PhillyInc: Philly Fed chief: Taming inflation is key to economy

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Philadelphia Fed Chairman Charles Plosser. (Bradley C Bower / AP)

When you're one of 10 people who gets to vote on U.S. monetary policy, your words get dissected as if you were the manager of the division-winning Philadelphia Phillies.

Federal Reserve Bank of Philadelphia president Charles I. Plosser is no Charlie Manuel. But listen to enough of their post-game or post-Fed-meeting interviews and you can see that they are similar in one respect: Both managers like to keep things simple.

In Manuel's case, it's expecting his hitters to hit, his pitchers to pitch, and his fielders to field.

As for Plosser, it's warning the Federal Reserve against straying from what he sees as the central bank's main mission: fighting inflation. To him, keeping prices stable makes it possible for the Fed to fulfill its other mandates: promoting maximum employment and moderate interest rates.

Inflation, or more specifically Plosser's long push to prod the Fed into adopting an explicit numerical objective for inflation, was a big part of his speech Thursday at the Villanova School of Business' second annual Business Leaders Forum at the university's conference center in Radnor.

About 10 minutes in, as Plosser was talking about the current inflationary environment, the lights went out in the conference center's dining room.

He didn't miss a beat, quipping: "You mention QE2, and everything goes dark."

Then, addressing the Rev. Peter M. Donohue, the president of Villanova University, who had introduced him, Plosser asked, "Father, did you have anything to do with this?"

As any university president would when surrounded by a roomful of business leaders, Donohue replied: "If we had more donations, we could keep the lights on."

A little levity goes a long way at a time when so many fear that the U.S. economy of 2011 feels like 2008, and that we're slipping into another recession.

In fact, Plosser has revised downward his forecast for gross-domestic-product growth in 2011 from a 3-to-3.5 percent range to less than 2 percent. But he expects growth to accelerate to about 3 percent in 2012.

Despite the risks posed by Europe's sovereign-debt crisis, Plosser said, "I do not believe the data signal that we are on the precipice of a so-called double-dip recession."

That doesn't mean all is hunky-dory. Consumers keep saving more and spending less. Labor market conditions "remain a serious challenge," said Plosser, who expects the August unemployment rate of 9.1 percent to remain little changed for the rest of the year, but fall to between 8 percent and 8.5 percent by the end of 2012.

As for what can be done about high unemployment and sluggish growth, Plosser said he thinks the Fed has reached the limits of what monetary policy can do: "Even a monetary-policy maker can't say, 'Let there be light.' "

Which helps explain why he cast one of three dissenting votes during the two most recent meetings of the Federal Open Market Committee.

 Plosser is not a fan of the Fed's recently completed second round of quantitative easing, which involved the purchase of $600 billion of long-term government securities, or its plan now to buy $400 billion of longer-term Treasuries and sell an equal amount of shorter-term bonds by mid-2012.

While the goal is to bring down long-term interest rates, the "pass-through" to businesses and consumers is likely to be quite small. "Thus, I am skeptical that this will do much to spur businesses to hire or consumers to spend, given the nature of the structural adjustments occurring in the economy and the uncertainties posed by the fiscal challenges both here and abroad," he said.

The danger for the Fed in trying such tactics is one of losing credibility in the eyes of the public. "In my view, the actions taken in August and September risk undermining the Fed's credibility by giving the impression that we think such policies can have major impacts on the speed of this recovery," he said. "It is my assessment they will not."

In Plosser's opinion, the Fed can't solve all the economic problems besetting the United States right now, and shouldn't act as if it can.

Otherwise, when the lights do go out, it will be that much harder for the Fed to make the hard choices needed to bring the economy back from the shadows.

 


Contact Mike Armstrong

at 215-854-2980 or marmstrong@phillynews.com, or @PhillyInc on Twitter. Read his blog, "PhillyInc," at www.phillyinc.biz.