Charles Plosser, President of the Federal Reserve Bank of Philadelphia, told an audience in New Jersey this morning that while he sees no near-term or medium-term risk of inflation, in the longer term the current accommodative policies do raise inflation risks. In a brief overview of the economy at the beginning of a new year, Plosser said he expects the unemployment rate to fall to near 7% by the end of 2013, and he further expects U.S. GDP growth of 3% both this year and next.

Plosser believes that U.S. households are acting prudently and correctly by paying down debt and increasing savings. He draws the following conclusion:

In my view, until household balance sheets are restored to a level that consumers and households find comfortable, consumption will remain sluggish. This is likely to take some time, and attempts to increase economic “stimulus” may not help speed up the process and may actually prolong it.

And it is that accommodative monetary policy (stimulus) that Plosser argues should be tightened more quickly than currently expected. In fact, Plosser states:

[O]ver the medium to longer term, I expect inflation to be near our 2 percent target. But this expectation is based on my assessment that the appropriate monetary policy is likely to tighten more quickly than the Committee anticipated in its latest statement.

Plosser will not be a voting member of the Federal Open Market Committee (FOMC) this year. The full text of his speech is available here.

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