Charles Plosser made his mark on the academic world of monetary theory and the practical world of global central banks long before he started making his mark on the Federal Reserve when he became president of the Federal Reserve Bank of Philadelphia in 2006 and then served through 2015. An early adopter and advocate of rules-based monetary policy he pushed the academic and central banking worlds to more closley align policy with the Taylor Rule which uses a mathematical formula based on inflation and growth to provide a guide on where the Fed’s key policy rate should be at any point in time.
Now the big spotlight is on the Federal Reserve and its chair, Jay Powell, as President Trump’s campaign is trying to force them to cut interest rates. Charlie’s big push is to pound the world’seconomic floor with a different mantra: independent central banks have much better policy outcomes than “those who are subservient to the political process and don’t act independent” of it.
”When things fall apart, we get things like the great inflation of the seventies” he says. “You know we get all sorts of bad outcomes when that independence is not respected sufficiently. or the political process tries to undermine that independence for a political short term benefits.”
”And so it is precious” he adds. “And it is important.”
Charlie was famously asked by former Fed Chair Ben Bernanke back in 2012 to codify the central bank’s first ever policy framework agreement. The framwework agreement helped the Fed in effect announce that it had adopted a 2% inflation target, a landmark step that Bernanke had advocated for years and treid to get Congress to accept.
So dive in and hear what he has to say. “Why the Fed must be open to criticism…They need to be aware of understanding of their policy mistakes and fess up to them - so to speak. Sometimes, that's not easy for big organizations to do.”
And, what about presidents that bash the Fed chair constantly and threaten to fire him if he does not start cutting rates immediately? That’s on Charlie’s list too. Read on - or better still listen to the podcast- and hear what he has to say.
Independent Central banks make better policy 00:01:17.530
Those countries that have central banks that are more independent tend to perform better in terms of the outcomes for the economies in which they're involved. There are ample examples of the opposite Argentina, Zimbabwe hyperinflations in South America. when central banks become subservient to the political process and don't act independent outcomes are worse. So this is independence is a desirable feature. That we want to preserve. The challenge is, how do we do that and how to rebalance in a democracy independence with accountability, and that's certainly a fair and difficult question to answer.
Independence is precious 00:02:23.130
But it is precious in some sense, because we know from experience, when you don't have independence. things fall apart and whether it be like I said, Argentina or the other South American countries. When things fall apart, we get things like the great inflation of the seventies. You know we get all sorts of bad outcomes when that independence is not respected sufficiently. or the political process tries to undermine that independence for a political short term benefits. And so it is precious. And it is important.
Checks and Balances are part of democracy 00:03:04.390
That doesn't mean it's easy to sustain. Because it's not. The way I think about it is that oversight? We're a democracy, after all, we have to have oversight. Nobody is truly independent. And we have a system of government which focuses on checks and balances at various times where different parts of Government act as breaks or restrictions on other parts of government that want to do things. And in the case of monetary policy, it's the brakes on freewheeling political fits for policy for which the monetary authority has some responsibility to help keep in check in order to maintain price stability. So there's a tension there, and there always will be a tension. But the question is, how you resolve those tensions, and how you manage those tensions, and that's a difficult and challenging question. Charles Plosser: My preference is, and I've said this many times before…
It's oversight, but it's also setting expectations of what the Fed and monetary policy can and cannot do.
The Fed will not cannot save the world 00:04:29.100
The biggest danger we face oftentimes is expecting the fed to solve all our problems, economic problems. And it can't do that. And when you set those expectations. The Fed didn't save the world.
The Fed needs to be open to criticism 00:12:04.530
Of course, the fed needs to be open to criticism. They need to be aware of understanding of their policy mistakes and fess up to him, so to speak, sometimes. That's not easy for big organizations to do. You know, there's big organizations like the Fed and other parts of government. You tend to find institutions circling the wagons, you know, when they're attacked and protecting the institution, and that's to be expected at some point. But you know there are these phrases you hear, which are direct in the sense that they defend the institution they want to protect the institution. They don't like to admit they made mistakes. and but that doesn't make them any different from lots of other institutions.
Respect must be earned and vitality maintained 00:13:07.550
So the trick is to have a process that keeps the vitality of the institution alive. By not promoting group-think by not appointing phonies, you know, as revenues to invite openness of debate and controversy, not to throttle dissent, but to encourage it. One of the greatest things that that Mervyn King did was moving to the Bank of England early in the crisis he lost votes. People voted against him. And that did more to build the respect of an independent institution than having everybody agree all the time.
Framework reviews are a good start 00:17:36.620
I do think that what the Fed's doing now, or its attempts to do. These reviews and assessments of their policies and strategies is healthy. Whether they've got that right or not remains to be seen because they did this in 2020, and, as you remember, I was pretty critical of what they produced in 2020 and I don't want to. I don't want to let it, and they need to keep open mind and keep themselves exposed to different points of view.
You need dissenting views at the Fed 00:19:01.210
You need dissenting views. You need people open to discussion. You don't want the fed or anyone else to come into it with a ‘group think’ kind of mentality. You know where everybody's on the same page and a dream with everybody else. You want that ability to dissent. You want that ability to disagree. And you want it to be heard. Ultimately, the Fed. In response to those criticism, we'll have to make decisions and they'll make choices. And that's what they do. That's all right. But it's very important to have those discussions and not expect everyone to follow the lineyou need independent thinkers. That's why you need people who are willing to dissent and to say, No, I don't think that's right. and that they need to be heard and not muffers.
Not all Fed chairs tolerated dissent well 00:21:49.970
For the longest time Greenspan would not accept dissents. And oh, he would, he would! He would muzzle people. You know that as well as I do. and Fed chairs often brought to muzzle people, because they're the chair, and they don't want to be embarrassed by somebody disagreeing with them. it's very hard to change rather than circling the wagons. You need to open the process up and be willing to debate.
Presidential criticism is fine ..but should stay behind closed doors 00:23:02.320
Do that behind closed doors all the time. And so certainly it should be acceptable for the President, or any other policymaker, for that matter, to express their opinions about what's going on. And they ought to be polite and so forth. But that that needs to be. That's okay. But that's different from saying everybody should then fall in line and do what the Democrats said. The Republicans said it, the President said, or the Treasury Secretary. And understand its consequences, to have a useful debate
Bernanke used to talk to the Administration a lot 00:24:33.190
I mean. Ben spent a lot of time early in the crisis, explaining what he was doing, trying to explain why he was doing what he was doing. Was it always satisfactory? Not to me? But he was. It was his job to explain what the Fed was doing…
Fellow
Charles I. Plosser
Visiting Fellow, Hoover Institution
Charles I. Plosser served as the President and CEO of the Federal Reserve Bank of Philadelphia from 2006 until his retirement in 2015.
In his position he served as a member of the Federal Open Market Committee, which is responsible for U.S. monetary policy. During this period the world experienced a global financial crisis and a severe recession, requiring extraordinary action by monetary policymakers. He also served during a time of dramatic change in the activities of the Federal Reserve Banks including their role in financial services and the payments system as well as bank supervision. Among many other duties, he chaired the Committee on Investment Performance, which was responsible for oversight of the entire Federal Reserve System’s employee pension and thrift funds.
Prior to joining the Federal Reserve, Plosser was the John M. Olin Distinguished Professor of Economics and Public Policy and director of the Bradley Policy Research Center at the University of Rochester’s William E. Simon Graduate School of Business Administration where he served as Dean from 1993 to 2003. In 2004 he was a visiting scholar at the Bank of England. He is also a Research Associate at the National Bureau of Economic Research in Cambridge, Massachusetts. Over the years, Plosser has lectured to academic and business audiences worldwide on topics ranging from management education to economics and public policy issues. Prior to his public service at the Federal Reserve he also served as a consultant to numerous corporations on topics ranging from strategic planning and forecasting to portfolio and pension fund management, capital budgeting, and financial analysis. He was a member of the New York State Board of Economic Advisors and has served on the board of directors of ViaHealth, Inc. and RGS Energy Group, Inc. He has also served on the Advisory Board of the University Technology Seed Fund, LLC. In addition, he served as a director of the Graduate Management Admission Council from 1997 to 2003 and served as chairman of the board from 2002 to 2003.
Since January 2016, Plosser has served as a Public Governor for FINRA, the Financial Industry Regulatory Authority, where he serves on the Investment Committee and the Finance, Operations and Technology Committee.
Plosser earned his Ph.D. and M.B.A. degrees from the University of Chicago in 1976 and 1972 respectively. He is a 1970 graduate of Vanderbilt University where he earned a bachelor of engineering degree (cum laude with honors) and a member of Tau Beta Pi (National Scholastic Honor Society for Engineers).
