WEBVTT - Plosser: Fed's Short Term Focus on Data is  Very Risky (Audio)

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<v Speaker 1>They want to talk now with a former FED official

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<v Speaker 1>who sees some issues with the FED becoming so data

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<v Speaker 1>dependent and even issuing some vacuous f O m C statements.

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<v Speaker 1>I'm referring to Charles Plosser. Charlie is a former president

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<v Speaker 1>of the Federal Reserve Bank of Philadelphia. Thanks for taking

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<v Speaker 1>some time. Great. So the Fed uh not only didn't

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<v Speaker 1>give us a hint like, oh, we're going to raise

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<v Speaker 1>rates in July or September, Janet Yellen, uh, and the

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<v Speaker 1>release of the dots showing that even even fewer FED

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<v Speaker 1>officials are expecting two rate hikes this year sounded very devish.

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<v Speaker 1>Are they on the right track, Charlie, Well, I think

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<v Speaker 1>there's a lot, there's a there's Uh. They're obviously very nervous.

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<v Speaker 1>I guess that's what one way to put it. And

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<v Speaker 1>whether on the right track, I don't think anybody really

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<v Speaker 1>knows for sure. But I found it striking in her

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<v Speaker 1>statements and at the press conference that um she said,

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<v Speaker 1>you know, we really shouldn't be uh, people shouldn't overreact

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<v Speaker 1>to one month labor report number. You know, these numbers

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<v Speaker 1>get revised and they get changed, and we don't know

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<v Speaker 1>what they mean. And we shouldn't be so data dependent

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<v Speaker 1>that we react to one months one month's number. But

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<v Speaker 1>my my reaction is that's exactly what they did. That's

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<v Speaker 1>exactly what they did. They reacted to one month's bad

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<v Speaker 1>number in the labor market. And and you know, the

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<v Speaker 1>previous month UM employment grew by a hundred and thirty thousand,

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<v Speaker 1>which actually is not bad. That's about where you expect

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<v Speaker 1>it to be to maintain, you know, maintain the employment

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<v Speaker 1>base given a population growth and so forth and so on.

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<v Speaker 1>So it's really one number they're reacting to, and I

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<v Speaker 1>find I find that disturbing UM and more evidence that

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<v Speaker 1>one of the problems the f form C has and

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<v Speaker 1>has had had and has had for a long time.

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<v Speaker 1>I might add, is this very short term focus about UM,

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<v Speaker 1>about the data. And it's one thing to be data dependent,

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<v Speaker 1>it's so it's another thing to be whipsode by numbers

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<v Speaker 1>that bounce around a lot, and that that's part. That's

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<v Speaker 1>the part that kind of concerns me. I think that

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<v Speaker 1>in terms of gradual rate increases, I think that's still

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<v Speaker 1>what they'd like to like to see. And I also

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<v Speaker 1>would remind the market that you know, those dots have

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<v Speaker 1>come down. I have everybody agrees with that, but that

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<v Speaker 1>but but by the way, just because because they can

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<v Speaker 1>come down, they can go back up again. And so

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<v Speaker 1>um Janet did emphasize quite emphatically that that there's there's

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<v Speaker 1>a lot of uncertainty about the path of the economy,

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<v Speaker 1>and and and to sort of take the pas or

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<v Speaker 1>take the words of the said about our implications about

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<v Speaker 1>what they think is going to happen over the next

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<v Speaker 1>year or six months or a year. You know, it's

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<v Speaker 1>you got to take that all the grain of salt,

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<v Speaker 1>because look, because look what's happened, because they can just

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<v Speaker 1>just needs to go the other way. Charles Plus as

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<v Speaker 1>co author of Trends and Random Walks in macro Economic

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<v Speaker 1>Time Series, where are we in the business cycle? And

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<v Speaker 1>tell us if you've been reading the major history after well,

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<v Speaker 1>you wrote it, so I read it. So tell us

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<v Speaker 1>if there are these are there permanent shocks that have

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<v Speaker 1>affected GDP that we don't know about, Well, I think

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<v Speaker 1>we do know about them. I think what we've seen,

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<v Speaker 1>particularly in this recession, more dramatically than we've seen in

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<v Speaker 1>many of the the post certainly of the post war era,

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<v Speaker 1>is um is a dramatic shock to the economy that

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<v Speaker 1>has reduced products, appears to reduce productivity and maybe even

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<v Speaker 1>the rate of growth of productivity. And if you look

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<v Speaker 1>at the CBO's estimates of potential output every year, they

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<v Speaker 1>just mark it down lower and lower and lower. And

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<v Speaker 1>what that reflects is the fact that, um, you know,

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<v Speaker 1>measures the potential output are sort of calculated looking backwards,

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<v Speaker 1>and so what they're doing is they're incorporating the evidence

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<v Speaker 1>that this shock to the economy had some permanent, long

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<v Speaker 1>run effects to it to the economy, and that's why

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<v Speaker 1>they've ended up gradually keep lowering potential output. And so

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<v Speaker 1>now there's really in terms of potential output, there's not

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<v Speaker 1>much of a gap left anymore. And that's consistent with

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<v Speaker 1>the people who are you're even the reform c has argued, Look,

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<v Speaker 1>you know where we are in terms of employment. Um,

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<v Speaker 1>we can argue whether we're at full employment or not.

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<v Speaker 1>Nobody really knows, but most people agree we're pretty close.

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<v Speaker 1>And so, um, so, yeah, I think there are some

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<v Speaker 1>permanent have been some permanent or at least very persistent

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<v Speaker 1>shocks that have hit the economy. That's when you've got

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<v Speaker 1>to recognize that one reason why inflation stays low. I

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<v Speaker 1>guess you could say, once inflation moves lower or higher,

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<v Speaker 1>it's hard to move it. That Charlie, I want to

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<v Speaker 1>know what you say about negative interest rates, because it's

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<v Speaker 1>not just the ECB buying bonds and helping to push

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<v Speaker 1>a lot of European bond yields lower. It's not just

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<v Speaker 1>that Maga Japan going negative in January. It seems like,

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<v Speaker 1>you know, investors, traders are now pushing more and more

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<v Speaker 1>bonds in a negative territory. Is there a danger of

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<v Speaker 1>some kind of negative feedback loop, a sentiment shift, some

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<v Speaker 1>kind of expectation that works against what central banks want

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<v Speaker 1>to do, which is boost the economy and create a

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<v Speaker 1>little price pressure. Well, I think I think there's a

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<v Speaker 1>lot we don't know about that, And I think the

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<v Speaker 1>ventures into negative interest rates I have a lot of

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<v Speaker 1>um doubts about. I think if you look at the

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<v Speaker 1>countries that have done it, particularly the bigger countries, and

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<v Speaker 1>I want to emphasize that is the ECB and and

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<v Speaker 1>in Japan. I think places like Switzerland Sweden are a

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<v Speaker 1>little different because they're so small and so open economies.

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<v Speaker 1>But in those two big economies, from my perspective, I

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<v Speaker 1>don't see much evidence that they are doing what people

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<v Speaker 1>want them to do, that they're accomplishing very much um

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<v Speaker 1>and so I think, uh so, if they're not accomplishing

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<v Speaker 1>the kind of boost in either inflation or it's real

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<v Speaker 1>economic growth, then what what are going to be the

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<v Speaker 1>unintended consequences of that? I think these are very risky

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<v Speaker 1>policies for the monetary authorities to engage in. They are

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<v Speaker 1>um yes, they have some quote theory behind them, but

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<v Speaker 1>I'm I'm very dubious and wary of these sort of

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<v Speaker 1>adventures into um uh negative interest rates, particularly the policy matter.

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<v Speaker 1>I think it's very very risky. Thank you very much.

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<v Speaker 1>Charles Plosser, former president of the Federal Reserve Bank of Philadelphia.

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<v Speaker 1>You're listening to taking Stock on Bloomberg Radio.