The “bipolar” Fed

From Charles Plosser:

Federal Reserve Bank of Philadelphia President Charles Plosser said Wednesday the U.S. central bank needs to raise short-term interest rates “sooner rather than later,” in a speech that praised the Fed’s recent move closer toward ending its easy-money policy stance.

Raising rates off of the current near-zero levels “may allow us to increase rates more gradually as the data improve, rather than face the prospect of a more abrupt increase in rates to catch up with market forces, which could be the outcome of a prolonged delay in our willingness to act,” Mr. Plosser said.

From Narayana Kocherlakota:

In his formal remarks, Mr. Kocherlakota repeated his belief that a U.S. central bank rate increase next year would be a mistake. Inflation is unlikely to reach the Fed’s 2% target until 2018, and because of this outlook, “it would be inappropriate for the [Federal Open Market Committee] to raise the target range for the fed funds rate at any such meeting” occurring in 2015, he said.

Note: Plosser has sounded like a “scratched vinyl record” since 2008. In July (note the date) of that year he said:

In sum, this year and next will be quite challenging. The economy will grow this year but at a slow pace, and the unemployment rate is likely to get worse before it gets better. At the same time, inflation will be uncomfortably high for a while.

I am more optimistic about the outlook for 2009 and I expect we will see economic growth return to near its longer-term trend. But to prevent recent inflation from continuing(!) to plague the economy and to avoid a rise in inflation expectations, I believe the current very accommodative stance of monetary policy will need to be reversed, and depending on how economic conditions evolve, I anticipate that this reversal will likely need to begin sooner rather than later.

Meanwhile, Kocherlakota in 2010:

  1. argued that unemployment was structural and
  2. that if the Fed Funds rate was kept at zero the appearance of deflation was only a question of time!

With regard to (2) what he meant was something like:

With the federal funds rate near zero since December 2008 and expected to remain there for the next year or two, the Fisher equation has important implications for the expected inflation rate. If the real economy is currently rebounding to a sustainable growth trend, the real interest rate will rise and the only outcomes possible will be either a higher nominal federal funds rate or a negative expected inflation rate

Giving rise to the “Neo Fisherite” school of thought!

Personally I prefer, like Keynes, someone who can change his mind when the facts change.

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