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(CEP News) - Philadelphia Fed President Charles Plosser said energy price drops aren't likely to lead to sustained deflation, noting instead that expectations are well-anchored.
Speaking in Rochester, N.Y., Plosser did say, however, that the Fed must commit to preventing sustained deflation from becoming widely anticipated. "At a time of great concern about financial turmoil, we should keep in mind that instability in the general level of prices - whether inflation or deflation - is itself a significant source of financial instability," he said. "When the public's inflation expectations begin to rise, that can contribute to higher actual inflation. It is therefore important for the Fed to maintain its credibility to keep inflation low and stable when large relative price movements in energy and food commodities led to large increases in the consumer price index." He said an inflation target would be a valuable tool in preventing deflation expectations. While economic growth over the next several quarters will be weak, Plosser said he expects growth to improve in the latter part of 2009. Plosser also said the Fed should not favour a single industry over another, and that when market normality returns, regulatory reform will be needed. The reform should address key principles, including: clear and feasible objectives; a commitment to systematic policies; transparency; and a healthy respect for the independence of the central bank, Plosser said. Speaking to reporters following his speech, Plosser said the Fed is still studying alternative policies and that they can purchase "longer-term securities." He also said the current crisis is "not the 30s" and that he doesn't foresee another depression. He also said that while the Fed has received numerous loan requests from municipalities, they don't have the authority to lend to them. By Stephen Huebl,
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