Plosser Says Rate Hike is Inevitable Even if Housing Prices Continue to Fall

Speaking in a Bloomberg Television interview, noted hawk Philadelphia Federal Reserve President Chuck Plosser said the Fed may have to hike rates even as housing prices continue to fall.

Plosser commented that the economy has not changed much in the last few months and that rising prices pose the biggest challenge to the economy. Plosser noted that price pressures are moving through the economy and that the Fed may have no choice but to raise rates.

Plosser acknowledged that financial stability is an important consideration for the economy and that the Fed must take action before price expectations become "unhinged". Plosser added that the Fed's credibility must be reinforced by action.

Plosser warned that high inflation expectations will result in firms passing on higher costs to consumers. He warned that a slackening economy does not necessarily contain inflation pressures.

"The U.S. economy is on a road to recovery, but the road will be bumpy," said Plosser.

Plosser admitted that no one knows if the worst of the credit crisis has passed. He pointed to the recent GSE turmoil stating that the turmoil posed a risk to markets and this made the Fed's job difficult.

By Steve Stecyk and edited by Cristina Markham