Philly's Plosser challenges Fed consensus

Charles I. Plosser: Some called his remarks critical of the next Fed chief. "That's not correct," he said.

Did Ben Bernanke's Federal Reserve save the U.S. from a worse financial panic in the 2008 finanical freeze, as this Bloomberg LP column claims? Do Bernanke's the cheap-money and aggressive bond-buying policies, likely to continue under Janet Yellen, President Obama's pick to replace him, threaten to slow long-term recovery? And do in-house critics Philadelphia Federal Reserve President Charles Plosser, who in speeches and occasional votes challenges government attempts to stimulate hiring and questions the ad hoc and aggressive nature of the Fed's interest rate easing policies, doing his job enriching the national discussion? Is he representing his Philadelphia-based district? See my column in Sunday's Inquirer, or read excerpts below (see also my earlier column here): 

A few weeks ago, just after the Federal Reserve let him back onto its policy-setting Open Market Committee (he rotates on and off), Philadelphia's Federal Reserve Bank president, Charles I. Plosser, got investors' attentionwhen he told a crowd of economists that the Fed might be forced to raise interest rates rapidly to unwind lame-duck chairman Ben Bernanke's cheap-money policy.

According to Reuters, Plosser went on to take a shot at Janet Yellen, who will replace Bernanke next month, when he dissed the kind of cyclical mathematical modeling favored by Yellen as a basis for rate targeting and other economic policy.

By current Fed standards, Plosser is a conservative ideologue: He is skeptical that the central bank can execute its congressional mandate to control unemployment by applying monetary policy on a long-term basis. He has voted against Bernanke-led measures to boost the Fed's holdings of mortgage bonds and other arcane financial creatures. Plosser prefers good old Treasury bills.

Plosser also said the 2008 recession, which provoked all that "aggressive" Fed reaction, had whacked the U.S. economy with "a permanent hit to the output level."

But he put less emphasis on the scary interest-rates-will-rise stuff Wednesday at a Union League talk sponsored by La Salle University. He said dumping other bonds and "returning to an all-Treasuries portfolio" will be "easy in principle, challenging to execute smoothly."

He also put dissension in context, saying: "Diverse views are represented [at the Fed]. In this way, the institution avoids groupthink." 

I asked Plosser about that "permanent hit" and whether he meant to tie it to Fed policy. No, he said: "A lot of that decline was stuff that was going to occur anyway."  It is due to the aging of the labor force, among other causes he added.

How about the gap between him and Yellen? "Some people interpreted my remarks as critical to the incoming chair. That's not correct. That's some people's interpretation," Plosser said.

True and different models, including those he doesn't agree with, will yield "different policy prescriptions," and different results, Plosser said. But his remarks "were not necessarily directed at any individual or individual policy." They were just "a general statement of riskiness," he added.

Is Plosser positioning himself as one of the people who might replace Yellen in a future Republican presidency? Was he asked to tone down the suggestion of dissension at the Fed, or is he self-censoring?

I'm glad we can see these ideas and actions debated at high levels. A separate question worth asking: how well does Plosser gauge the needs of Philadelphia businesses, bankers, wage-earners, and rent-payers and represent them to the Federal Reserve? The regional Fed collects a lot of local economic and employment information. Is that enough for regional presidents like Plosser to be aggregating and passing along to the Board of Governors?

Does he also have an obligation to note whether business owners and managers (for example) are pro-intervention, even if he isn't?