Speaker 1: They want to talk now with a former FED official
Speaker 1: who sees some issues with the FED becoming so data
Speaker 1: dependent and even issuing some vacuous f O m C statements.
Speaker 1: I'm referring to Charles Plosser. Charlie is a former president
Speaker 1: of the Federal Reserve Bank of Philadelphia. Thanks for taking
Speaker 1: some time. Great. So the Fed uh not only didn't
Speaker 1: give us a hint like, oh, we're going to raise
Speaker 1: rates in July or September, Janet Yellen, uh, and the
Speaker 1: release of the dots showing that even even fewer FED
Speaker 1: officials are expecting two rate hikes this year sounded very devish.
Speaker 1: Are they on the right track, Charlie, Well, I think
Speaker 1: there's a lot, there's a there's Uh. They're obviously very nervous.
Speaker 1: I guess that's what one way to put it. And
Speaker 1: whether on the right track, I don't think anybody really
Speaker 1: knows for sure. But I found it striking in her
Speaker 1: statements and at the press conference that um she said,
Speaker 1: you know, we really shouldn't be uh, people shouldn't overreact
Speaker 1: to one month labor report number. You know, these numbers
Speaker 1: get revised and they get changed, and we don't know
Speaker 1: what they mean. And we shouldn't be so data dependent
Speaker 1: that we react to one months one month's number. But
Speaker 1: my my reaction is that's exactly what they did. That's
Speaker 1: exactly what they did. They reacted to one month's bad
Speaker 1: number in the labor market. And and you know, the
Speaker 1: previous month UM employment grew by a hundred and thirty thousand,
Speaker 1: which actually is not bad. That's about where you expect
Speaker 1: it to be to maintain, you know, maintain the employment
Speaker 1: base given a population growth and so forth and so on.
Speaker 1: So it's really one number they're reacting to, and I
Speaker 1: find I find that disturbing UM and more evidence that
Speaker 1: one of the problems the f form C has and
Speaker 1: has had had and has had for a long time.
Speaker 1: I might add, is this very short term focus about UM,
Speaker 1: about the data. And it's one thing to be data dependent,
Speaker 1: it's so it's another thing to be whipsode by numbers
Speaker 1: that bounce around a lot, and that that's part. That's
Speaker 1: the part that kind of concerns me. I think that
Speaker 1: in terms of gradual rate increases, I think that's still
Speaker 1: what they'd like to like to see. And I also
Speaker 1: would remind the market that you know, those dots have
Speaker 1: come down. I have everybody agrees with that, but that
Speaker 1: but but by the way, just because because they can
Speaker 1: come down, they can go back up again. And so
Speaker 1: um Janet did emphasize quite emphatically that that there's there's
Speaker 1: a lot of uncertainty about the path of the economy,
Speaker 1: and and and to sort of take the pas or
Speaker 1: take the words of the said about our implications about
Speaker 1: what they think is going to happen over the next
Speaker 1: year or six months or a year. You know, it's
Speaker 1: you got to take that all the grain of salt,
Speaker 1: because look, because look what's happened, because they can just
Speaker 1: just needs to go the other way. Charles Plus as
Speaker 1: co author of Trends and Random Walks in macro Economic
Speaker 1: Time Series, where are we in the business cycle? And
Speaker 1: tell us if you've been reading the major history after well,
Speaker 1: you wrote it, so I read it. So tell us
Speaker 1: if there are these are there permanent shocks that have
Speaker 1: affected GDP that we don't know about, Well, I think
Speaker 1: we do know about them. I think what we've seen,
Speaker 1: particularly in this recession, more dramatically than we've seen in
Speaker 1: many of the the post certainly of the post war era,
Speaker 1: is um is a dramatic shock to the economy that
Speaker 1: has reduced products, appears to reduce productivity and maybe even
Speaker 1: the rate of growth of productivity. And if you look
Speaker 1: at the CBO's estimates of potential output every year, they
Speaker 1: just mark it down lower and lower and lower. And
Speaker 1: what that reflects is the fact that, um, you know,
Speaker 1: measures the potential output are sort of calculated looking backwards,
Speaker 1: and so what they're doing is they're incorporating the evidence
Speaker 1: that this shock to the economy had some permanent, long
Speaker 1: run effects to it to the economy, and that's why
Speaker 1: they've ended up gradually keep lowering potential output. And so
Speaker 1: now there's really in terms of potential output, there's not
Speaker 1: much of a gap left anymore. And that's consistent with
Speaker 1: the people who are you're even the reform c has argued, Look,
Speaker 1: you know where we are in terms of employment. Um,
Speaker 1: we can argue whether we're at full employment or not.
Speaker 1: Nobody really knows, but most people agree we're pretty close.
Speaker 1: And so, um, so, yeah, I think there are some
Speaker 1: permanent have been some permanent or at least very persistent
Speaker 1: shocks that have hit the economy. That's when you've got
Speaker 1: to recognize that one reason why inflation stays low. I
Speaker 1: guess you could say, once inflation moves lower or higher,
Speaker 1: it's hard to move it. That Charlie, I want to
Speaker 1: know what you say about negative interest rates, because it's
Speaker 1: not just the ECB buying bonds and helping to push
Speaker 1: a lot of European bond yields lower. It's not just
Speaker 1: that Maga Japan going negative in January. It seems like,
Speaker 1: you know, investors, traders are now pushing more and more
Speaker 1: bonds in a negative territory. Is there a danger of
Speaker 1: some kind of negative feedback loop, a sentiment shift, some
Speaker 1: kind of expectation that works against what central banks want
Speaker 1: to do, which is boost the economy and create a
Speaker 1: little price pressure. Well, I think I think there's a
Speaker 1: lot we don't know about that, And I think the
Speaker 1: ventures into negative interest rates I have a lot of
Speaker 1: um doubts about. I think if you look at the
Speaker 1: countries that have done it, particularly the bigger countries, and
Speaker 1: I want to emphasize that is the ECB and and
Speaker 1: in Japan. I think places like Switzerland Sweden are a
Speaker 1: little different because they're so small and so open economies.
Speaker 1: But in those two big economies, from my perspective, I
Speaker 1: don't see much evidence that they are doing what people
Speaker 1: want them to do, that they're accomplishing very much um
Speaker 1: and so I think, uh so, if they're not accomplishing
Speaker 1: the kind of boost in either inflation or it's real
Speaker 1: economic growth, then what what are going to be the
Speaker 1: unintended consequences of that? I think these are very risky
Speaker 1: policies for the monetary authorities to engage in. They are
Speaker 1: um yes, they have some quote theory behind them, but
Speaker 1: I'm I'm very dubious and wary of these sort of
Speaker 1: adventures into um uh negative interest rates, particularly the policy matter.
Speaker 1: I think it's very very risky. Thank you very much.
Speaker 1: Charles Plosser, former president of the Federal Reserve Bank of Philadelphia.
Speaker 1: You're listening to taking Stock on Bloomberg Radio.