(RTTNews) - The current financial crisis has created a set of obviously challenging circumstances, Philadelphia Federal Reserve Bank President Charles Plosser said Friday, although in the current economic environment he does not see deflation as cause for concern. Speaking at a conference in Philadelphia, Plosser said that inflation is now “OK,” and economic weakness is likely to persist throughout 2009.

Concerns about deflation have roiled the markets recently, as the price of gas has declined 50 percent and the consumer price index saw its biggest one-month drop ever in October. However, the Philadelphia Fed President told reporters that he is “not too worried about deflation at this point” and added that the Fed is “committed to making sure deflation does not become a serious concern.”

In a speech delivered Thursday evening, St. Louis Federal Reserve Bank President James Bullard warned about the possibility of deflation and the debilitating effects it would have on the economy, effects that would be exacerbated by the current housing crisis.

“Deflation, should it occur in the U.S., might be particularly challenging because some of the core problems we have are in housing markets, where contracts are written in nominal terms,” Bullard said. “An unexpected deflation would make those contracts more expensive for borrowers.”

As threats loom on the horizon, Plosser noted that the markets “aren’t functioning normally” and offered a somewhat bleak outlook for the near term economy.

Fourth quarter GDP is expected to decline at a “somewhat sharper” rate than the 0.3 percent seen in the third quarter, Plosser said.

Growth will be “rather anemic - that’s a charitable way of putting it - in the fourth quarter,” Plosser said.

Unemployment rates will continue to rise throughout 2009, he added. Unemployment rates serve as a lagging indicator, meaning they will likely remain elevated even when the economy has begun to recover.

“Unemployment rates are likely to decline slowly,” he said. “Although they can rise sharply, they are likely to decline slowly.”

It will take until 2010 for a “more normal and positive year” as the economy turns around, Plosser said.

In terms of the housing market, the Philadelphia Fed President said he is predicting a bottoming out by mid-2009, although he added, “I have to confess that’s a highly uncertain forecast.”

On the inflation front, Plosser - typically hawkish - said, “Inflation is OK for right now.”

The sudden decline in oil and gas prices is “pretty positive news for the economy,” Plosser said, adding that it has “taken edge off pressures of expectation.”

In terms of the evolving regulatory structure, Plosser has urged better regulation instead of more regulation.

“Part of the problem is thinking about regulation in terms of who we regulate,” Plosser noted. “It’s not who we regulate, it’s what.”

As an example, he referenced the failure of Bear Sterns in March and the concern about whether or not the Federal Reserve should regulate investment banks - a concern that Plosser said is now moot due to the fact that there are no more major investment banks on Wall Street, as Bear, Lehman, Merrill Lynch, Goldman Sachs and Morgan Stanley became casualties in some form or another of the financial crisis.

However, Plosser predicted that there would be reform, although he added that he hopes congress will take their time to craft insightful legislation, “particularly in light of the fact that this industry is evolving as we speak.”

When asked if the extreme turmoil witnessed in the past year heralded the end of the era of Great Moderation, Plosser said that it is too soon to tell.

“There’s a lot of history to be written,” he said. “Maybe we need to step back a bit and do a little analysis.”

He expressed his support for a second economic stimulus, saying, “Another package is probably appropriate.”

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Posted in Categories: Economy, Forex, Releases, USA.

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