Rate Hike Before 2013 Possible - Fed Official Plosser Sees

(Dow Jones) - The Federal Reserve may have to tighten monetary policy earlier than many now expect, a central bank official said in a speech that also suggested the US economy will do better in 2012 amid improved labor markets.

"I believe economic conditions may require the Fed to raise rates before mid-2013," Federal Reserve Bank of Philadelphia President Charles Plosser said during a speech in Rochester, N.Y.

Plosser held a voting role at Federal Open Market Committee meetings in 2011. He was a persistent critic of the policies pursued by the central bank through much of the year, joining with a cadre of other policy makers to oppose some of the stimulus the Fed provided last year.

The central banker said he remains uncomfortable with the Fed's current conditional commitment to keep interest rates very low through the middle of 2013. He fears markets view this as a fixed pledge, rather than something tied to policy makers' expected path of economic development.

But Plosser was upbeat about the economy's prospects. He welcomed the Fed's very recent decision to join the publication of its economic forecasts with a summary of Fed officials' monetary policy projections. He also worried about long-run inflation implications of the current course of monetary policy.

Plosser said the economy is growing at a "moderate pace," and explained he expects "annual growth to gradually accelerate to around three percent in 2012 and 2013."

Inflation will be "moderate" over the short run, and inflation expectations are currently "stable," Plosser said. He noted "we need to proceed with caution as to the degree of monetary accommodation we supply to the economy" because what the Fed has done "could translate into a steady rise in inflation over the medium term even without much of a drop in the unemployment rate."

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