Plosser may call for rate hike at next Federal Reserve mtg: RBC Capital Markets

Philadelphia Federal Reserve Chief Charles Plosser is known as a hawk, meaning he favors raising interest rates to address the threat of (future) inflation. In 2011, Plosser is a voting member of the Federal Reserve’s policy board and he’s expected to voice his hawkish opinion at the next rate policy meeting on April 27th.

David Watt of RBC Capital Markets expects Plosser to not only vote against the Fed’s policy of quantitative easing, but also for a 25 basis point interest rate hike.

Watt's assumption is based on a hawkish speech, titled “Exit,” that Plosser gave on Friday. “Exit” in this case refers to the Fed’s exit from the extraordinary level of liquidity it has provided the financial markets after the global financial crisis.

In the exit plan Plosser presented, the Fed would gradually shrink its balance sheet by about $1.5 trillion and embark on a non-stop nine-meeting-long 25 basis point rate hike stretch that culminates in a 2.50 percent benchmark interest rate – all within the next 12 months.

In response to his comments, the US dollar rallied while Treasuries fell.

Nevertheless, Watt doesn’t think Plosser will get his way, even if he votes his hawkish views at policy rate meetings.

A major reason is that Federal Reserve Chairman Bernanke “does not yet seem uncomfortable with the current stance of policy [and]…there is no chance that Bernanke will be outvoted.”

Watts thinks the Federal Reserve will leave the benchmark interest rate unchanged at 0.25 percent for at least 12 months.

Email Hao Li at hao.li@ibtimes.com

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