charles i plosser : the us economic outlook and the normalization of monetary policy speech by mr charles i plosser, president and chief executive officer of the federal reserve bank of philadelphia, at the society of business economists annual conference, london, england, 9 june 2011. * * * the views expressed today are my own and not necessarily those of the federal reserve system or the fomc. introduction good morning. thank you for this opportunity to speak before your society. as business economists, you are well aware of the extraordinary economic times in which we live. a financial crisis and arguably the worst global recession of the post - war era have challenged policymakers in the u. s. and abroad. in many nations, monetary and fiscal authorities undertook extraordinary actions to mitigate the damage, and for most of the hardest hit countries, the recession trough has passed and a moderate recovery is underway. yet the actions taken leave a legacy of huge government budget deficits, short - term interest rates at record lows, and central bank balance sheets of unprecedented magnitudes. even as our economies recover, policymakers face some daunting challenges as we try to unwind these extraordinary actions and rebuild confidence and credibility in our monetary policy frameworks. today i would like to discuss my outlook for the u. s. economy and some thoughts about ways to begin the normalization of u. s. monetary policy. i believe there are several steps the federal reserve can take to ensure a successful exit from this period of extraordinary accommodation, including taking a page out of the bank of england ’ s book by announcing an explicit numerical goal for inflation. as always, my remarks reflect my own views and do not necessarily represent the views of the federal reserve board or my colleagues on the federal open market committee. economic outlook let me begin with an update on the u. s. economy. we are nearly two years into a moderate, sustained recovery from financial crisis and the worst economic downturn since the great depression. in the fourth quarter of last year, the level of real gdp finally passed its prerecession peak, but it did so with some 7½ million fewer workers, a reflection of strong productivity growth. this year ’ s first - quarter gdp growth, at just below 2 percent, was somewhat disappointing. but i believe that this weakness will likely prove to be a temporary soft patch and that the underlying fundamentals remain in place for the economy to resume growing at a moderate pace in the second half of this

earlier in the year when the prices of many commodities, including oil, were rising sharply. however, measured on a year - overyear basis, both total inflation and core inflation continue to advance. i do anticipate that with many commodity prices now leveling off or falling, and inflation expectations relatively stable, inflation will moderate in the near term. however, we must continue to monitor this situation, particularly in this environment of very accommodative monetary policy. indeed, it is good to remember that the current inflationary environment is quite different from the one we faced a year ago when we embarked on the so - called qe2 policy to purchase $ 600 billion of long - term u. s. treasuries. at the time, there were concerns about deflation, whereas now inflation is running above our long - run goal. i would also note that unemployment was higher last fall than it is today. thus, with inflation higher and unemployment lower, it is appropriate to ask what criteria we are using to justify further accommodation. in this environment, i think it is very important that we refrain from actions that risk fueling a steady rise in inflation or inflation expectations over the medium term. we must not become too sanguine that high unemployment will lead to low inflation. the lesson of the 1970s is clear – high unemployment or low resource utilization is not sufficient to prevent high rates of inflation. the current environment in the u. k. should also be a warning. the unemployment rate in britain is near 8 percent, having risen sharply during its recession, yet inflation is now approaching 5 percent and has been steadily rising for nearly two years. monetary policy this brings me to a discussion of the recent policy actions the fed has taken, why i dissented from these actions in august and september, and what i believe should be the long - term view of monetary policy. as i noted at the beginning of my remarks, the economic conditions of the past few years have led to extraordinary monetary policy accommodation. to date, our actions have led to a level of the federal funds rate – the traditional instrument of monetary policy – that has been near zero for almost three years. the fed ’ s balance sheet has grown more than threefold, from nearly $ 900 billion before the crisis to about $ 2. 9 trillion today, and its asset composition has shifted significantly from mostly short - to medium - term treasuries to longer - term treasuries, mortgage - backed securities, and