WASHINGTOn (MNI) – The following are excerpts from an interview
with Philadelphia Federal Reserve Bank Pres. Charles Plosser, aired
Thursday evening on the PBS Nightly Business Report:
I think I would describe the health of the economy as improving.
It’s not great, but we’ve been through a very painful recession, a very
painful financial crisis. But we have been growing for the last almost
ten quarters now, and I think that’s a good sign. It’s not as rapidly
or as fast as we’d like to see it, but nonetheless we are improving.
—
I’m more encouraged than I have been in some time. The employment
reports that we’ve been receiving over the last five to six months have
been quite encouraging. The breadth of the employment we’re seeing,
where it’s growing is broad-based. And I hope it’s building the
momentum and the sort of foundations we need for continual recovery.
But I’m not expecting sort of really rapid declines in unemployment
rates for example, so a modest but continuing decline.
—
The job market will be healed when the flows and the jobs are
flowing at a reasonable, steady pace. But you know, economies
fluctuate, and so there’ll be times when we feel like we’re taking two
steps forward and one step back. That’s just the way economies work.
But I am encouraged.
—
Well, I think certainly the longer we get 200,000-plus jobs
reported a month, the better everyone’s going to feel. I think that
will continue to bring the unemployment rate down a little bit. And it
will build some momentum, improve incomes as more people are employed,
and that will help the economy.
—
I think part of the problem is defining what we mean by full
employment. It’s kind of a nebulous term actually, it’s difficult to
estimate what that means. But, I think it’s going to take another few
year … two to three years before we get back to something below 6%.
And maybe, it may be 6% is the new full employment rate going forward,
but that may take another couple of years.
—
The Fed’s not exactly a job creator. They can support the economy
by keeping rates low and keeping the financial markets functioning
effectively and efficiently. We can help do that, but we can’t directly
effect jobs very easily only indirectly through supporting the economy.
So I think the challenges are going to be very difficult. There are
lots of people who are having to find new jobs in new sectors. There
are sectors that are going to be smaller than they were before the
recession, and so it’s a real challenge.
—
The Fed has done an extraordinary amount over the course of this
business cycle. And we are at record levels of accommodation by
anybody’s measurement of what accommodation means. And I think that
it’s unlikely given the nature of the unemployment problems we face,
just pumping more liquidity into the economy at this point is probably
not going to help us very much on the job front.
That doesn’t mean that it’s time to sort of pull back that
liquidity. But I’m very doubtful that given the forecast and given
where the economy seems to be today and look at what it looks like it’s
going to be doing in the future that more accommodation on the part of
the Fed is likely to be very beneficial.
—
The problem we have with a very large balance sheet, there’s not
great inflation risks that are pending in the near term, but as the
economy improves and this liquidity that we’ve pumped into the banking
system is now sitting in the banking system, when all that money starts
to flow out into the economy it will generate inflation and potentially
lots of it.
So the bigger our balance sheet is, the more difficult the problem
is at the exit to withdraw that liquidity in a timely fashion so that it
doesn’t generate high inflation. It’s also true that in the near term
as we keep rates really, really low we run the risk of distorting
resource allocations, distorting markets.
And people have talked a lot about this, the hurting savers because
they can’t get any return. So there are all sorts of distortions that
monetary policy creates in the economy and risks of what might come down
the road.
And when we do policy we have to think about those things. We have
to make the tradeoffs of cost and benefits of a policy. Monetary policy
is not free. It’s just not that there are costs to it. And we have to
be wary that we don’t find ourselves in a position where those costs
come back and bite us in a very severe way.
—
Inflation is a monetary phenomena. A lot of people blame the 1970s
inflation on high gasoline prices or oil prices. That’s not the cause
of the inflation. The cause of the inflation in the ’70s was that
monetary policy allowed those high gasoline and oil prices to pass
through to every other commodity. So it’s monetary policy that creates
the inflation. It’s the reaction of monetary policy to high oil prices
that helps cause the inflation.
—
I think that the Fed will need to raise interest rates when the
economy says it’s time to raise interest rates. It’s not going to be
based on a calendar, and it shouldn’t be based on the calendar. It
depends on the economy, it depends on what inflation’s doing, it depends
on what expectations of inflation are doing. It depends on how the
economy is doing in general.
And we will adjust policy appropriately, and we have to do it soon
enough so that we don’t get behind the eight ball. Because if inflation
does come it’s very painful to get rid of. We saw what happened in the
’70s. We had inflation reach double digits, we had to get it back down,
but what was the price we paid for that? 10% unemployment rates in the
’82 recession. I don’t want to go through that again.
SUSIE GHARIB:
Do you see raising rates to let’s say 1% by the end of this year?
PLOSSER:
Oh, it depends so much on the course of the economy. But it’s
conceivable, it’s conceivable.
GHARIB:
What about the risk of raising rates too soon?
CHARLES PLOSSER:
Well, that certainly.
SUSIE GHARIB:
Couldn’t that put the brakes on the recovery?
CHARLES PLOSSER:
Well, I doubt if it will. As I said before, remember we are in a
very accommodative stance. And the difference between interest rates of
zero to 25 basis points or 50 to 75 basis points I don’t believe is
going to make or break the economy per se.
—
I think China’s a big country but it’s not the only country in the
world. Sometimes I think we get a little too obsessed with what’s going
on in China in terms of how that plays out for the U.S. economy and the
world economy. It certainly matters, but whether China’s growing at
9.5% or 8.5% I’m just not sure that’s a big deal as far as the U.S.
economy or our recovery is going to be.
So, I watch what’s going on in China, I’m concerned about them.
They’re trying to deal with inflation problems, they’ve got resource
allocation problems. So they’ve got their challenges cut out for ‘em.
But unless China went into a full-blown recession I’m not sure that the
fallout for the U.S. is going to be that substantial.
** MNI Washington Bureau: 202-371-2121 **
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