Although inflation moderated in the last months of 2006, continued, underlying inflation may cause the Federal Reserve to raise interest rates this year, according to Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia.
"I am not convinced that underlying inflation is on a downward trend," Plosser said, in a speech this week. "We may simply be seeing the temporary effect of recent declines in the price of oil, which seems just as likely to rise as to fall in the future," he added. "Additional monetary policy action may be needed to keep us moving along the path to price stability."
However, he also pointed to what he called "the incredible resiliency of the U.S. economy." In 2006, it was tested by devastating hurricanes, a sharp increase in oil prices, boom and bust in the housing market, a struggling domestic auto industry and "geopolitical risks that contributed to economic uncertainty," Plosser said. Through it all, "our economy has continued to expand and produce new jobs and new opportunities," he continued.
Plosser expects continued strong economic growth through 2007, with real GDP growing by some 3% and the unemployment rate remaining under 5%. He said he sees three positive themes at work this year: "hopeful signs of an improvement in the housing market, robust growth in consumer spending and small but encouraging progress in our foreign trade balance."
Addressing the impact of the housing market slump, Plosser said that although some firms were hurt by the residential construction decline, the impact for many was also "at least partially offset by stronger activity on the commercial construction side." Anecdotal evidence indicates that labor and materials freed up in residential construction made commercial projects more feasible, he added.
Plosser made his remarks, that he said reflected his personal views and not necessarily Fed policy, in a speech to the Greater Philadelphia Chamber of Commerce.