Philadelphia Federal Reserve Bank President Charles Plosser said Tuesday the FOMC will need to control, not try and boost, U.S. inflation “in the next three to four years.”
Plosser, speaking to reporters following a speech at the Economic Club of New York, also said that while many are focused on the timing of the first rate hike timing, he would like a focus on what conditions will likely spur such a hike.
As the economy improves, he said, the timing of the first rate hike “will get closer” and liftoff will come “when the data tell us” it’s time to act, he said. “We have to act, at times, when the data tell us. Words are nice, but actions speak louder than words.”
Plosser, a voter on the Fed’s policymaking committee this year, also warned the timing for the first rate hike “may be sooner than people think.” He said he would prefer the Federal Open Market Committee to “begin narrowing the set of things we look at” when deciding to act on policy, because a narrower set would help the Fed focus “more intelligently” on policy.
The Fed funds rate has been been at the zero lower bound since 2008, but Plosser said he would be “very uncomfortable” with a situation where the unemployment was close to the Fed long-term trend, and inflation was close to 2%, and “we still have a 0% Fed Funds rate.”
Plosser urged the Fed “to be cautious,” and “not overstay our welcome at zero,” saying he’s “nervous about interest rates near zero for the past five years.”
Long an advocate of rules-based monetary policy approach, Plosser said such rules would make explicit the tradeoff between unemployment and inflation. But he doubted the FOMC would adopt a rules-based policy any time soon. “The reality is, the FOMC won’t pick rules” for setting policy, he said.
Part of the benefits of a rule-based system “is getting us to think about consequences and not live day-to-day as policy makers,” he said.
Another thing he didn’t see changing: The Fed’s preferred inflation target, the Personal Consumption Expenditures Index, although he said he favors using the Consumer Price Index. He said, by now, that is a dead debate and the FOMC had moved past the issue.
As for economic outlook, Plosser said the U.S. economy is “improving,” although “one could wish it was stronger.” But while the U.S. economy has seen steady improvement, it was “not exuberant,” he said.
He also said the current FOMC statement does not reflect the U.S.’s economic improvement.
Compared to decades ago, the Fed is “talking more on the unemployment rate,” he said. For his part, Plosser sees the unemployment rate reaching 5.8% by the end of this year and 5.6% by the end of 2015.
Asked why his unemployment rate was lower than the FOMC central tendency, Plosser said, “if you look at the beginning of each year, I have consistently been at the low end of that.” He also pointed out that his unemployment forecast does not depend much on the participation rate.
Still, he sees “pretty solid growth” in the U.S. labor market over the past year. “I believe the unemployment rate will drift down. We do know a large portion of the decline is due to retirements and to people moving onto disability.”
Plosser said he is worried the degree of precision in economic forecasts generally is “vastly overrated,” adding “we just don’t have” that type of accuracy.
The FOMC is “not very good at forecasting inflation,” he said, and its inflation model forecasts “have not been good for a long time.” But it does look at “many” inflation measures, he added.
He urged that “anchoring inflation expectations is a valuable and important way of helping maintain inflation stability,” adding the Fed needs to “recommit to that. Our messages have to be credible and committed.”
Plosser said he did not have a specific forecast for nominal and real wages, but said he very much “disagrees” with the idea the U.S. can’t “get inflation until wages grow faster.”
Worried about banking reserves turning inflationary, Plosser said the reverse repo rate was a “sideline tool” that could help control the bank deposit flows upon the Fed’s eventual exit from quantitative easing. He said bank deposits would move when customers can get more “interest rate” yield elsewhere.