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Charles Plosser Transcript June 10 2013

Charles Plosser Transcript June 10 2013

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Susie Gharib interviews Charles Plosser, president of the Philadelphia Reserve Bank.
Susie Gharib interviews Charles Plosser, president of the Philadelphia Reserve Bank.

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Published by: Nightly Business Report by CNBC on Jun 11, 2013
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  NIGHTLY BUSINESS REPORTINTERVIEW WITH PHILADELPHIA FEDERAL RESERVE BANK PRESIDENT CHARLESPLOSSER CORRESPONDENT: SUSIE GHARIBPRODUCER: ANDY ROTHMANJUNE 10, 2013SUSIE GHARIB:President Plosser, first of all, thank you so much for talking tonight with Nightly BusinessReport, we really appreciate it.PRESIDENT CHARLES PLOSSER:Well, thank you for coming here. It's great to have you.GHARIB:So, let's begin with the question people are most wondering about. When do you think theFederal Reserve will begin cutting back on its stimulus, what everybody calls QE?PLOSSER:Well, I think that's very hard to say. I was not a big fan, as you know, of starting it. So I'd rather  bring it sort of back-- to reduce it as soon as we can. But having said that, the Fed did say wewill dial these monthly purchases up or down depending on the state of the economy. And Ithink that it's important that when the economy improves, that we react to that. Because if wedon't, we're losing our own credibility about how this-- program is supposed to work. So I think we can easily dial it back, lower the pace of purchases somewhat, see how things go, thingscontinue to improve, we can dial it back a little more. I think that's the way to think about it.GHARIB:When do you think the Fed should begin that process?PLOSSER:Well, if it was-- if it was just up to me, I would begin the scaling back, toning down the dial, thevolume a little bit at this next meeting. I think the economy can stand that and I think it's justified based on the improvements on the economy since last September.GHARIB:
When you talk about cutting back on the stimulus, what happened to waiting until theunemployment rate gets a lot stronger, down to 6.5% the target that the Fed has set?PLOSSER:Well, remember, we do-- we're operating with two tools here. One is the interest rate, which isour federal funds target, which is essentially at zero. And what we've said is that 6.5%unemployment rate is a threshold. That's when we would consider to begin moving the short-term interest rate up.But before we can do that, we are still buying assets. So we're not going to raise interest ratesuntil we stop buying assets. Because the asset purchase program is an effort to provide ever more stimulus. It's trying to increase the level of accommodation. And so we're going to have todo that first. And so at some point, we're going to have to say, "Things have been improvingenough and the outlook is better enough that we can dial the purchases back." Eventually, weneed to do that before we get to the 6.5% unemployment break. But-- that may be a while yet.GHARIB:My understanding though was that the Fed had set this target of 6.5% and wouldn't even consider cutting back of the stimulus until the unemployment rate got a lot better.PLOSSER:Because that's when we'll consider raising the federal funds rate, which is our primary insertedmonetary policy. Six and a half percent threshold, it's not a trigger, but a threshold, was thestatement that applied to when the Fed would consider raising the federal funds rate, or our targetfor interest rates. But before we do that, we have to stop buying assets. We can stop buyingassets and still-- have the interest rates stay low until we reach the threshold or somewherearound the threshold of 6.5%.GHARIB:And why are you confident that the U.S. economy can withstand this policy change as soon asthe June meeting?PLOSSER:Well-- I think two-- several things are going on. One is the spiked increase in payroll taxes,despite
sequester, the economy's still growing. And the labor market is doing much better than people thought. So you went back and thought what people said back in January about what theythought was going to happen to the economy, to consumption, to employment, because of thesequester and the payroll tax.They thought things would be much, much weaker than they have turned out to be. So I think we're weathering that pretty well. I think manufacturing's still a little weak. I think that partlyhas to do with overseas economies and the world, global economy.But the domestic economy is improving on a pretty good state, pretty good pace. And I think theother thing things important is housing. Housing is doing very well right now. And that's been
one of the weakest parts of the economy for a long time now. And so I think it's a good sign thathousing is recovering.I don't see that a change, a small reduction in the pace of purchase will have that much effect onthe economy at all. I just don't believe it will be that noticeable for the broader economy.Financial markets will react, there'll be some volatility presumably, and they'll react. But the person on Main Street, the person looking for a job, or the company trying to hire a person for a job will largely be unaffected by this, I think.GHARIB:But why not wait until the economy gets a lot stronger?PLOSSER Well, we could always do that, but then the risk is, is that you get behind the curve and interestrates begin to rise very fast. All the reserves that we created in the banking system begin to flowout of the economy. That would be a good sign, except, that's going to put the risk of very muchhigher inflation down the road. And so we've got to be able to time our exit, if you will, in a wayto meet both the growth of the economy, but also keep inflation under control.GHARIB:So what are your thoughts on today's news that Standard & Poor's has raised its outlook on U.S.debt from negative to stable? What is that telling you?PLOSSER:I think that's a positive sign. But fundamentally, we haven't solved our fiscal problem. We arestill on an unsustainable fiscal path. Congress has done nothing to really address that at this point. Still needs to be addressed. So while it's favorable, it's not-- I don't really believe we'vestopped our fiscal crisis.GHARIB:What do you think are the chances that your colleagues on the Fed will vote at next week's policy meeting in favor of starting the process of cutting back on stimulus?PLOSSER:Oh, I never speculate on what my colleagues are going to say any more than they speculate onwhat I will say. (LAUGH) So it will certainly be a topic of discussion. But I don't think anybody decides for sure until they hear what everybody has to say. That's the beauty of our system and the beauty of the meetings, that everybody gets into a room, we talk about what wehear, we talk about our ideas, we listen to what each other have to say.And that's the beauty of the system. And there's not a particular-- I think it's important that wenot slip into group think, if you will, and-- as Walter Lippmann used to say, "Where all menthink alike, no one thinks very much." And I think it's important that we have theseconversations. So we will-- we will deliberate.GHARIB:

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