman Ben Bernanke has said asset purchases may begin winding down this year and possibly end next year, though he has also said such policies will remain in place for the foreseeable future.
Sooner or later, such policies should end, said Plosser, a noted inflation hawk.
"The first step is to wind down our asset purchases by the end of the year in a gradual and predictable manner. As I said, I see little if any benefit from these purchases, and growing costs," Plosser said.
"The second step is for the FOMC to commit to its forward guidance on the fed funds rate path, that is, to begin treating the 6.5% unemployment rate and the 2.5% inflation rate in the guidance as triggers rather than thresholds."
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