In an interview on Bloomberg TV’s “Market Makers” with Mike McKee, Philadelphia Fed President Charles Plosser said the Fed is getting closer to its objectives for full employment and price stability. He said, “The data keeps telling us we ought to be raising rates” and that “If we wait too long, we could find ourselves raising rates faster and higher than we want to.”
Plosser: Fed Is Getting Closer to Its Objectives
Charles Plosser on his current outlook:
“I think that what the message really is that, look, the monetary policy is very accommodating. It has been for a long time. But at the same time, we are moving closer to our goals and objectives. Inflation is drifting back up toward our 2 percent objective; unemployment rate continues to move down. I think it’s important that we acknowledge that we are getting closer to our objectives. And for me, it’s important for me that we adjust monetary policy appropriately as we approach those objectives.”
Charles Plosser on whether the Fed is close to its objectives, and differences in opinion between Fed officials:
“I think — for me, the question is that, regardless of where you define your objectives to be, we are closer now than we were. We are closer now than we were a year ago. And so, in that sense, what I believe is that we don’t – we should not be keeping interest rates at zero until we reach all our objectives.
That would — for me, that would be an uncomfortable position for the Fed to be in, because we’ve never been there before. You look back in history and ask yourself the question when the last time unemployment was at 6 percent and inflation was close to 2? And we had the funds rate at zero? Not very many episodes where you can find that.
So I think we have to be — acknowledge both to ourselves and the public that, as we get closer to our objectives, and you can debate about whether we are there yet or not, but as we get closer, monetary policy ought to be, in my mind, reacting to those movements.”
Charles Plosser on what’s driving inflation now and why it’s moving up to a sustainable level:
“Well, I think most people believe — most economists now believe that an important element of inflation — determining inflation is inflationary expectations, keeping those anchored. So inflation expectations have been anchored, they’ve been pretty stable. That’s a good thing. And I think that is why many economists begin, and the Fed has said we anticipate inflation will gradually drift back towards our target. And that’s partly relying on the notion that expectations are keeping inflation anchored.”
Charles Plosser on inflation signals and determining what is just noise:
“I mean, economic data is always noisy, OK? So I don’t – I don’t view it as noise. We’ve been anticipating – the FOMC has been anticipating that inflation would drift up. And we have been saying that in our statements. So this is evidence that, in fact, it’s doing what we thought it should do.
Now, the question is what will happen in the future? Will it drift back down again or will it stay up or overshoot, as some people think? Who knows? We don’t know the answer to that. But right now, it’s kind of doing what we think – we anticipated it to do. And we will have to see over time whether that remains stable.
We’ll get months of data that are noisy, some of them will be lower, some of them will be higher. But I think there’s good signs that both in the CPI and the PCE, are both moved up a little bit and that’s a good thing.”
Charles Plosser on why unemployment is decreasing but wages are not rising:
“Well, I think wages actually are rising and they’re rising faster than they were two or three years ago. So they have drifted up as well, but they’re not rising rapidly. And usually wage growth is, in my view, historically is sort of a lagging indicator of inflation, not a leading indicator. So I think wages will continue to drift up bit by bit and that would be a good thing as well.”
Charles Plosser on whether wage increases will push inflation higher:
“No, I think they respond to higher inflation. So in other words that — I believe that wages respond to higher rates of inflation rather than wages pushing inflation up.”
Charles Plosser on why the Fed is waiting to raise rates:
“My view is that a lot of the guidelines that we look at, rules and things like that that give us guidelines about where the stance of policy ought to be for any combination of inflation and unemployment, where that policy rate ought be, many of these rules are indicating that we should begin gradually raising interest rates. And that’s informative to me in thinking about — and I think the message is is that, for us to deviate from what these guidelines and benchmark rules tell us, we’d have to have pretty good reason to want to deviate from them and explain why. So I think we’re closer than a lot of people might think.”
Charles Plosser on whether the Fed will lose credibility if it waits too long:
“Well, I think — well, we’ll lose credibility. We may lose control of inflation. We may lose control of financial markets where we find ourselves later on having to raise rates faster and higher than we otherwise would like to, because we’re so far behind that the markets get ahead of us. That could be disruptive
And so if we wait too long, we could find ourselves raising rates faster and higher than we want to. And the same thing is true for the balance sheet. The balance sheet is supposed to providing accommodation. If we don’t begin to shrink the balance sheet, then if we’re to achieve any level of monetary policy accommodation, interest rates have to be higher and rise faster than they otherwise would with a small balance sheet.
So I think there is some subtle issues on the exit that could cause for a very bumpy ride coming out of this if we wait too long.”
Charles Plosser on whether the speed change:
“Well, it depends — well, no, I don’t think so. But, again, we’re sitting at a point right now where we’re — historic amounts of accommodation. Unemployment six percent, inflation’s close to two. The question is are we already behind? And how far behind are we? Because that’s not a historically place that we’ve been before. So the question is are we already behind?
And yes, monetary policy works with a lag. Still does. What those lags are I think a lot of people can debate and it’s understandable. But if the financial markets get ahead of us and they decide rates need to go up, they’ll go up and we will have to follow them up. And if we want to keep inflation under control, we’ll have to raise rates faster probably than we otherwise might choose.”