(RTTNews) - The Federal Reserve will need to hike interest rates “sooner rather than later,” Philadelphia Fed President Charles Plosser said Tuesday. The reversal of the accommodative monetary policy will need to take place “before either the labor market or the financial markets have completely turned around,” Plosser, one of the more hawkish FOMC members, told the Philadelphia Business Journal Book of Lists Power Breakfast.

Plosser, who is currently a FOMC voting member, also suggested that more attention should be paid to headline inflation, which includes historically volatile food and energy prices, when setting monetary policy. Typically the Federal Reserve focuses on core inflation when determining the federal funds rate.

“I don’t believe we can be sanguine that the behavior of core inflation will keep the public’s inflation expectations well-anchored in the face of persistently high headline inflation,” Plosser said in prepared remarks. “To keep inflation expectations anchored means that monetary policymakers will have to back up their words with action.”

The Philadelphia Fed President appeared less concerned about economic growth, noting that the Federal Reserve’s “accommodative” approach to monetary policy has “ensured” that economic growth will return to its long-term in 2009. For the rest of 2008 he called for “continued sluggish growth and weakness in the labor markets,” with an increase in the unemployment rate.

“The road to recovery is likely to be a bumpy one,” he warned.

However, the focus of Plosser’s remarks was the threat of inflation, and he cautioned against allowing inflation expectations to lead to the return of a wage price spiral.

“If monetary policymakers wait until they see the evidence of a wage-price spiral, they will be too late - the public will have lost confidence in the Fed’s ability to keep inflation under control, and this will make the job of bringing inflation down much more costly and difficult,” Plosser warned. “Moreover, we could end up with a period of both low economic growth and high inflation.”

“Inflation is already too high and inconsistent with our goal of - and responsibility to ensure - price stability,” Plosser added.

He predicts that PCE inflation will remain around 4 percent in 2008, although it should moderate by the end of 2009 to between 2 and 2.25 percent provided the Federal Reserve raise rates.

“If policy becomes overly expansionary as it tries to address an economic slowdown, the relative price shock will result in higher inflation,” he said. “That was the mistake we made in the 1970s.”

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