Plosser’s Speech (and no, I’m not back!)
Long time, no talk to. While I’m not about to resume blogging, I had written some notes about Philadelphia Fed President Charles Plosser’s recent speech…and I thought that it would be easy to share them. I thought this was a significant speech because it describes the argument that is being made to potentially raise interest rates sooner. My guess is that President Plosser and Dallas Fed President Fisher are both raising concerns in the FOMC meetings (Pres. Plosser actually dissented at the last meeting). On to my notes…
Philadelphia Fed Pres., Charles Plosser, presented his argument as to why the FOMC should raise rates sooner, rather than later. Specifically, he does not like the FOMC’s forward guidance that says, “that it likely will be appropriate to keep its target federal funds rate near zero for a considerable time after the asset purchase program ends.” He gave the following arguments:
- We are more than five years into a recovery. While it has been sluggish and uneven, the progress is undeniable.
- The first-quarter slowdown was weather related. The second quarter showed a strong recovery in most of the categories that had been affected by the weather in the prior quarter.
- The Philadelphia Fed’s Manufacturing Business Outlook Survey increased for the third consecutive month and had its strongest reading since March 2011. This is a reliable indicator of national manufacturing trends. Expectations are strong and there is continued expansion in manufacturing employment.
- The year-to-date monthly average job growth has been 215,000 jobs this year compared with 194,000 jobs last year. You have to look at the long-term trend (not just the weak reading for the past month).
- The economy has created 1.7 million jobs since the start of the year, nearly 10% more than the same period in 2013, 20% more than in 2012, and 30% more than in 2011.
- The unemployment rate was 6.1% in August, down more than a full percentage point from a year ago (and down from the peak of 10% several years ago). This means that the unemployment rate continues to fall faster than many policymakers had been forecasting. The Summary of Economic Projections submitted in December 2013 predicted that the unemployment rate would be somewhere between 6.3% to 6.6% at the end of 2014 and by the end of 2015, it would be in the 5.8% to 6.1% range. We are a year ahead of where we thought we would be.
- Long-term unemployment has dropped by approximately 1.3 million people from a year ago. The duration of unemployment spells has declined. Job openings have returned to pre-recession levels and the rate at which employees voluntarily leave their jobs (the quit rate) has risen.
- Inflation appears to be tracking upward. The year-over-year CPI was 2% in July, the fourth month at or above that level. The year-over-year PCE inflation index was 1.2% in December. In July 2014, it was 1.6%. Again, back in December 2013, the prediction was 1.4% to 1.6% for 2014.
- The FOMC statement that it will not raise interest rates for some time fails to reflect the significant progress toward our goals. It also limits the committee’s flexibility to take action going forward.
- Taylor-type rules indicate that interest rates should already be above zero or should be lifting off in the very near future. (The Taylor rule states that the nominal Fed funds rate should reflect a real Fed funds rate [often thought to be around 2%, near the real growth rate], plus an additional amount to reflect inflation that is above target inflation, plus another amount to reflect output that is above potential output.)
- Raising rates sooner, rather than later, reduces the chance that inflation will accelerate and, in so doing, require policy to become fairly aggressive with perhaps unsettling consequences.
- The idea that we cannot raise rates because the labor market has not completely healed is risky because we do not know how to confidently determine whether the labor market is fully healed or when we have reached full employment.
- If monetary policy waits until it is certain that the labor market has fully recovered before beginning to raise rates, policy will be far behind the curve. Then, the FOMC may be forced to raise rates very quickly to prevent an increase in inflation. This may create unnecessary volatility and a rapid tightening of financial conditions.
- In sum, we are no longer in a financial crisis, the labor market is not in the same dire straights it was five years ago, and inflation is increasing.
Have a great weekend.