Plosser: Right for the wrong reason

In a sense Plosser is right. From the WSJ:

“The actions taken in August and September tend to undermine the Fed’s credibility by giving the impression that we think such policies can have a major impact on the speed of the recovery. It is my assessment that they will not,” Federal Reserve Bank of Philadelphia President Charles Plosser said. “We should not take certain actions simply because we can.”

After so many “shots wide off the mark” the Fed is bound to lose credibility. That´s bad because, on the off chance that it makes the right move – an NGDP Target, or even a distant second best Price Level target – it will be hard to inspire “confidence”.

And the views of FOMC members are so diametrically opposed! According to Plosser:

Meanwhile, “we should be cautious and vigilant that our previous accommodative policies do not translate into a steady rise in inflation over the medium term even while the unemployment rate remains elevated.”

While for Bernanke the real danger is deflation:

“If inflation falls too low or inflation expectations fall too low, that would be something we have to respond to because we do not want deflation”.

Update (30/09): But Steven Williamson likes Plosser:

I tend to like Charles Plosser’s speeches, and this recent one is no exception. Plosser has an excellent understanding of why central bank commitment to a policy rule is a good thing, and communicates the idea well to a lay audience.

5 thoughts on “Plosser: Right for the wrong reason

  1. Do you place any weight on thoughts like this one from Mark Thoma: “I guess I have more faith in Bernanke and others at the Fed than they have in themselves.” In other words, do you see the problem with the current fed as a lack of fed self-belief or just an over emphasis on the wrong topics (i.e. preventing deflation / very low inflation)?

    Thanks again.

    http://moneywatch.bnet.com/economic-news/blog/maximum-utility/ben-bernanke-and-the-washington-consensus/1780/#ixzz1ZMgObjZW

  2. Ryan. Mostly the latter. In a way, the only difference between Bernanke and the BoJ is that while “stable prices” to the BoJ means 0% inflation, to Bernanke it means something between 1% and 2%!

  3. Well, Fed credibility…hard to measure. And I still say, if you wave a pair of Ben Franklins in front a street hooker, and she leaps into your arms, then you know that printing more money will stimulate the economy. It is as basic as that.

  4. Plosser: “The actions taken in August and September tend to undermine the Fed’s credibility by giving the impression that we think such policies can have a major impact on the speed of the recovery. It is my assessment that they will not”

    Plosser: “we should be cautious and vigilant that our previous accommodative policies do not translate into a steady rise in inflation over the medium term even while the unemployment rate remains elevated.”

    How can we reconcile these two Plosser statements? Fed policy could lead to a steady rise in inflation, but could not have an impact on the speed of the recovery? It seems inconsistent to me.

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