(Bloomberg News) Federal Reserve Bank of Philadelphia President Charles Plosser said the Fed may need to raise interest rates before late 2014 and that additional stimulus isn't needed as the U.S. economy shows signs of strength.

"Now that unemployment is at 8.3 percent and falling and inflation is over 2 percent and drifting up, we should not anticipate additional accommodation," Plosser said today in a speech in Wilmington, Delaware. "Indeed, in the absence of some shock that derails the recovery, we may well need to raise rates before the end of 2014."

The policy-setting Federal Open Market Committee this month raised its assessment of the economy, while repeating its plan to keep interest rates near zero at least through late 2014. Fed Chairman Ben S. Bernanke said this week that while he's encouraged by the decline in joblessness to the lowest level in three years, continued accommodative monetary policy will be needed to make further progress.

"I believe monetary accommodation is still called for, but I do not believe it should be as accommodative or aggressive as it was at the height of the crisis, when unemployment was over 10 percent and inflation was just 1 percent," said Plosser, who doesn't vote on the FOMC this year. "Current conditions do not warrant further accommodation."

The Fed may need to raise interest rates as soon as the end of 2012 or early next year, Plosser said in response to questions from reporters.

'Begin Easing Off'

"If growth continues to improve and the unemployment rate continues to fall, then there will be increasing pressure on us to begin easing off of our policy stance," Plosser told reporters. If "we start to ease off on accommodation," that "doesn't mean we're going to race to the top," because the central bank would still have "very accommodative" policies in place even with an interest rate increase, he said.

The Fed has kept the benchmark interest rate near zero since December 2008 and has purchased $2.3 trillion of bonds in two rounds of asset purchases. Federal Reserve Bank of New York President William C. Dudley said on March 19 that it is "far too soon to conclude that we are out of the woods," and "nothing has been decided" on more bond buying.

Signs of Improvement

Plosser said he hasn't been debating the possibility of so- called sterilized quantitative easing. The Wall Street Journal reported this month that the Fed is considering a program aimed at stimulating growth while restraining inflation. Under the plan, the Fed would print money to buy long-term Treasuries or mortgage bonds and tie up that money by borrowing it back for short periods at low rates, the newspaper said, citing people it didn't identify.

"What is that? Where did that come from?" Plosser told reporters. "I haven't had any discussion about it."

Plosser predicted the U.S. economy will expand by 3 percent in 2012, above the Fed's January forecast of growth from 2.2 percent to 2.7 percent this year. The Philadelphia Fed chief said he has been "encouraged by recent employment reports," and that he's seeing signs of improvement in manufacturing and consumer spending.

"As we continue down the road to recovery, there will undoubtedly be some bumps and setbacks along the way, but I am generally optimistic," Plosser said. "As growth continues and strengthens, I expect further gradual declines in the unemployment rate, with the rate falling below 8 percent by the end of 2012."

Risks Remain

Still, Plosser said that risks to the economic outlook remain, particularly from the sovereign debt crisis in Europe. "Fiscal challenges" in the U.S. also pose some uncertainty, he said.

While the housing market this year will probably stabilize and may improve, a "strong" recovery is unlikely until the overhang of foreclosed and distressed properties falls, he said.

"Even as the economy rebalances, housing and related sectors are not likely to return to those pre-recession highs," Plosser said. "The housing crash that ensued destroyed a great deal of wealth for consumers and the economy as a whole," and "monetary policy cannot paper over these losses, nor should it try to do so."

Additional monetary stimulus "could lead us down a very treacherous path," because of the risks of higher inflation and "financial market distortions" caused by record-low borrowing costs, Plosser said.

Inflation Threat

He reiterated that the Fed must monitor inflation risks with prices accelerating faster than the U.S. central bank's 2 percent target. "I am concerned about the drifting up of inflation," Plosser said. Higher oil prices are concerning because accommodative monetary policy may allow them to translate into broader inflation, Plosser said.

"Yet, should economic conditions significantly deteriorate or the upside risks to inflation I have stressed fall and significant risk of deflation emerge, we should rethink our policy stance," Plosser said. "But neither of these events seems likely to me at this juncture."

He said that monetary policy shouldn't "be a day trader" and overreact to small changes in economic data.