Wednesday, December 2, 2009

Charles Plosser and the Burden of Fed Credibility

The Economist's Free Exchange blog is shocked to hear this from Federal Reserve Bank of Philadelphia President Charles Plosser:
"Since expectations play an important role in the dynamics of inflation, it is important that policy act in a manner that keeps expectations well-anchored near the Fed’s inflation objective,” Plosser said in a speech in Rochester. “If expectations do become unanchored, then the Fed will have lost its credibility and either inflation or deflation could arise…So, anticipation and forward-looking policy are essential if the Fed is to achieve its goal of low and stable inflation."
I agree with the Free Exchange blog that inflation becoming unanchored is not an issue now. In fact, Plosser's own bank does the Survey of Professional Forecasters which shows the Fed still has an amazing amount of inflation-fighting credibility. Below is a figure based on this data (click on figure to enlarge):

Note that the 10-year forecast has been and continues to be around 2.5%. Based on Plosser's comments above, one would think it might have been inching up lately, but no it more or less has flat-lined since the late 1990s. I wonder what Plosser thinks of this data; how does he reconcile it with his comments above?

2 comments:

  1. Hi David,

    I was reading through your recent posts about the risk taking channel - interesting stuff. But I was surprised that you wrote this piece. You are not really surprised by Plosser's speech, are you? He's a hawk; and he always will be, if not for any other reason but to be the lone dissenter.

    I wonder sometimes about the speeches given by various Fed principals. What's the agenda? Sometimes they are just so contradictory!

    Rebecca

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  2. Rebecca:

    Call me naive, but I would hope that a Fed presient would consider all the data at his/her disposal including long-term inflation forecasts.

    Good to see you back in the blogosphere.

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