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Philadelphia Federal Reserve Bank president Charles Plosser on the outlook for the economy and job growth and the challenges in managing inflation.
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Welcome to foxbusiness.com.
We are continuing our conversation with the president of the Federal Reserve Bank of Philadelphia Charles Plosser on the economy and monetary policy president -- thanks for continuing.
You're discussion with us -- -- you were talking in your -- speech today -- about about all the liquidity.
That is sloshing around in the financial system right now that the that the FO on the Fed policy has been very accommodative.
And and you're worried at some point about about -- happening -- about about what happens to that liquidity.
Say as as you start to.
Exit from all of this what what are you concerned about there.
Army that there's a lot of liquidity and in the banking system is sitting on something like one point five trillion dollars of excess reserves are just sitting there.
And that's a lot of liquidity and the danger in the risk -- calm on the other side it when the economy begins to pick up.
The -- start taking those reserves in lending them our making loans or buying securities.
And that liquidity begins to flow into the economy.
That is the time when we will have to begin worrying about inflation.
And we we're gonna have to control.
The Fed will have to control.
How quickly that flows out and control that outflow of liquidity if we're gonna maintain our target of -- inflation.
And that's going to be a challenge in the bigger the balance sheet is the more excess reserves -- going to be -- the bigger problem we're.
We could we could potentially face now it all could work out very fine and very slowly we can manage it but.
Think there's a risk that we could get behind the curve.
And not put ourselves.
In some and some uncharted territory in terms of growth and liquidity in their full potential inflation.
Are you worried at all about these exceptionally low interest rates causing.
Asset bubbles like we saw during housing bubble well I think I think -- the answer that is yes I think that there's the potential there for.
Low interest rates for.
Particularly long periods of time in this environment.
We don't know but.
You can worry about where the distortions are being being creative of one form or another.
The search for yield by some investors is sort of distorting the markets in some way.
We don't see that right now.
But.
The problem with things like asset booms of various -- because what the asset -- is that is that it's very hard to -- and until.
-- -- You're concerned that the chase chasing yield could actually again have have an unintended consequence that.
Savers who are consumers who are now saving their money.
Could end up saving more money because they aren't getting as much return on their savings accounts.
And thus that could reduce consumer spending and what is that the artist and -- sort of potential I mean there.
Like any change in interest rates have a lot of conflicting -- some good some bad and and on net.
That would be one potential.
Affect that would reduce the effectiveness of interest rate reduction.
What what what is your your current.
State.
Analysis of of the economy.
Where are we and and what is your forecast that going forward.
Well -- I think that for the rest of this year I'm not predicting that very much is gonna happen we're gonna I think it's going to be about 2% for the year.
The economy is -- and lots of uncertainty.
Whether it be about elections about fiscal policy.
Both here and in Europe and broad.
And I don't foresee much of that sort of alleviating the the them.
Restraints on the economy probably -- next several months I'm hopeful.
-- return the first of the year perhaps some of these uncertainties will.
We'll have we'll have more clarity to them less uncertainty associated with them and that's -- -- -- both individuals and firms to take a little more aggressive action in spending.
I don't know that to be the case but that's my current forecasts I'm thinking.
2% growth the -- this year but 3% growth in the next two years after that an unemployment and getting gradually begin to come down again.
What other -- talked about in your speech also was to provide more.
Certainty for investors consumers and others -- about by adopting.
By adopting.
Types of rules -- joked with our anchors about the Taylor rule for example we won't get into the weeds on the Taylor rule but.
What is the general idea that what would you like to see whether the general idea is that one of the things that monetary policy can do is it can create its own uncertainty.
About health policy makers will behave in different situations what they can do.
Many economists and until of course is one -- them but many economists have argued.
That monetary policy could reduce uncertainty about the future course of monetary policy by making it more clear about what we react to.
When -- we change interest rates and what what will react to.
And the more people understand how we will be -- the future.
The more clarity in less uncertain in the years and that actually makes the economy better off so you -- saying that.
That that consumers if they if they fed sees inflation hit the specific point door unemployment the unemployment rate hits a specific point and it would.
If X happens then the Fed would do why is that well except that it's it's more as them as the economists would say it's more continuous and it's not specific points it would be as inflation changes moves up or moves down or as the unemployment -- output gap moves up or down.
You would react to those moves and you would -- -- -- -- more continuous way not.
Not with -- and triggers per say but on a more uniform in regular basis and try to make that clear to the and it it seems as though the though that the that the Fed is kind of moving in that direction.
And you're getting some traction on this well I think it I think there's been a lot of discussion within the there -- a lot of very bright capable people in the system we've talked about rules and we have.
Discussions about that we had some at the last meeting the minutes show.
So I think people -- interest in this but.
You know it takes awhile to bring everybody together with a common.
Common view about how to make this -- But isn't there isn't a promise -- our plan to keep short term interest rates.
The Fed Funds rate exceptionally low through mid 2015.
And keep them low even if the economy starts to show some growth.
Isn't that kind of well it's heading that direction it's heading in the direction the sense that it's contingent on the economy some -- it's okay.
But it really doesn't tell you anything about how policy will be -- Before you hit that point or even after you hit that.
And so it's really only.
11.
Statement one action as opposed to a reaction function which describes how you would react more generally.
-- It do you want to make any prediction on how far.
This these these additional bond purchases could go -- it some of your colleagues have talked about.
It taking years potentially to get the unemployment rate down to whatever that it it should be whatever that should be.
Which suggests that the that the FOMC could end up.
Adding you know I don't know.
I think that the survey of bond strategist that Reuters did the week ago or so ago said.
Another 800 billion.
-- -- is that potentially how big this get -- I think the the statement the committee made wise we will continue to do this until we see substantial improvement.
In unemployment in the labor markets.
And the question is when that will occur I think the hope clearly of the committee.
The hope is this that these actions will make that occur sooner rather than later.
That's the -- but.
If the actions are not effective this could go on for quite some time with what's holding back the labor market.
Has very little to do -- monetary policy.
And mature but your own but strong forecast the consensus market showed a lot of the unemployment rate perhaps not getting down below 7% before 2014.
So that suggests a long time -- -- but.
Depends on what do you mean by substantial progress him.
Ultimately what do you what do you think what about what would be substantial progress you what we're what would you like to see the unemployment rate get down to.
I I I think it's I think it's -- AM.
A mistake for us to sort of set targets for unemployment rates because I don't think we can control of very much.
And so making progress on unemployment is I'd like to see the unemployment rate gradually decline.
And and unemployment.
Improving those that they are up employment improve in those things you want to watch for I think different that the challenges of different people are gonna have different.
Since is about how to calibrate that he will.
But that but kind of the natural rate of unemployment without getting too.
-- in the weeds on that this kind of spend five to 6% or something like that was that that would that be a healthy economy again -- Didn't it is -- did you might think it's -- that would be a healthy economy today about all of that would be healthy economy a year or two years from and that's part of the danger.
Of trying to focus too much on a number.
Because through the eighty's and ninety's and 2000 -- -- view of changing of the natural rate of unemployment in the long run moved up and down.
And so.
I think we'd be very careful -- you know putting metrics on that.
We worked very hard in January -- consensus statement to explain why we didn't explicitly have.
-- -- target -- unemployment targets.
And you know some recessions.
The pace at which.
The labor market improves can be very different.
And for different reasons so we may be able to be moving back towards some long run normal level.
But would may not be able to control the pace of that return very.
Very would you like to take a crack at.
What the -- and team might do.
Hey come January.
Additional asset purchases when Operation Twist expires -- just popped into my head by the way you know not and I.
-- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- Policy movement -- -- details yet but you do go back on to the FOMC in January 2014 that's correct right.
And so we could expect that you -- vote against.
Well I have friends are depends on the economy and then I can't predict I think that that what will happen in January or December -- some point is Operation Twist hands.
And that the committee will look at the economy and evaluate whether or not.
Either for more action or whether what they'll do and it's a natural time.
For reevaluation and I I take our responsibility to reevaluate the policy at that time very seriously we should do so.
So but just to wrap last question here -- -- giving us the wrap here.
You know for the folks at home who are trying to.
Figure their way forward.
What.
The big the big message today from -- this is one well I think the I think the big messages the economy is gradually improving not as fast as we'd like.
That a lot of what's holding it back is uncertainty about elections in fiscal policy I encourage.
Congress and the Europeans to get their act together -- Improving the stance and fiscal policy.
And with some of that uncertainty -- yet they don't believe than.
They -- is gonna pick up very gradually continue to improve but.
Not like gangbusters.
-- Charles Plosser president of the Philadelphia Federal Reserve Bank thank you so much for joining us today on Fox Business Network and foxbusiness.com.
