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   Tuesday - Jul 22,  2008

8:30 AM ET:  Philadelphia Federal Reserve Bank President Charles Plosser spoke on the economy and monetary policy early this morning. Plosser spoke out strongly for the Fed to take early action against rising inflation and that the Fed should not necessarily wait for financial markets to fully stabilize. The bottom line is that some regional Fed bank presidents are leading the charge to remove some of the Fed's currently easy monetary policy soon in order to fight inflation. There is even a hint that he sees some Fed officials as talking tough but not acting tough against inflation as needed. We can expect hotter debates on raising interest rates by a number of regional Fed presidents at the August 5 FOMC meeting.

Plosser is one of the first Fed district bank presidents to counter the argument that the Fed must wait on financial stability before raising rates.

"Keeping policy too accommodative for too long worsens our inflation problem. Inflation is already too high and inconsistent with our goal of - and responsibility to ensure - price stability. We will need to reverse course - the exact timing depends on how the economy evolves, but I anticipate the reversal will need to be started sooner rather than later. And I believe it will likely need to begin before either the labor market or the financial markets have completely turned around."

His outlook for inflation is well above the Fed's implicit comfort zone of 1-1/2 to 2 percent inflation. "My outlook is that headline personal consumption expenditure (PCE) inflation will remain near 4 percent in 2008, reflecting in part the increase in energy prices. I expect core PCE inflation to be around 2-1/2 percent this year." His outlook for 2009 is still above the Fed's preferences. "In 2009, as energy and other commodity prices level off, I expect both measures of inflation to be lower - in the 2 to 2-1/4 percent range by the end of next year - provided we set monetary policy appropriately to restrain inflation and keep inflation expectations well-anchored." Plosser emphasizes that the Fed has the resolve to keep inflation from coming unanchored as during the 1970s.

"I want to emphasize that what we have been seeing in the economy this past year, and in my own outlook going forward, is very different from the 1970s, because I see the Fed as committed to keeping inflation expectations well-anchored. I agree with a statement Fed Chairman Bernanke made in June that the Fed will strongly resist an erosion of longer-term inflation expectations, because an "unanchoring" of those expectations would be destabilizing for economic growth as well as inflation."

The Philly Fed president ends his speech by focusing on the importance of tracking headline inflation and basically challenging other Fed officials to back up their anti-inflation talk with action.

"Since energy price increases have been so persistent in recent years, I do believe more attention should now be paid to measures of headline inflation in setting monetary policy. I don't believe we can be sanguine that the behavior of core inflation will keep the public's inflation expectations well-anchored in the face of persistently high headline inflation. To keep inflation expectations anchored means that monetary policymakers will have to back up their words with action."

The latter are clearly fighting words by a regional Fed president. Expect a heated debate at the August 5 FOMC. -- R. Mark Rogers