By Verna Gates
In a speech to the Rotary Club of Birmingham, Alabama, Plosser said he expects U.S. growth to be "quite weak" in the first half of 2008 and said the jobless rate will rise to 5.25 percent by year end.
"Unfortunately, I expect little progress to be made in reducing core inflation this year or next, and I am skeptical that slower economic growth will help," he said.
Plosser said the rate cuts have will help the economy return to around trend growth of about 2.7 percent by 2009 but warned it would take a few quarters for them to start having an effect.
Plosser said he expects growth in 2008 to top out at around 2 percent and said consumer spending and retail sales are likely to be weaker in the first half of the year than in 2007.
Plosser said he expected housing to remain a drag on growth in 2008. He also said slower payrolls growth could drive the jobless rate up to 5.25 percent by year end.
KEEPING INFLATION IN CHECK
When factoring in the inflation rate, he said real benchmark interest rates are now approaching zero, which he called "clearly an accommodative level."
The Fed holds its next rate-setting meeting on March 18, and markets anticipate another interest rate reduction.
Given recent high oil and food prices, Plosser said, the central bank needs to watch both the core and headline inflation rates to gauge underlying price pressures in the economy.
And while he said rate cuts were justified given slower U.S. growth, he said easier monetary policy would not by itself solve all the economy's problems.
He added that the bond insurers' problems "did not directly influence" the Fed's recent rate cuts, which accounted for 1.25 percentage points of the cuts since September.
(Reporting by Verna Gates; Writing by Steven C. Johnson; Editing by Editing by Jonathan Oatis)
