Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia, who will become a voting member of the Fed’s policy-making committee in 2014, spoke with a small group of reporters in Philadelphia last week about his view of the economy, why he doesn’t think the Fed should taper its bond-buying campaign, and why he intends to continue airing his disagreements with the Fed’s leaders.
Mr. Plosser, who has opposed the Fed’s efforts to stimulate the economy in recent years, argues that the central bank is taking large risks for small rewards.
During his last term as a voter, in 2011, he opposed the Fed’s third round of bond buying, known as Operation Twist. And he has called regularly for the Fed to curtail its fourth round of bond buying, putting him at odds with Janet L. Yellen, the Fed’s vice chairwoman, who is awaiting Senate confirmation as its next chief.
But Mr. Plosser also worked closely with Ms. Yellen as part of a small group of Fed officials that put together the Fed’s first specific declaration of its policy goals, published in 2012, including its intent to keep inflation at about 2 percent a year. They share a conviction that clear communication helps to increase the Fed’s power.
A lightly edited transcript follows. Please note that I have summarized rather than quoted the questions, and that most were posed by other reporters.
What did we learn about the economy from the November jobs numbers?
I think it’s pretty hard to argue that this wasn’t a pretty positive jobs report. If you sort of look back over the last six months, it’s been pretty steady progress and even improving some. So I think the news is, as I’ve been saying for most of the year, that the labor market is improving on a pretty steady pace. It’s not a dramatic pace, but it’s been improving for most of the year. I feel good about that. And generally what we’ve seen over the last several months is pretty broad-based improvement in employment in lots of different sectors. It hasn’t been too concentrated in one sector or another. That’s all positive, a good sign for the economy going forward.
Do you expect the economy to accelerate next year? Do you expect us to grow fast enough to recover the losses sustained during the Great Recession?
There was, if not permanent, very persistent damage to the economy from the crisis. That has been part of at least my personal way of how I thought about the crisis, that some of this was actually not going to come back the way that some people thought it was. And accepting that has sort of influenced the way that I think about policy. If you just look at G.D.P., it drops and then starts going up again almost parallel to the old trend line. I don’t believe we’re going to get back to that old trend line, at least not very quickly. And we may never get back to that old trend line. Who knows?
And what you’re seeing over time is more and more economists, the C.B.O. in particular, marking down their estimates of what G.D.P. is going to be. I think we’ll continue with steady growth. My forecast for 2014 is about 3 percent. For 2015, a little below that, 2.7 percent. That’s about where I think we’re going to be.
The government also said Friday that inflation was just 0.7 percent over the 12 months ending in October. That’s far below the Fed’s 2 percent target. Are you worried that inflation is too low? And are you still worried that the Fed’s stimulus campaign could unleash higher inflation?
I’ve been a very strong advocate for our inflation target. I think it’s important that we defend that target both from above and below. I think the question is how much do we think in the current environment that the low, below-target rate of inflation that we have now is likely to be sustained for a long period of time. It’s been my view that I believe inflation is likely to trend back up toward our target.
My worry about too much inflation is really in the out years. It’s not near term. It’s later, when the amount of monetary accommodation that we provide, particularly in the banking system, when those reserves begin to flow out into the economy, that’s when we’ve got a risk of inflation. I’m worried that if we don’t control those in the right way, we could get too much inflation.
But frankly, if we get into that period without enough inflation then our goal should be to let those flow out in a way so that we achieve our target. When that monetary stimulus that is in the banking system begins to flow out, we should do that in a way that makes sure that we achieve our target.
Isn’t low inflation an argument for more stimulus in the short term?
Our asset purchases are not very inflationary right now because they’re just going into the banking system and sitting there. So doing more quantitative easing to try to create more inflation in that context is not going to be very effective. Our ability to actually stimulate more inflation in the short run might be a little questionable. Just buying more assets won’t do that.
You’ve said that you want the Fed to explain to investors exactly how the current bond-buying program is going to end. How do you provide that kind of forward guidance without further confusing investors?
I’ve been talking for a few years now about how complicated we’ve made monetary policy, all this stuff on the margins in which we’re trying to make decisions and influence the markets and change expectations. I’ve become concerned that we’ve made it so complicated that we’re getting in our own way.
We created this QE3, this flow-based program, with the idea that somehow we could fine-tune the rate of purchases to adjust to the economy. I think what we’ve learned it’s not that easy. We’re getting a lot of volatility and a lot of uncertainty meeting after meeting. Are we going to begin the taper? How much? When is it going to end? All of that is uncertainty that we’ve created. So I think we need to simplify.
It might be better and simpler if we just said here’s how much we’re going to buy. We cut off QE2 quickly with little disruption in the marketplace in part because the markets had a long time to anticipate and understood what we’re doing. We would well serve both the markets and the economy by bringing more clarity to this.
It would remove a fair amount of uncertainty from the marketplace.
Do you think the Fed should taper its bond buying in December?
Most of you know that I was never a big fan of this program in the first place, so part of me says the sooner we can end this thing the better. But in reality, the sooner we say we’re going to end this program once we’ve purchased X, the sooner we say that, the better. I’m not going to give you a dollar amount. We can debate about what that number is – I want it smaller, some of my colleagues want it larger – but the sooner we say that, the better. Pick a time and reduce the uncertainty between now and then. I wouldn’t even say that you taper, you just say that we’re going to stop then. We’re going to buy at this pace until then, just like we did with QE2, which we did without much disruption or much problem or people trying to anticipate what are we going to do. It’s that constant uncertainty about what we’ll do at each and every meeting that I think we can eliminate this way, and we’ll be better off for it, and we’ll not sacrifice much of the benefits of the program.
So you don’t necessarily think the Fed should taper?
I don’t see any reason why we couldn’t say in December, we’re going to buy X and do that every month until we reach X and then stop. And there’s no tapering necessary.
There is a concern among some investors that public disagreements among Fed officials are confusing and counterproductive. You are likely to find yourself in disagreement with Ms. Yellen. Do you see any merit in the idea that such disagreements should be kept private, rather than aired publicly?
I do not. I believe what the chairman has done in creating an environment of open discussion and views, particularly at a time where both economic theory and the theory of monetary policy is far from settled — in terms of either theory or practice — that that has been a very healthy and positive thing to have happen.
But more than that, I also think it’s an important element of the central bank being transparent. I think we owe transparency to the public. I’ve said on a number of recent occasions that we need to be accountable and I think part of being accountable means communicating the nature of the debates that go on within the central bank. And understanding those debates is part of what I believe ultimately can bring confidence in the central bank because people understand that we’re having the same debates that they are. And yeah, ultimately we reach a decision, but we build confidence and trust that we are having healthy debates within the system.
The danger I think, when you send a message of extreme consensus that doesn’t really exist, you’re actually doing a disservice. So I’m a very strong believer in openness and transparency and these things. I know the financial markets sometimes don’t like it, but that’s life. Life isn’t always easy and it’s not always clear-cut.