Plosser is a distinguished economist who became known for his work on "real business cycles". That work fits nicely with the views he espoused this afternoon. My notes:
It is time to exit our asset purchase programmes. And return to "normal monetary policy."
The views among the members of the Fed Open Market Committee [FOMC] look a lot like those of the audience shown here in the poll taken just before he spoke. Plosser thinks this is probably a a good thing. He seems to like the pluralism that exists on the committee.
With the Federal Funds rate near zero, the Fed bought long treasuries and Mortgage backed securities [MBS]s to put downward pressure on long rates. [EE: of course it nothing to do with bailing out the holders of those MBSs who were in big trouble at the time.]
As might be expected, Plosser emphasized the importance of expectations. The FOMC statements affect these. Plosser calls these FOMC statements “forward guidance”. [EE from a rational expectations (or any other expectations) perspective, credible advance notice of a regime or policy change will affect people's behaviour today].
The FED adds $85b to its balance sheet each month. Most people in the audience took this in stride. I gasped audibly.
One of the rules Plosser would like the FOMC to be clear on: At 6.5% U, FOMC will consider raising Federal Funds [FF] rate.
Favours a more rule-based approach to discretionary decisions. This makes it clearer to decision-makers what they can and cannot count on.
Plosser implied that he disagrees with policy that continues to ease, albeit at a lower rate, as the economy grows. He argued that the 10 year bond rate began to rise back when the May %U rate came out, and not just in June when Bernanke's statements caused some market concerns. In an interview afterward, he said long rates were low because economies were in recession, and they began to rise as people became more optimistic about the future for economies.
He projected the unemployment rate in the US would drop to 7% by end of year. And he went on to argue that the FED must slow asset purchases soon and cease them by the end of the year. Otherwise they will face greater difficulties unwinding the programme (which involved buying long-term gubmtn bonds and MBSs) and that could lead to higher than desired inflation.
Plosser said there is too little discussion concerning the risks of keeping accommodation (asset purchases) in place too long. “Just because the financial markets like what we are doing at the present time doesn’t mean that what we are doing is good for the economy in the long run.” Also, he dislikes the distortions introduced into the financial markets by the asset purchase programmes.
He cautioned, though, that managing expectations is easier said than done. And credibility is important if forward guidance is to work. You can't announce one policy and then not carry it out.
A big problem, said Plosser, has been that the FED has offered a variety of changing targets and forward guidance (EE: this is what academic economists call "regime uncertainty"). E.g. changing dates for when FF rate might change. FOMC says “Thresholds are not triggers.” Plosser says “Effective forward guidance requires credible commitments.” He lamented that since 2008 the rulebook was thrown out. Discretion was the rule.
To what should the FED commit and how?
- Wind down asset purchases by the end of this year. The costs now (and expected) outweigh benefits.
- FOMC should commit to its forward guidance re FF. E.g. when U is 6.5% it must not be easing so much if at all; or if the rate of inflation is 2.5%, the Fed must tighten.
- And this is crucial to his views, which he emphasized in an interview: Provide information on what will happen after the triggers are reached. Be clear about what the FED will do.
During the question period he said: "long and variable" is replaced by "slow and unpredictable." I got a chuckle out of that, but it's probably an economics inside joke. Over 40 years ago, when someone asked Milton Friedman about the length of the lags in monetary policy, he said "long and variable."
He also pointed out that the difference between the tech and housing bubbles was leverage. No foolin'.
And (in his mind) FED is concerned about reflating bubbles.
Overall, a careful but very informative speaker.
My attendance at the summit is supported by several sponsors, including the Department of Economics at The University of Regina.