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Plosser Says Fed Must Defend 2% Explicit Target for Inflation

Jan. 5 (Bloomberg) -- Federal Reserve Bank of Philadelphia President Charles Plosser said the central bank should take the steps necessary to ensure inflation stays near its goal of 2 percent.

“It is important that the Fed credibly commit to defending that target either on the upside or the downside,” Plosser said today to a meeting of economists in San Diego. “Right now, it would not be good either for our credibility or for the economy for us to have deflation. For the Fed at this point, we have established a target and we need to defend that target.”

The central bank’s preferred measure of inflation, the personal consumption expenditures index excluding food and energy, rose 1.5 percent in November from a year earlier. The broader consumer price index gained 1.8 percent, the Labor Department said on Dec. 14.

At the same time, “small but steady deflation is not something that we should necessarily be terrified of,” Plosser said to the American Economic Association’s annual meeting.

While Japan has suffered from falling prices in recent years, that is not the country’s main economic obstacle, he said.

A “minus-1 percent labor force growth” and low productivity gains are inhibiting Japan’s economic expansion, Plosser said. “It is not really deflation” that is Japan’s biggest challenge, he said.

The Fed last month said it will keep its benchmark interest rate near zero as long as joblessness is above 6.5 percent, inflation is projected to be no more than 2.5 percent and longer-term price expectations are well anchored. The Fed previously said it will keep rates low through at least mid- 2015.

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