by Calculated Risk on 1/08/2008 11:34:00 AM

From Philly Fed President Charles I. Plosser (voting member of FOMC in 2008): Economic Outlook

The fourth quarter of 2007 and the first quarter of 2008 are going to be quite weak; that has been clear for a number of months. My forecast already incorporates the prospect that we will get some bad economic numbers from various sectors of the economy in the coming months. Since monetary policy’s effects on the economy occur with a lag, there is little monetary policy can do today to change economic activity in the first half of 2008.

The below-trend growth of the economy in the first half of 2008 will likely mean slower payroll employment growth for the first two to three quarters of the year. With slower job growth for a time, the unemployment rate may rise somewhat above 5 percent during the course of the year.

I am still optimistic that the economy will improve appreciably by the third and fourth quarters of 2008, and that is when any monetary policy action today will begin to have noticeable effects. Overall real GDP growth will be faster in the second half of 2008 as the economy begins to return to its longer-run trend growth of about 2-3/4 percent. On a fourth-quarter to fourth-quarter basis, I expect that the economy will grow about 2.5 percent in 2008, close to its pace in 2007, and that it will be growing more consistently near its longer-term trend in 2009.

So Plosser suggests there is no reason for more rate cuts. Monetary policy works with a lag, and even though Plosser sees a couple of weak quarters, he is forecasting a recovery in the 2nd half of 2008.

I am concerned that developments on the inflation front will make the Fed’s policy decisions more difficult in 2008. Recent data suggest that inflation is becoming more broad-based. Recent increases do not appear to be solely related to the rise in energy prices. Consequently I see more worrisome signs of underlying price pressures. Although I am expecting slow economic growth for several quarters, we should not rely on slow growth to reduce inflation. Indeed, the 1970s should be a sufficient reminder that slow growth and falling inflation do not necessarily go hand in hand. Moreover, the 1990s should remind us that we can have sustained economic growth without generating inflation.

Although inflationary expectations have crept up only slightly since early September based on inflation-indexed Treasury securities, my sense is that these inflation expectations are more fragile now than they were six months ago. If inflation expectations continue to rise, it will be difficult and costly to the economy to deliver on our goal of price stability and puts at risk the Fed’s credibility for maintaining low and stable inflation.

And Plosser is "hawkish" on inflation. Clearly Plosser opposes further rate cuts.