Tags: philadelphia | federal reserve | janet yellen | charles plosser

Philly Fed's Plosser Clarifies Yellen

By    |   Wednesday, 26 Mar 2014 07:50 AM

Charles Plosser, president of the Federal Reserve Bank of Philadelphia and a rotating voting member of the Federal Open Market Committee (FOMC), recently appeared on CNBC.

He discussed the issues surrounding the statement issued by the FOMC following its most recent meeting, which led to a brief flurry of reaction in financial markets.

Plosser is a particularly interesting Fed president because he is known to be a conservative and a skeptic of the extraordinary measures the Federal Reserve has employed in the aftermath of the 2008 financial crisis.

This writer has networked at Philly Fed events, heard Plosser speak, and chatted with him.

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It appears that the markets over-reacted to Yellen’s remarks on when the Fed might begin to raise interest rates once the tapering of long-term government and mortgage-backed securities purchases is complete, perhaps by the end of the year.

Plosser found the market’s reaction “puzzling” and said he was “surprised’ by it, because Yellen had stated that the timing of any action would depend on market conditions at the time as indicated by available data. Plosser added that he thinks it is more important to focus on this issue of market conditions than on how long after the taper ends that rates might rise.

CNBC’s Steve Liesman sought to pin Plosser down on how this process might unfold, and when Plosser responded with a discussion of the role of the “dots” submitted by the FOMC members, Liesman stuck with the subject and extracted from Plosser November of this year as the month when the taper is contemplated to end.

Liesman also pressed Plosser as to what the interest rate might be. Plosser responded that he is thinking in terms of 3 percent at the end of 2016 and working back from there.

Assuming that unemployment has reached a normal level and inflation has reached the Fed’s target of 2 percent, he assumes there must be a positive real rate and estimates it at 3 percent.

Becky Quick pointed out that this suggests that the Fed will have moved in 25 basis-point increments per quarter during 2016, and Plosser agreed that he envisions a gradual glide path to reach 3 percent.

Plosser acknowledged that 3 percent at the end of 2016 is somewhat above the level favored by his colleagues, but he argues that if the economy is at normal levels, there is no reason to hold rates artificially low and incur the risks that entails of distorting the pricing of risk in financial markets.

He reiterated that he continues to worry that the markets might move first and react in unexpected ways because there is no precedent for easing or for its unwinding.

(More on Plosser and the Philly Fed can be found here.)

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Robert-Feinberg
Charles Plosser, President of the Federal Reserve Bank of Philadelphia and a rotating voting member of the Federal Open Market Committee (FOCM), recently appeared on CNBC’s Squawk Box.
philadelphia,federal reserve,janet yellen,charles plosser
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2014-50-26
Wednesday, 26 Mar 2014 07:50 AM
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