Plosser Calls Fed Data-Dependence Words Step to More ClarityJeff Kearns
Federal Reserve Bank of Philadelphia President Charles Plosser said language added to the Fed’s last statement better shows how policy will react to economic data and “provides a start” toward offering greater clarity.
The Federal Open Market Committee on Oct. 29 kept a pledge to keep interest rates low for a “considerable time” after asset purchases end, while also adding that they will rise sooner if the economy does better and stay low if it doesn’t.
Officials now must prepare markets for a sooner-than-expected rise, and the new language was a step in that direction, Plosser said today in a speech to a UBS AG conference in London.
That change in the FOMC statement earned it the support of Plosser, who voted against the prior statement in September. Most policy makers, who ended their two-year asset program last month, expect the first rate rise since 2006 to come next year.
“The committee explicitly noted that should the economy make faster progress than anticipated toward its goals, liftoff could occur earlier, and if progress was slower than anticipated, liftoff could be delayed,” Plosser said. “This is the operative language and it makes clear that the committee intends for policy to be data-dependent.”
The policy-setting committee said in its last statement that if there’s faster progress toward its employment and inflation objectives than it now expects, then rate increases “are likely to occur sooner than currently anticipated.” Officials also said that if progress is slower, increases probably won’t come until “later than currently anticipated.”
That change to the policy statement “added clarity by stressing the fact that the decision to lift the interest-rate target would be driven by the data,” Plosser said.
The only dissent at the last FOMC meeting was by Minneapolis Fed President Narayana Kocherlakota, who wanted a stronger commitment to getting inflation up to 2 percent and said the asset purchases should have been continued for longer.
Plosser outlined several reasons why keeping rates near zero is risky, including stoking inflation or another asset-price bubble.
Plosser repeated his previous projection U.S. growth will be about 3 percent for the rest of this year and next year. While inflation is below the Fed’s 2 percent target, “the gap seems to be gradually closing,” he said. The Fed’s preferred gauge of prices rose 1.4 percent last month from a year earlier.
Answering questions after his speech, Plosser said central banks needed to maintain their “credibility” by managing inflation expectations and that trying to manipulate inflation could often lead those to become unanchored.
He also said it’s better to act sooner with monetary policy than have to do so more aggressively later on and that exchange rate movements have little “pass through” to inflation in the U.S.
During his speech, he said labor markets were healing, even though many Americans are “frustrated and disappointed” with their jobs and employment prospects. The jobless rate fell to a six-year low of 5.8 percent last month.
“Whether you believe that the labor market has fully recovered or not, it is clear that the economy has made considerable progress toward full employment and price stability,” he said. “We are no longer in the depths of a financial crisis nor is the labor market in the same dire straits it was five years ago. To me, that means we should no longer be conducting monetary policy as if we were still in the midst of a financial crisis or in the depths of a recession.”
Plosser, 66, plans to retire from the bank on March 1.