Charles I. Plosser, aka Charlie, was president of the Federal Reserve Bank of Philadelphia from 2006 to 2015 where I first met him when I went down to the bank from New York to interview him. At the time he was considered a hawkish Fed official, one who argued for rules-based monetary policy at a time when the Taylor Rule was still relatively new and not fully embraced by the economics profession. (I also met for the first time and interviewed Loretta Mester that day, then his director of research. Yes the same Loretta Mester who became the president of the Federal Reserve Bank of Cleveland and followed in Charlie’s footsteps as a diehard inflation fighter.)
Charlie may have been and may still be an inflation hawk but it’s noteworthy that when former Fed chair Ben Bernanke, widely considered a dove at the time, needed someone to write up the first ever monetary policy review in 2012 he didnt’t choose another well-known dove. He chose Charlie who for 20 years held the prestigious and influential job of co-editor of The Journal of Monetary Economics.
Could this be why? From his Philly Fed bio: ”He believes in a systematic approach to monetary policy to promote better economic outcomes and financial stability. He has also been a long-time advocate of the Federal Reserve adopting an explicit inflation target, which the FOMC adopted in January 2012.”
So imagine my surprise when I interviewed Charlie as the Fed wrapped up its two-day meeting and started off by asking him what he thought of the FOMC’s decision to hold its key rate steady again even as Summary of Economic Projections, the famous SEPs, raised the forecast for inflation this year to 3.1, even further from its 2% target, and maintained its median forecast for two rate cuts this year. Wouldn’t a dyed in the wool hawk say Chair Powell and his colleagues are holding policy unchanged at a time when restraint is needed?
Apparently not. Here’s what he said.
”Individual FOMC members are just as uncertain as everybody else about what's going to happen. And I think Jay made it very clear what their objective was. Keep the economy on track as best they could, and stabilize inflation, because stable inflation and low stable inflation is the best contribution the Fed can make to ensuring continued growth and a healthy labor market. And I think that's the right attitude for them to have at this point, I don't think Jay made a mistake.”
Wow. Charlie is a person who has never hesitated to criticize the Fed when he thinks officials are on the wrong track. At a time when there are critics on both sides, some who think the Fed should be cutting rates and others who think they should be acknowledging the need to possibly to hike them this year, Charlie’s insistence that Powell is right to hold back until the dark cloud of tariffs, wars, oil prices clar up is significant.
So dive in and hear why he thinks the Fed is right to keep its powder dry, why it should not move pre-emptively on rates when there is so much uncertainty that it’s impossible to know what the right thing is to do now. And why cutting rates at a time when the budget deficit is swelling could lead to more inflation.
Supportive of Powell’s positioning of the Fed 00:01:58.480
Charles Plosser: it's hard to know when any of us are right. In some sense, there is so much uncertainty, and Jay obviously emphasized this. And, as does everybody else, the uncertainty that's looming for the economy, the world economy from lots of tariffs. There's a huge amount of uncertainty. We've got multiple wars going on. You know, we've got trade problems tariffs an economy that some people say is softening, and other people are not so sure about that. So I think Jay did a very. very good job of sort of positioning the Fed for right now given the amount of uncertainty. They're in a place where they can move, if and when they feel like they have to. and that the data is yet unclear as to what duration that may or may not be. Some people would describe this as, keeping the powder dry. And I think that trying to act preemptively if you will. on the economy or on inflation at this point is a very risky strategy, and I don't believe they want to do that at this point And they seem to feel themselves as well positioned to act, when the time comes. I think that's a fair position for them to take. and I was supported at this stage of the game.
Focus on stability and low inflation is the best course 00:05:23.810
Well, I think that what that says <such minor adjustments> is that nobody's very sure of anything. And the fact that you have marginal, very marginal, changes in the outlook, and then the appropriate policy rate says that things really haven't changed very much… Those minor changes should not, I think - should not - be blown up into sort of major interpretations of what's going on within the FOMC. Individual FOMC members are just as uncertain as everybody else about what's going to happen. And I think Jay made it very clear that their objective was. Keep the economy on track as best they could, and stabilize inflation, because stable inflation and low stable inflation is the best contribution the Fed can make to ensuring continued growth and a healthy labor market. And I think that's the right attitude for them to have at this point, I don't think Jay made a mistake.
Small shifts are not interpretable policy changes 00:06:40.290
Powell emphasized that don't read too much into these little changes, because nobody knows. and if you interpret these things or over-interpret them, if you will, you can find yourself in trouble. I think the Fed does not want to over-interpret them, or have other people over-interpret them and I mean, there's some sectors of the economy, the financial markets, and others who are just clamoring for rate cuts, and I think that we don't want to read too much into these minor adjustments, because in this period of uncertainty, as the data come in, individuals on the FOMC are going to adjust upward or downward, or a little bit here, a little bit there… When change is imminent, I think you'll know it.
Plosser sees no signal here- No black smoke 00:09:54.440
I don't think they want to send a signal. There's look, there's nothing in the economic data in terms of the employment or GDP or things that sent signals to the Fed. Oh, we've got to hurry up and cut rates. The time is just not there. Might it get there? Certainly, I don't know that it won't. I think it is too early to signal that you're on a track to do something that may end up being totally inappropriate. And so they don't know how inflation is going to behave. It's still above 2%, significantly.
No compelling data to move the Fed 00:11:13.740
Evidence is not terribly compelling one way or another. because we just haven't -haven't - had enough data. Well, there are risks to the Fed and risk to the economy and inflation for the Fed to be seen be perceived as trying to act preemptively. On the economy that's still in pretty good shape. And unemployment is really not rising. Jay pointed out that wages inflation-adjusted, were still rising; the unemployment rate at 4.2 - 2-years ago, one would have said that was full employment. So I mean, I think the notion that people have sometimes that the fed can fine tune the economy or fine tune some of these outcomes: is mistaken, and it sets you up for problems.
No time for pre-emptive action or signaling 00:12:52.970
The danger of signaling or becoming let me say, preemptive, or aggressive, in supporting rate cuts is what the Fed might do through a couple of channels. I'll come back to that. One time Tariff price hikes could turn into inflation because you could potentially damage and support higher expectations of inflation in anticipation of more rate cuts. That would have exactly the opposite effect of what you want to have. You might, rather than having the tariff just be a short term, increase in the price level, that <move/rate cut> might be an impetus to turn it into more inflation. And another reason for that same line of thought is that budget deficits going forward for the next 5 years are all looking to be something like over 5% of GDP budget deficits. Huge spending is still in the pipeline and government budgets. And the last thing you want to do - not the last thing but one of the things you wouldn't want to do - is to start cutting rates and have it interpreted as, well, the Fed’s got to be funding all those deficits by printing money like they did in 2,020 and 2021. And what did that result in? That resulted in a lot of inflation! And the Fed sends a signal that's consistent with. we're going to accommodate these big deficits by cutting rates and printing money. That's should fuel expectations of inflation rising, again. So you don't want to do that, either.
Maybe- not a reason to hike rates..,but 00:15:00.
So that may not be a reason for raising rates now. but it certainly should lend strength to an argument that now is not the time to be cutting them.
Wants to avoid stagflation- budget deficit hikes risks 00:17:25.379
What I want to do is ensure that we don't find ourselves in a stagflation scenario. They don't want to do anything that's going to encourage that. And as I mentioned about the budget deficit cutting rates now. might not be the right way to ensure it. We don't have stagflation, because cutting rates now might encourage expectations that we, the Fed's, going to try to fund and offset budget deficits that are in the pipeline. They're coming as far as the eyes can see, as far as I can tell. and that would be inflationary if we did that; started funding those deficits. And cutting rates would be a way to do that. That's how you would do that. You would cut rates, buy up government debt. and that's what we did in 2020. And look at the inflation we got. So I think you don't want to set a tone that suggests you're going to be very accommodative of deficits. because that might raise expectations of inflation and turn what might be just a temporary rise in the price level into a self-sustaining, higher inflation rate. So that's why they're trying to trot in the middle. I don't think they're forecasted to stay there. I don't believe that, but I also believe they don't want to conduct policies in a way that may end badly. That's where we are.
At some point the Fed will move until then…wait 00:20:08.450
Well, at some point there will be data that forces them to act one way or the other. Which way will that play out. I don't know the answer to that, and if I was sitting down writing my dot plots for the SEPs, as I did many, for many, many years. I would be hard pressed to write a dot plot. or suggest or recommend a path that moves dramatically one way or another, based on today's data. Whether it be may be Trump will back off on terrorists. And that would be good for both inflation and the economy. Probably. Hold on. Maybe something will happen on the geopolitical front in the Middle East or Ukraine that would jumble all our forecast about what's going to happen. So I'm of a very cautious mood right now in terms of not wanting the Fed to be seen as aggressive in either direction. Because of the degree of uncertainty and the way geopolitical stuff… the way Trump's policies are so unpredictable. And who knows what's going to come out of China in terms of policy. At this point all I know is I wouldn't want to be setting a tone. It's pretty empty in terms of what the path of rates is likely to be for the rest of this year, because I don't know, and I think sending signals. saying things that will be interpreted as signals about what the future holds would not be wise at this point. I don't think.
Have you ever seen times like this before? 00:23:18. 410
The Fed has been on the fence; there are times when you know. Gosh! There's pressures to go this way, the pressures to go that way. How do we balance them out? And what's the balance of risk, as they would like to say. I think there have been times like that. And then many times like that… But that's the process of policymaking and is facing up to those unknowns. And being careful of not only what you do, but what you suggest you're going to do, one way or another. Certainly Volcker: in the early eighties. He didn't want any doubt about what he was going to do, and that was absolutely necessary that that commitment be there, because if the commitment wasn't there, the whole effort could be undermined. I don't think we're in a situation like that right now. There's just a lot of uncertainty that may not hold through the summer. We don't know, depending on what happens to tariffs. What happens in the Middle East. What? How does inflation responds to the tariffs? I think I would not want to place bets. You're putting bets on policy based on whatever force has someone thinks might come next. Come back to me in the next 6 months…
What are the risks? 00:26:50.
One of the things you've heard from the Fed periodically. I'm not saying I condone it, but I'm going to just say it. People at the fed often said, Look, we want to get inflation up. After this period of very low inflation we were worried about the Fed was inflation was too low. They would say things like, we need to get inflation higher, and you know, if we overshoot it a little bit, we know how to fix that. Raise rates now. So there's a sense which in 2020 built in a bias in policy towards tolerating more inflation. It's also true that, despite everybody telling the Fed in late 2020, like 2020 and 2021 that they were falling behind the curve, and that they would get more inflation than they wanted. That's what we got. We got. 10% inflation for a while, and I think, And as I said, if they go, if they start signaling on a rate cutting. I don't know.
Policy errors could introduce inflation 00:28:45.290
People like to use the word cycle or period that they could indeed stoke inflationary fears. They could turn what might be price level changes in 2026 due to tariffs into actual inflation. and they might encourage people to believe that the large budget deficits that we see going forward. that the fed is going to accommodate those by keeping rates low for the government. and that, too, will start inflation. All those, all those are reasons to be very cautious and put a stake in the ground as to sort of what policy needs to be today. Taylor rules and other such rule. Like recommendations aren't signaling a big need for rate tracks right now. Nor are they signaling a need for rate hikes. Maybe they might be signaling that. and but they do signal. What you might interpret is that the notion that people have that rates are now modestly restricted. Still. I wouldn't even bet that's right at this point. I just think that now is not the time for aggressive actions one way or another.
Charles I. Plosser
Charles I. Plosser served as president and chief executive officer of the Federal Reserve Bank of Philadelphia from 2006 to his retirement in 2015.
Plosser was born in Birmingham, Alabama. He earned a bachelor's degree from Vanderbilt University in 1970 and master's and doctoral degrees from the University of Chicago, in 1972 and 1976 respectively.
Before coming to Philadelphia, Plosser was the John M. Olin Distinguished Professor of Economics and Public Policy and director of the Bradley Policy Research Center at the William E. Simon Graduate School of Business Administration at the University of Rochester, where he also served as dean from 1993 to 2003. He was also a senior research associate at the Rochester Center for Economic Research in the university's College of Arts and Sciences, and a research associate at the National Bureau of Economic Research in Cambridge, Massachusetts. In addition, Plosser has been a visiting scholar at the Bank of England and the Federal Reserve Bank of Minneapolis. Plosser was also the co-editor of the Journal of Monetary Economics for twenty years.
Over the years, Plosser has served as a consultant to numerous corporations on topics such as strategic planning and forecasting, 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 boards of the New Enterprise Forum and the University Technology Seed Fund LLC.
During his term as president of the Philadelphia Fed, Plosser and his colleagues have faced the challenges of a global financial crisis followed by a severe recession. The Federal Reserve took unprecedented actions, in both monetary policy and in its lending operations that were intended to mitigate the effects of the financial crisis and address deteriorating economic growth. As a member of the Federal Open Market Committee (FOMC) contemplating these actions, Plosser has stressed the need to preserve the Federal Reserve's independence and structure by drawing a distinct line between fiscal and monetary policy.
In the aftermath of the crisis, as financial regulatory reform is being debated, Plosser has argued that reform must end the notion that any firm is considered too big to fail or risk sowing the seeds of the next financial crisis.
Plosser believes in a systematic approach to monetary policy to promote better economic outcomes and financial stability. He has also been a long-time advocate of the Federal Reserve adopting an explicit inflation target, which the FOMC adopted in January 2012.
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