Inflation Hawk Weighs In

Philadelphia Federal Reserve Bank president Charles Plosser is one of the most hawkish Fed officials on inflation.


He recently said, We're in much better shape than six months ago, but that does not mean everything is hunky-dory. (I am) not worried about inflation in the near-term; my worries about inflation are in the intermediate to long-term.

How can that be with all the money the Feds have pumped into the US over the past year?

It is because all of that money is not in circulation. As Plosser says, All the excess reserves in the banking system that are sitting there right now are not inflationary, but they could become inflationary if we're not careful.

He was also asked about the fall of the dollar relative to other national currencies. He downplays the significance of the U.S. dollar's recent declines. People talk about the fall of the dollar, but we have to remember that the dollar is not even where it was before the crisis started.

Plosser is in favor of establishing a formal inflation target. He says that countries which have set formal targets have greater protection from the adverse effects of large relative price shocks to food, energy and other commodities. The Federal Reserve does not have a formal inflation target.

He also says it is not quite time yet to raise interest rates in the US. A lot depends on the nature of the economy, how it evolves over the coming couple of quarters. We will have a lot better sense going into the middle of next year, how well the recovery has taken hold.

That's important before we can make any final decisions. At the end of the day, policy is going to be data dependent; it's going to depend on how the economy's evolving. We will just have to wait and see.

As time has gone on, over the last several months, I've become more optimistic that what we are seeing is the beginning of a recovery. As a consequence, I have become less concerned about the possibilities of a double dip.

But at the same time, there are always shocks that could happen, things that we don't know that could come might trigger a relapse of some kind. Commercial real estate might be one. But if the economy continues to grow, then commercial real estate will gradually take care of itself.

Plosser's outlook is bolstered by the Fed Model, which shows no sign of a double-dip recession in the coming year. You can read more about this in my March 7 blog, Feds & Recession.