Charles Plosser: Well, that’s a very difficult question. Some cases it can and some cases it can’t. But we have to remember one of the things that’s critical about Fed policy is that it often works with a lag so we have to be very forward looking so actions taken today or in the recent past typically aren’t fully felt in the economy for several quarters to come. So the Fed has a challenge in its forecasting exercises to look forward and try to assess the future path of the economy in setting our monetary policy, not just what’s happening today.

SG: Mr. Plosser, yesterday Chairman Bernanke said that the Fed is prepared to cut interest rates significantly if necessary to support economic growth. Are you open to more rate cuts?

CP: Certainly I am.  I think the economy has slowed considerably. My own forecast for the first half of ’08 is a rather slow economy.  I think what’s happened recently is that the data that have come in in the last few weeks on the end of the 4th quarter of last year have suggested more weakness.  I think the challenge is going to be, going forward, is to thinking about what data comes in and how that’s affecting our forecast going forward. So I am certainly open to that and there is a lot of uncertainty right now about the economy.

SG: You said this week in a speech that you are very concerned about inflation risks.  Which are concerning you more? Inflation risks or a weakening economy?

CP: Well, the Fed has a dual mandate from Congress  and that is to support economic growth and to promote price stability.  We have more uncertainty right now. The growth outlook looks a lot more uncertain than it did a just a few months ago but at the same time inflation risks have risen in my mind as well. So we are concerned about both of those and we have to pay attention to both of them. The Fed with its dual mandate has to preserve both price stability and support growth… The price stability..  The Fed is the only institution in the government that we can deliver on price stability.  So we have to be very concerned about that as well. So I’m concerned about both at this point.

SG: Several Fed watchers that I have talked to recently describe you as an inflation hawk.  Is that an accurate description?

CP: I believe in the dual mandate that says we need to be concerned both about economic growth and inflation.    I am not a  big fan of inflation, but on the other hand I am worried about it and I think we have to pay attention to both of those things.  As I said before the Federal  Reserve is the only institution in government that can deliver on price stability and I think we have to take that charge very seriously.

SG: You said this week that you see worrisome signs of inflation, and that it’s more broad-based than high oil prices.   Where else do you see inflation heating up?

CP: Well, one of the things that I see since last summer, for example,  is that a statistic called the median CPI, which measures the price increases of a whole lot of commodities in the consumer price index.. that that median CPI has risen considerably since August suggesting that the number of goods and services in the economy that are measured by the CPI…. the number of those that are increasing at more rapid rates,  are in fact increasing.   That suggests that more prices in the basket are rising at faster rates… and that’s of some concern.  Do I know whether that will continue or not?  I don’t know, but it is of some concern to me that more goods and prices, more goods and services are rising at faster rates and that’s of concern.

SG: The view of many Wall Street economists is much more concerned about recession and not inflation, and as you’ve probably heard many Wall Street firms are now forecasting the US economy is going into a recession.  They say that the unemployment rate has jumped and that has been a reliable signal for recession.  Does that worry you?

CP: Well, I am certainly forecasting a period of slower economic growth.  My own forecast at this point is not to forecast a recession.

SG: All right, well can you elaborate a little bit more on that? I mean,  I am sure you look at a lot of data.   Is any of the data...

CP: I think I do look at a lot of data and I think that’s the point is that we don’t want to put too much weight on any one number or any one set of data or one month’s worth of numbers.  So I think it’s very important that we sort of look at the collective data over a period of time to determine what the path of the economy is going to be. I am worried about slower growth.  There’s no question about that.   I am more uncertain about the future path of the economy than I once was. But my forecast at this point does not include a recession.

SG: The stock market seems to be signaling that there is a recession.  Are you at all concerned that so many of the major stock market indices have been performing so weakly?

CP: Well, I'm concerned about that because the stock market is an important element of consumer wealth and therefore potentially affecting consumer spending. And so that is a forecast.. ah.. contributes to sort of a concern of the path of consumer spending going forward.

SG: Let’s talk a little bit more about the consumer.  We all know how important the consumer is to the economy.  What aspects of consumer behavior is worrisome right now?

CP: Well, I think the most thing that we’re concerned about right now is consumer spending. As everybody knows and is constantly referred to is, consumer spending makes up 65 to 70 percent of GDP.   The consumer has been relatively strong and resilient over the last several months since summer. Employment growth  has been strong and that supports consumer spending.  However, the combined weakness in wealth… that is both housing wealth and stock market wealth… and some softness in employment growth seem to be suggesting that the robustness of consumer spending going forward may not be as healthy as we thought it was just a few months ago. So that’s the source of concern, and whether that spending and employment growth will continue to support consumer spending going forward.

SG: How much do you think that the problems in housing and the drop in home prices is contributing to a drop in consumer confidence?

CP: Well, it’s certainly true that when you pick up the newspaper every day and talk about the problems in housing and in housing prices,  that doesn’t do much for consumer confidence.  Consumer confidence is not particularly a good forecaster of future events.  It’s a pretty good indicator of how people feel currently, but is not a particularly good forecasting tool.   So I think the consumer has become less confident. I think the concerns about house prices, the concerns in the financial markets have contributed to sort of greater concern.

SG: There is talk now as you know of fiscal policies to stimulate the economy, What’s your view of fiscal stimulus and the proposals that have been bounced around recently?

CP: I think it’s way premature for me to sort of think about what fiscal policies may be proposed.  There’s really nothing on the table that is very concrete at this point so I guess I prefer to stay away from fiscal policy issues at this point.

SG: All right, Mr. Plosser, this has got to be a tough time for the Fed between Wall Street clamoring for interest rate cuts, and of course it’s also a political season and there are a lot of Presidential candidates who are out there on the campaign trail criticizing economic policies. Does the Fed feel pressured to cut rates?

CP: Well, there’s lots of pressure that comes from all sorts of quarters for the Fed to do this that or the other. But the Fed is a remarkable institution. In my time there, and  in my nearly 30 years of studying monetary policy and Federal Reserve policy, the Fed is an awful apolitical institution.  I don’t see.... I see pressures clearly.  Financial markets put pressure on us, politicians put pressure on us.  But I think when you sit around the table at FOMC meetings and we think about monetary policy, the people that sit there are trying their very best to make what they view as the very best decision for the economy. And politics plays very, very little role.

SG: Mr. Plosser thank you so much, we appreciate your time.

CP: Thank you for having me, I appreciate it very much.