FOMC member Charles Plosser: The U.S. Economic Outlook and Monetary Policy Key Points of Speech from UBS European Conference in London

By Economics Monitor

Nov 12 2014, 16:32 PM EST

Charles I. Plosser, President and Chief Executive Officer of Federal Reserve Bank of Philadelphia spoke on The US Economic Outlook and Monetary Policy at UBS European Conference, London, England today.

Here are the key points of his speech:

His views on the U.S. economy and why he remains positive about the economic prospects for the U.S.
The stance of monetary policy and the advantages of raising rates gradually and starting sooner instead of being forced to raise them abruptly later.
The FOMC's forward guidance should be adjusted to provide more information about the reaction function and how policy will respond to economic data.
This will give the Fed the flexibility to respond more gradually to the evolution of the economy.

He said that US economy is now more than five years into a steady recovery that began in June 2009, as evidenced by various indicators:Gross domestic product (GDP) rebounded to 4.6% in second quarter of 2014 (from 2.1% in first quarter) and third quarter GDP projected at 3.5%, personal consumption also recovered from 1.2% in first quarter to around 2.2% over second and third quarters, unemployment rate has massively declined from 10% in October 2009 to 5.8% in October 2014 and last week’s employment data showed an increase of 214000 jobs in October.

Focussing his attention on monetary policy he said, “The Fed has taken extraordinary monetary policy actions, keeping the federal funds rate near zero for nearly six years and expanding its balance sheet to about $4.5 trillion.”

Further he discussed three risks associated with maintaining the current monetary policy stance and why he would prefer to raise rates sooner than later:

First, it is not known how to confidently determine whether the labor market is fully healed or when full employment is reached. Economists don’t fully understand the extent to which the structural and nonmonetary factors affect the labor market.

Second, he says that if we wait until we are sure that the labor market has fully recovered before beginning to hike rates, “policy will be far behind the curve”. This may force the Committee to raise rates abruptly to prevent an increase in inflation which may create unnecessary volatility and rapid tightening of financial conditions.

Third, zero interest rate policy has led to a very aggressive reach for yield as investors take on either credit or duration risk to earn higher returns and it is very difficult to know how or where the consequences of such actions may show up.

In conclusion he said, “I remain positive about the US economic outlook...If monetary policy is to be truly data dependent, then out stance of policy must change with the data. Changing the forward guidance to provide greater clarity about the policymakers’ reaction function would strengthen accountability and afford us the flexibility to gradually adjust rates as the economy evolves.”