Fed's Plosser warns rate hike may come sooner than expected

Philadelphia Federal Reserve President Charles Plosser speaks at the Council on Foreign Relations in New York, May 8, 2014. REUTERS/Brendan McDermid

By Howard Schneider WASHINGTON (Reuters) - A strengthening U.S. economy may force the central bank to hike rates "sooner rather than later" to stay ahead of inflation, Philadelphia Federal Reserve President Charles Plosser said on Tuesday. Affirming his hawkish stance, Plosser in a Washington speech said the Fed is at risk of falling "behind the curve" in its control of inflation if policy stays at its current loose level as the economy grows and the labor market continues to improve. He said he sees growth at 3 percent this year, despite a dim first-quarter result that he, along with many Fed members, have attributed to severe winter weather. Overall the U.S. economy "is on the firmest footing it has been on since the recovery began," Plosser said according to a prepared text distributed ahead of his remarks at a housing conference. He dismissed the first-quarter reading as an aberration and said the "underlying details are...encouraging." "As we continue to move closer to our 2 percent inflation goal and the labor market improves, we must be prepared to adjust policy appropriately," said Plosser, who currently serves as one of the regional bank members on the Fed's main policy-setting committee. "That may well require us to begin raising interest rates sooner rather than later." Plosser has staked out a position as among the most concerned about the risk that inflation may become unmoored as a result of the Fed's extended period of loose monetary policy. Interest rates have been effectively zero for five years, and a series of stimulus programs have seen the central bank buy up $1.4 trillion in assets. It is now winding down its monthly asset purchases and is expected to end them altogether this fall. Plosser said he felt the steady reduction was moving "in the right direction." But he also said he worried that the Fed, and other central banks, have now become accustomed to the "highly interventionist" role they adopted to fight the 2008 economic crisis and subsequent slowdown. As conditions return to normal, he said, the Fed and other central banks should move "behind the scenes...restoring some semblance of normalcy to monetary policy." Plosser said he was optimistic about the housing market despite its struggles. But he also said he was concerned that more reform was needed to make government support for housing finance more transparent in order to avoid the sort of "heady" real estate boom that sparked the 2008 crisis. (Reporting By Howard Schneider; Editing by Andrea Ricci)