Philadelphia Federal Reserve President Charles Plosser told Bloomberg Radio host Kathleen Hays in Jackson Hole, WY today that monetary policy may not solve problems facing the U.S. labor market.
Plosser said, “I’m very uncomfortable with the notion that we have to keep monetary policy at zero interest rates until the labor market has healed completely.”
He also wants Fed guidance changed to signal a rate increase sooner than currently suggested: “The longer we wait, the bigger we risk we’ll have to raise interest rates faster when the time comes” and quicker rate increases would be “more traumatic” for financial markets.
Plosser Sees FOMC Concern About Reverse Repo Program
Plosser: Continued ZIRP May Not Heal Job Market – Transcript
KATHLEEN HAYS, BLOOMBERG RADIO: You made a bit of a splash with your dissent on the language on forward guidance, pledging the Fed to keep rates low for a considerable period of time. Explain to our listeners why this “considerable period of time” phrase is so important that you dissented on it.
CHARLES PLOSSER, PRESIDENT, FEDERAL RESERVE BANK OF PHILADELPHIA: Well, I think it’s important because it’s a considerable period of time after we stop purchasing assets, is the — is the language.
And that means that it’s bad policy and — to begin with, from my perspective, because it talks about calendar time. And what we really ought to be talking about is data, what is the data telling us and how should we going to — how we’re going to use the data to decide when to start raising interest rates.
And my feeling is, is that since we began the taper so to speak back in last December or January, we’re way ahead on the data compared to where we thought we’d be. In fact, if you go back to December and look at the summary of economic projections that the FOMC puts out each quarter, we’re about a year or a year and a half ahead of where we thought we would be last January.
And yet our policy hasn’t changed. So are we data dependent or not?
And my argument would be that we are data dependent. We should be data dependent. And what that means is that we need to change the language of our policies and react to that data.
And I think it’s time we did that. And so we could have, with better data, you could say, well, we’ll end the taper — or we’ll end quantitative easing sooner and leave considerable period of time. That would have brought — that would have been a reaction to the data. But we haven’t done that. So we haven’t changed our pace of taper and we haven’t changed our forward guidance about when we would raise rates after the taper was over.
HAYS: Well, is it possible — and is this what maybe the Fed started to talk about very intensely at the last meeting, looking at this very question you dissented on. You could remove considerable period of time. You watch the data. Oh. All of a sudden, the data weakens. I — and then the Fed doesn’t move.
Right now the markets seem to be thinking that when you remove considerable period of time, you are on the verge of raising interest rates.
PLOSSER: Maybe. I mean, we should be talking about what the data are telling us and so I’ve been a very strong advocate for more rules-based policy. And what rules-based policies tell you how to set the interest rate based on the data.
So if the data don’t change in the right way, then why should we raise rates?
But I would rather us get started raising rates sooner and raise them more gradually than to put it off, put it off, put it off until we are — have to raise them and we may have to raise them very quickly in response.
HAYS: Well, is it fair to say then that the removal of considerable period of time means that that is the Fed — is — that’s the prelude to the first interest rate increase?
PLOSSER: Well, it’s a changing of the forward guidance, is to sort of how we’re thinking about it. It has to be a prelude in some sense. It’s because it hasn’t happened yet.
PLOSSER: So we will have to raise rates at some point. But the longer we wait to begin signaling that, the more traumatic the adjustment’s going to be in the financial markets, I think.
HAYS: Why are you so concerned about waiting to raise interest rates? It looks to me like we’re not talking about a long time. I spoke to Dennis Lockhart here in Jackson Hole, he still says June 2015 looks about right to him. You know very well Jim Bullard says, oh, he thinks it’s more like March 2015.
Are we splitting hairs here?
PLOSSER: Well, we have to change the language in our statement, because the language in the statement is not reflecting either of those statements necessarily or may not be. We haven’t — we haven’t clarified it.
So our language is confusing. We are sending our official policy statement that says we will wait a considerable period of time, whatever that means — and it may mean different things to different people, which is, in some sense, the beauty of it — but we haven’t changed that despite the fact that the economy has changed dramatically since last December.
So how can we justify keeping the same official stance of policy when the economy’s changed as much as it has?
HAYS: Well, let’s give our listeners some numbers then, because there are definitely people out there who are skeptics. Charles Plosser’s got it all wrong. He’s a hawk. He just dissented because he didn’t get his way on interest rates.
So give our listeners some of your reasoning. Give me a couple of those — really those numbers are just screaming, look, the economy is changed; our language hasn’t.
PLOSSER: Well, in December of last year when we started the taper, which we claimed was going to be data dependent, our projection of the — at the FOMC, the SEP, said we would reach — we would not reach a 6 percent unemployment rate until the end of — almost the end of 2015. We’re there already.
We thought inflation would not rise back towards 2 percent. It’s almost there. OK? It has risen back faster.
So our projections about the path of the economy going forward back last December was that we wouldn’t be where we are today until nearly the end of 2015. So things have changed. Things have changed relative to our own expectations. And yet we haven’t changed policy.
HAYS: What is the risk of waiting an extra three months, an extra six months?
You’ve warned of dire consequences.
PLOSSER: Well, the dire consequences are — the consequences are we get behind. So I’ll put it in two different ways.
One is many people suggest that we can’t leave the zero interest rates until we’ve reached our goals. I think that’s very dangerous. Nowhere in history do we — would we say that we would keep zero interest rates until we are happy with everything in the economy and everything in the labor