Philly Fed's Plossner Is First Fed Member To Publicly Disagree With Bernanke, Calls For Interest Rate Hike, Warns Fed Could Lose Credibility

Tyler Durden's picture

Key highlights from Plosser's speech at the 31st Annual Economic Seminar in Rochester, NY

  • Expects GDP of 3% in 2010, and comparable growth in 2011: "Looking ahead to next year, I expect real GDP growth from the fourth quarter of this year to the fourth quarter of 2010 to be about 3 percent. I expect similar real GDP growth in 2011."
  • Expects unemployment to keep growing: "It is likely to take a couple of years before we see the unemployment rate back to more acceptable levels."
  • Uncertain in the recovery of the financial sector: "The recovery of financial markets from this crisis, however, is not complete and more time will have to pass before we can be fully confident in the health of the financial sector."
  • Very skeptical about subdued inflation prospects: "Unfortunately, the prospects for inflation over the next two to five years are much more uncertain, in my view, and apparently in the view of the market as well."

And the punchline:

Ultimately, inflation is a monetary phenomenon and there is no question that current monetary policy is extraordinarily accommodative. The Federal Open Market Committee has maintained the federal funds rate near zero for just about a year now and the Fed has more than doubled its balance sheet in the process. Without appropriate steps to withdraw or restrict the massive amount of liquidity that we have made available to the economy, the inflation rate is likely to rise to levels that most would consider unacceptable. The great challenge facing the Fed is getting those “appropriate steps” right.

The task is made more difficult, in part, by competing views of the economic forecast and the underlying structure of the economy driving that forecast. One commonly held view is that the economy is very weak now and, more important, that during the economic recovery, high rates of unemployment and very low rates of resource utilization will prevent inflationary pressures from arising for quite some time, perhaps years. This perspective suggests there is no danger that excess liquidity will generate inflation in the foreseeable future. According to this view, the Fed need not worry about withdrawing the liquidity or raising rates anytime soon because the inflation forecast will remain quite tame.

An alternative view shared by many others is that the just-described conventional wisdom misses the mark and without a more deliberate policy of reducing liquidity and raising interest rates sooner rather than later, we could very well see inflation become a serious concern. In this view, inflationary expectations play an important role in the dynamics of inflation. It is the Fed’s credibility to keep inflation low and stable that is key to anchoring those expectations. So, the Fed must act in a way that assures the markets and the public that it will take the necessary steps to keep inflation low and stable. If it does not do this, expectations can become unanchored and inflation will rise regardless of the amount of unemployment in the economy.

This view is consistent with both theoretical and empirical evidence that finds that economic slack or low resource utilization is not a very reliable predictor of inflation. Moreover, several empirical studies have shown that economic slack is difficult to measure with any accuracy. So making policy decisions based on measures of such slack and particularly on forecasts of slack many quarters ahead becomes problematic. Indeed, the failure to act in a way that keeps expectations of inflation anchored can easily trump economic slack in determining the path of inflation. Recall that some of the highest inflation rates this country has seen in the post-World War II era occurred in the late 1970s when we had high rates of unemployment and low resource utilization.

So what’s the bottom line? While policymakers may have different outlooks for the economy and inflation over the next couple of years, our objectives are the same. The Fed does not wish to see inflation rise to unacceptable levels and I plan to act with that objective clearly in mind.

In my view, the higher levels of resource utilization in the future signaled by today’s growth implies that real interest rates will rise, which calls for the federal funds rate to increase as well — as long as inflation is near its desired levels and inflation expectations are well-anchored. Note that increases in interest rates may be appropriate before unemployment or other measures of resource slack have diminished to acceptable levels. Failure to act in this manner risks continuing to inject liquidity into a growing economy at a rate that will create inflation above desirable levels later in the cycle. If this were to happen, the Fed would lose its credibility to preserve low and stable inflation.

If expectations do become unanchored, then the Fed will have lost its credibility and either inflation or deflation could arise. Moreover, the cost of regaining the Fed’s credibility may be great. So, anticipation and forward-looking policy are essential if the Fed is to achieve its goal of low and stable inflation.

In the current circumstances, the Fed will need to withdraw the extraordinary amount of liquidity it has provided to financial markets to ensure that the public does not lose confidence in its commitment to keep inflation low and stable. If it fails to do so, rising inflation expectations could prompt workers to demand higher wages and firms to demand higher prices to head off the expectation of higher costs, thus setting off a burst of inflation. For me, this risk bears careful monitoring.

Full report:



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Anonymous's picture

Too for that, we reached the point of no return.

Anonymous's picture

Could lose credibility? Has that ship not yet sailed?

Anonymous's picture

recognizes ben on his way out. figured he better start buttering up now to get the job.

Anonymous's picture

Non-voting member trotted out to test the waters?

Brian Griffin's picture

No.  Simply a boob.  I met him a few months back and wanted to lift my leg on his Bruno Magli loafers. 

sawyer's picture

This is sacrilege of the greatest sport on earth!

Wayne Gretzky is refered to as "The Great One" NOT "the great Gretzky".

Also it is ironic to refer to Gretzky in a financial commentary as his Coyotes are under banckrupcy protection...not so great

Argos's picture

Jackie Gleason was nickname "The Great One" by Orson Welles.

aint no fortunate son's picture

"If this were to happen, the Fed would lose its credibility to preserve low and stable inflation."

Too late... it already happened.

"If it fails to do so, rising inflation expectations could prompt workers to demand higher wages..."

Heaven help that workers should ever expect to stay even with Fed-induced inflation. That would be like giving the middle class a break... nah, can't happen, that's heresy.

Overpowered By Funk's picture

To avoid being blamed for the nefarious consequences of inflation, the government and its henchmen resort to a semantic trick. They try to change the meaning of the terms. They call "inflation" the inevitable consequence of inflation, namely, the rise in prices. They are anxious to relegate into oblivion the fact that this rise is produced by an increase in the amount of money and money substitutes. They never mention this increase.

Ludwig von Mises

D.O.D.'s picture

Outrageous... it's anti-semantic!

curbyourrisk's picture

Let me correct Plosser.   THE FED HAS ALREADY LOST CREDIBILITY, maybe not with the other criminal international banks, but definitely with the average american.  Audit them and do it NOW!!!

Anonymous's picture

"In the current circumstances, the Fed will need to withdraw the extraordinary amount of liquidity it has provided to financial markets to ensure that the public does not lose confidence in its commitment to keep inflation low and stable. If it fails to do so, rising inflation expectations could prompt workers to demand higher wages and firms to demand higher prices to head off the expectation of higher costs, thus setting off a burst of inflation. For me, this risk bears careful monitoring."

This last paragraph is particulary telling of the bizarro cause-effect relationship that those at the Fed, and in most macroeconomic academic departments generally, hold on inflation. It's not gradual developments in the supply/demand relationship cascading throughout the economy after each burst of new money creation that cause a general rise in prices, but a seemingly nefarious change in the "inflation expectations" of the populace that leads to those higher prices.

And these are the people that are steering the ship...

Assetman's picture

Forget about inflation, Mr Plosser.  The Fed needs to show the world that the dollar has resilience, or the Federal Reserve will cease to exist in 5 years.  My guess is that the "perceived inflation" argument is just a ruse to support a more urgent theme, that being dollar relevance.

BobPaulson's picture

Coming from a city where one of the main streets is Wayne Gretzky Drive, it's always nice to see reference to the great one. 'Didn't know he was an economist.

faustian bargain's picture

Nice timing on this, just before the confirmation hearing. I wonder if any others will pile on, now that the seal has been broken?

Lexington Duffet's picture

Good.  Some sense.  I think it was reasonable for them to try and deal with the disasters--not that they did everything right.  Now they need to soak up the extra water by tightening the money supply.  Let Japan drive its currency to be worth only its US assets.  Personally, I prefer to live in a country which pays its debts and keeps its word.  Not some banana republic which is what this country has been becoming.

(Under the current Republican leaders running up large deficits; removing regulations that are designed to protect against problems; removing the rules and weakening the regs and those who enforce them creating the environment which allow for too much gambling and other gross excesses; then denying responsibility for any of their actions or decisions.)  

IMO its sometimes frustrating to allow the collective wisdom to work. But history has shown in the long run the democratic process with its inherent inefficiencies works best. 

TraderMark's picture

In an unrelated note, a swarm of black helicopters seen dispatched with heading Rochester, NY

lsbumblebee's picture

Why is it that everytime gold breaks through another line of resistance we see the Fed feeding their corporate media cronies another story about how it has a secret weapon in its "toolkit" that will drain all the excess liquidity from the system? 

orca's picture

They have one secret weapon left: force majeure on physical settle of PM. It will happen and when it does, you have no idea of the carnage. Comex gold will go right to $10, since the link will be broken with tangible, and all the electronic longs will get sóóó fucked you won't believe it.

lsbumblebee's picture

How do you figure the price of gold will go down when it becomes clear that COMEX does not have the physical bullion to back up the paper promises?

orca's picture

Easy. Comex gold futures imply a possible delivery of the real stuff, and if that link is broken why would you pay anything for a piece of paper? FDR made it illegal, Bretton Woods severed the last link with the USD, and Comex will severe the ultimate link between electronic and tangible, real, physical gold. The only way to play PM is physical. When force majeure hits, and it will, there will be a tremendous electronic long squeeze, since everybody and their momma wants to drop exposure to crap. Think dotcom implosion, think Citibank, think AIG. Will solve all problems with übersqueezed shorts too.
(Edited, made a crucial mistake in the last sentence)

orca's picture

Is that all? Are you flabbergasted or do you think I am a nutcase? I am a nutcase, but an outside-the-box (I hate that word, but it is sometimes useful) thinking nutcase.

lsbumblebee's picture

Well anyway I'm sure China will be thrilled to hear that when the COMEX defaults it will be able to buy gold at $10 an ounce.

orca's picture

No it won't, you are missing my point. Real gold will zoom towards $10k, since there will be no supply, no trust and no market. However, electronic gold will crater to $10, or $1 or even $0.

lsbumblebee's picture

Oh I see. Real gold is not the same as electronic gold. Thanks!

Cindy_Dies_In_The_End's picture

The speech was not nearly as alarmist as the headline makes it sound. Not at all. Please read the whole thing. I think you'll be disappointed.

orca's picture

Uncle Charlie has to do the empty jawboning in December. "Will lose all credibility", yeah right, don't take my word for it, just look at gold, EUR/USD, USD/JPY (for cryin' out loud, the J.P.Y. of all currencies), crude oil, and of course S&P, Dow, Naz.
Funny guy, this Possner clown, demolishing the middle class and not even ashamed to be used as a mouthpiece for uncle Ben.

Convection Fry List's picture

I guess someone is going to suggest that we start a war to get us out of this mess and get the economy growing again... oh, wait, we already have two of them going on.

D.O.D.'s picture

Yup, the dog chasing it's own tail finally caught it... now what?

bugs_'s picture

Nobody expects the philly fed!

blackebitda's picture

dont y'all get it. to have inflation run higher without the fed doing anything is Ben's Dream. in Ben's study about the great depression, one of his key conclusions was that it was in fact the lack of inflation which was a reason for the duration of the great depression. if inflation picks up because a lack of credibility with the fed, that is perfect. then all the fed has to do is start raising rates in response to slow it down. deflation is way harder to stop than inflation. 

smart for the fed to wait for confirmation of inflation before raising rates. unwise to preempt a rate raise and be wrong. 

Anonymous's picture


and they can easily "wait just a little to long" to start raising the rates to allow the stock market to keep zooming

and of course they will lie about the rate of inflation.

net-net...they get markets up (bankers make lots of $), claim they are "managing inflation expectations" and dribble out 1/4 point rate increases to keep the punch bowl out.

CNBS keeps pumping, guy on main street scratching his head-congress/treasury/fed claim success.

realist proven wrong again. crisis averted, now go out and borrow and spend

Stuart's picture

WTF do you mean 'could lose credibility' ?   Past tense baby, past tense.  You've already lost credibility!

orca's picture

I wikied the guy, to get an idea of his background:
Charles Irving Plosser (born September 19, 1948) is the president of the Federal Reserve Bank of Philadelphia. An academic macroeconomist, he is well known for his work on real business cycles, a term which he and John B. Long, Jr. coined.

And what is this RBC?
Real Business Cycle Theory (or RBC Theory) is a class of macroeconomic models in which business cycle fluctuations to a large extent can be accounted for by real (in contrast to nominal) shocks. (The four primary economic fluctuations are secular (trend), business cycle, seasonal, and random.) Unlike other leading theories of the business cycle, it sees recessions and periods of economic growth as the efficient response to exogenous changes in the real economic environment.

Let's add one and one and pick any number for an answer, as long as it isn't 2. He believes in natural business cycles ánd he is a governor at the FED. Do you have to be an absolute moron in order to be appointed governor of the FED, or does it merely help?

Anonymous's picture

"If it fails to do so, rising inflation expectations could prompt workers to demand higher wages and firms to demand higher prices to head off the expectation of higher costs, thus setting off a burst of inflation. For me, this risk bears careful monitoring."

Just wait until they see rampant inflation with no rise in wages....then they may finally understand why reflation isn't going to work.

painequalschange's picture

Is SGOL considered "electronic gold"?  Supposedly it's backed by physical bullion in a Swiss vault. 

I suppose anything that is not physically in my hand is electronic then... 

Are they any less exposed to these Comex problems?

mitack's picture

Sounds good, except, it is still paper...

And if you live in the USA, and they prohibit

the ownership of gold as they once did, just

no look no further than the recent UBS/IRS

battle to see whats going to happen to your



Anonymous's picture

everything said by fed officials is bullshit