One on One with Charles Plosser, President of the Philadelphia Federal Reserve
Friday, January 11, 2008
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SUSIE GHARIB: More evidence today that officials at the Federal Reserve are prepared to cut interest rates. This morning Charles Plosser, president of the Philadelphia Federal Reserve, told me in an exclusive interview that he is open to doing just that. Plosser is a voting member of the Fed's open market committee and will help decide whether to cut rates when the central bank starts a two-day meeting January 29. My first question to Plosser: can Fed monetary policy prevent a recession?
CHARLES PLOSSER, PRESIDENT, FEDERAL RESERVE BANK OF PHILADELPHIA: Well, that's a very difficult question. In some cases it can and in some cases it can't. But we have to remember one of the things that is critical about said 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 is happening today.
GHARIB: Mr. Plosser, yesterday Chairman Bernanke said that the Fed is prepared to cut interest rates significantly in necessary to support economic growth. Are you open to more rate cuts?
PLOSSER: 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 has happened recently is that the data that have come in the last few weeks on the end of the fourth 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 is affecting our forecast going forward. So I certainly am open to that. And there is a lot of uncertainty right now about the economy.
GHARIB: You said this week in a speech that you're very concerned about inflation risks. Which are concerning you more, inflation risks or a weakening economy?
PLOSSER: Well, the Fed has a dual mandate from Congress and that is 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 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.
GHARIB: Several Federal watchers that I've talked to recently describe you as an inflation hawk. Is that an accurate description?
PLOSSER: I believe in the dual mandate that says we need to be concerned both about economic growth and inflation. I'm 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 those things.
GHARIB: The view of many Wall Street economists is much more concern about recession and not inflation. And as you probably heard, many Wall Street firms are now forecasting the U.S. economy is going into a recession. They say that the unemployment rate has jumped and that that has been a reliable signal for recession. Does that worry you?
PLOSSER: Well, I'm certainly forecasting a period of slower economic growth. My own forecast at this point is not to forecast of recession. 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 is 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'm worried about slower growth. There's no question about that. I'm more uncertain about the future path of the economy than I once was, but my forecast at this point does not include a recession.
GHARIB: 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?
PLOSSER: 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 as a forecast contributes to sort of a concern of the path of consumer spending going forward.
GHARIB: 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?
PLOSSER: I think the most thing that we're concerned about right now is consumer spending. As everybody knows and it's 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.
GHARIB: How much do you think that the problems in housing and the drop in home prices is contributing to a drop in consumer confidence?
PLOSSER: It is certainly true that when you pick up the newspaper every day and talk about the problems in housing and housing prices, that doesn't do much for consumer confidence. Consumer confidence is not particularly a good forecaster of future events. It is a pretty good indicator of how people feel currently, but it 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 concerns.
GHARIB: 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 is also 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?
PLOSSER: 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 is the very best decision for the economy. And politics plays very, very little role.
GHARIB: Well, you can watch my entire interview with Philly Fed President Plosser on our NIGHTLY BUSINESS REPORT on pbs.org.
