Paul Krugman sends us to Binyamin Applebaum, who writes:

Binyamin Appelbaum: Fed Dissenters Increasingly Vocal About Inflation Fears: “An increasingly vocal minority of Federal Reserve officials…

…want the central bank to retreat more quickly from its stimulus campaign…. One committee member, Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia, dissented at the July meeting, arguing that there was already reason enough for the Fed to change course. The minutes said officials also were ‘increasingly uncomfortable with the committee’s forward guidance’ that the Fed expects to maintain its key short-term rate at its low level for some time.

And Paul comments:

Paul Krugman: Hawks Crying Wolf: “Is this really true?…

…Of course, they are being very vocal–but when didn’t they call for monetary tightening? The article highlights Charles Plosser…. You know that Plosser has been warning about imminent inflation since the beginning of the crisis. He did it in 2008; he did it in 2009; he did it in 2010; he did it in 2011… you can easily find him doing the same in 2012 and 2013…. The real story here is the remarkable resilience of inflation panic: people who worry about inflation never seem daunted in the least by the repeated failure of their predictions. It’s an interesting question why…

Let me strengthen Paul’s comment:

As those of us who–like Binyamin Applebaum–have been reading the Federal Reserve transcripts and minutes know that, Charles Plosser has, ever since he became President of the Federal Reserve Bank of Philadelphia in August 2006, consistently:

  • Feared increases in inflation that have-so far–not happened.
  • Expected rebounds in growth and employment and employment that have–so far–not happened
  • Expressed strong skepticism of the Federal Reserve staff’s modeling exercises in a direction that would ex post have made its assessments of the state and direction of the economy even more optimistic and less accurate than they have turned out to be.
  • Remained uncurious–in meeting transcripts released so far, at least–about why his assessments about the state of the economy and its future direction had been so far off.

It seems to me that when writing–as Binyamin Applebaum is–for readers who have not been reading the minutes and transcripts of FOMC meetings, one’s first duty in referring to Charles Plosser is to situate his views in this proper context.

Binyamin Applebaum does not do this.

It would be very, very easy to do.

Simply replace:

Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia, dissented at the July meeting, arguing that there was already reason enough for the Fed to change course…

with:

Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia, continued the pattern he established when he joined the FOMC in 2006 of arguing that there was already reason enough for the Fed to pursue a tighter monetary policy than the bulk of the FOMC wished…

Why not do this?

FRB: Transcripts and other historical materials:

August 8, 2006: MR. PLOSSER: Right now I tend to be more concerned about inflation than I am about growth. I don’t view the second-quarter slowdown as necessarily a precursor to a significant weakening of the economy going forward…. The inflation picture… has not improved. Despite a slowing economy, price increases have been accelerating. The increases have been broadly based, as has been pointed out by Bill Poole and others. They are no longer confined to energy and other commodities. Indeed, in June the CPI rose less than did the CPI excluding energy. Core inflation is above the range I consider to be consistent with price stability, and to my mind, inflation risks remain tilted to the upside…. Given this persistence in inflation, unacceptably high inflation seems likely to be around for a while….

MR. PLOSSER: Reasonable people at this stage doing sound economic analysis could come down one way or the other on this. But at this point, my inclination is to favor a 25 basis point increase…. I don’t think raising rates 25 basis points is going to have a significant effect on the real economy in the near term either, but it can help reinforce the public’s perception of our commitment to price stability…. Longer-term expectations remain contained because the markets and people expect the FOMC to contain actual inflation…. If the Committee chooses not to raise rates, does it risk sending the message that we are willing to tolerate inflation above an acceptable level for a significant period of time?…

MR. PLOSSER: I’m new to these language nuances about housing. It occurs to me, however, that one question you ought to ask is whether by including housing or continuing to include housing the Committee is putting itself in a position where it can’t raise rates until housing comes back. Are we unfairly locking ourselves in, or at least are the markets going to interpret it that way?…

MR. PLOSSER: I think there are a number of things that the FOMC could and should communicate, but its current expectation about the future path of the fed funds rate is not one of them. I don’t think that’s a very good practice in general…

September 20, 2006: MR. PLOSSER: What we do know is that core inflation has been above 2 percent for two and a half years and is expected to be there, according to the forecast, for another two years…. I see two inflation scenarios as being plausible…. In the first scenario, core inflation is elevated primarily because of transitory factors…. Even in this most desirable of scenarios… we have to recognize that we will have essentially ratified a higher price level driven by oil price increases, and we should ask ourselves whether or not we are comfortable with that. In the other scenario, stimulative monetary policy during the past five years has been a major contributor to the rise in core inflation… then our credibility is seriously at risk if we fail to take further steps to curtail price increases. We might be lucky. But we might risk finding ourselves in a situation in which inflation expectations become unhinged, making it more costly to bring inflation back down…

MR. PLOSSER: I do not think that a 25 basis point change in interest rates one way or the other will have much effect on the housing market at this point, and I do not believe that we should stand in the way of the adjustment to the housing sector to move to a more sustainable level of activity…. My concern… is that the longer we tolerate inflation above our comfort zone, the more risk we have that those expectations will become unhinged…

October 24-25, 2006: MR. PLOSSER: We’ve had some hopeful news on the inflation front over the intermeeting period, but the level of inflation continues to concern me…. Although the twelve-month change in core CPI actually edged up to 2.9 percent, a rate that I consider well above price stability, it may be beginning to stabilize. But, frankly, a lot of uncertainty remains, and it is dangerous, to my mind, to rely too heavily on one month’s numbers…. To the extent that some of the acceleration in inflation was fueled by very accommodative monetary policy over the past five years, we still need to consider whether monetary policy has firmed enough to remove the cumulative effects of the past policy accommodation to get inflation back down to a level consistent with price stability in a reasonable time so that our credibility is not at risk. The longer we allow that deviation from price stability to persist, the higher the risk to our credibility and the higher the risk that recent high inflation readings will raise longer-term inflationary expectations…

MR. PLOSSER: Inflation continues to be higher than I’d like to see, and I still believe there are larger risks on the inflation side than on the growth side…. If growth bounces back more strongly than the Greenbook forecasts, which I believe is a likely outcome, we may have to consider additional increases in the fed funds rate going forward. Thus, from that standpoint, I really don’t view the prospective policy path as particularly symmetric…

MR PLOSSER: Robert Gordon in recent work estimated that the bias in the headline CPI is about 0.8 percent per year…. If we decided and agreed upon a bias, let’s say it was 0.8, should that be our target? Yes, if price stability is our goal…. Many models of optimal monetary policy suggest, depending on the exact formulation of the model, that the optimal rate of inflation falls in a range of slightly negative to slightly positive. Thus, price stability may be desirable, but it may not be optimal in some circumstances…. There seems to be a disconnect between the market’s view of long-run inflation, which according to surveys and financial markets seems to remain around 21⁄2 percent, and the statements made by many of us on this Committee who seem to be comfortable with 1 to 2 percent…. Are we really committed to the goal of 2 percent or below? By publicly committing to a specific target, we might, I hope, obtain greater congruence of our goals and the market’s expectations….

The last thing I’d like to comment on relates to the so-called dual objective…. We need to try to communicate to the public that, although we may have a dual mandate in some respects, our ability to achieve certain objectives is very, very limited…

December 12, 2006: MR. PLOSSER: I also want to mention some anecdotal information that I find interesting. Last week I met with a number of mostly manufacturing CEOs from my District. An observation that one of them made, which many agreed with, was that from their perspective money was almost free. This observation is consistent with what some others have been saying around the table. They thought that there was plenty of liquidity and that interest rates were not limiting them particularly in any way. This observation is also consistent with the views that mortgages rates are still relatively low and that credit spreads show less stress on businesses at this point. I take these observations to indicate that monetary policy is not particularly restrictive at this point…

MR. PLOSSER: inflation continues to be higher than I’d like to see it and is forecast to remain so for longer than I’d like to see, thus putting our credibility at risk. I am more optimistic than the Greenbook about the possibility for a quicker rebound to potential. But even if you take the staff’s Greenbook forecast, with growth expected to be below trend for at least several more quarters before returning to trend, I’m comfortable with maintaining the current federal funds rate and the implicit firming that doing so would imply as the economy slows down.

Although I don’t think we should raise the fed funds rate today, I do want to put on the table and reemphasize, as several people have, that we need to acknowledge that if real growth rebounds quicker toward trend than is currently forecast, whether in the fourth quarter of this year or the first quarter of next year, then we must be in a position to raise the fed funds rate at that time. I happen to put more probability on that being the case than perhaps some do. A failure to do that or to signal that we will do that would put considerable upward pressure on the inflation outlook and on the public’s perception of our commitment to price stability. Of course, if we begin to see much larger spillovers from housing corrections or from other sectors, which I don’t think we will, we may want to allow the nominal funds rate to decline as the equilibrium market rates decline—again, not to exploit a Phillips curve type of tradeoff but to drive the real rate down at the appropriate time. But that would also be signaling that we are content with the current level of inflation, and I don’t think we are at this point…

January 30-31, 2007: MR. PLOSSER: I’ve become increasingly confident that the national economy has a positive underlying momentum… stronger underlying growth that has been temporarily weakened by housing and autos. There is little, if any, evidence that the housing and auto corrections are spilling over into the other sectors of the economy…. Although I didn’t talk to the chairman of Disney, I did talk to a small manufacturing firm with total revenues that come to $2 million. He has been very positive about the outlook…. The downside risks to growth have receded…. In my view, core inflation will not come back down until monetary conditions, which I believe have been very accommodative over the past few years, have tightened sufficiently…. I’m less convinced that price stability will be achieved without further action on our part some time later this year…

MR. PLOSSER: The appropriate policy here… is one in which the fed funds rate goes up somewhat from where it is today, perhaps to 5 1⁄2 or 53⁄4 percent. But then by the end of ’07 and into ’08, it’s coming back down again to more of a steady-state level, and then we can talk about what the real neutral rate is…

MR. PLOSSER: I am not confident that core inflation will continue to decelerate in the coming quarters, and that could risk our credibility. The level of inflation continues to be higher than I’d like to see, and in my forecast we may not see a return to price stability unless monetary conditions are tightened further. Although I don’t think today is the day to do it, I do want us to consider tightening if we see growth accelerating back to trend more quickly than in the Greenbook…

March 20-21, 2007: MR. PLOSSER: There are signs of increased pressures on wages and salaries…. Employers in a number of industries have said they had to raise salaries much more this year than they did last year in order to hire and retain workers in certain professional and managerial occupations as well as high-skilled workers in a variety of jobs…. I’m less convinced that inflation is moderating and that we’re making sufficient progress toward price stability. Perhaps I really should say that I am more concerned that we are not. The twelve-month change in the core CPI was 2.7 percent, and the three-month change has reaccelerated. I find the upward trend in core inflation over the past year, from 2 to 2 3⁄4 percent, troubling…

MR. PLOSSER: The earlier signs of moderating inflation seem to have ebbed somewhat, and inflation still seems to be higher than I’d like to see. So I am still concerned about the upside risk to inflation…. Cutting rates at this time, it seems to me, is inappropriate as it’s unlikely to have a significant effect on the weakness in real output or investment in the short run in that the absolute levels of long-term real rates remain relatively low. Moreover, a cut in the rates is likely to signal to the markets that we are much less concerned about inflation than we previously indicated and that we are willing to forgo our inflation objective in search of modest increases in real growth…

MR. PLOSSER: For the headline CPI, I would specify and announce a target of 1 percent. That’s consistent with our goal of price stability and the estimated measurement bias of the CPI…. I take seriously our mandate for price stability…. I recognize that some may feel that a 1 percent target is too low as the risk of deflation or zero bound restrictions on nominal interest rates might call for a greater cushion. I understand those arguments, and they are certainly plausible. But… I’m less concerned about our ability or the economy’s ability to deal with those issues, both of deflation and zero bounds…. I think a two-year horizon would be appropriate and, indeed, achievable given the typical shocks that hit the economy and the volatility of the CPI…

May 9, 2007: MR PLOSSER: On the national level, since the last meeting I have actually become a bit more comfortable with the economic situation. While I say that I am more comfortable, that’s a relative not an absolute statement. The most recent month’s readings on core inflation were welcome, but I think that caution and vigilance are still the order of the day. Indeed, the Greenbook authors, as we’ve noted, seem to have been revising their forecast of core inflation upward slightly over the past several months rather than downward, and that to me is a bit disturbing…. On the inflation front, I’m a bit less worried than last time but far from sanguine…. I believe inflation is still too high. Inflation expectations are stable, but they are too high as well, and we need to bring that rate down. Thus, we need to be vigilant here and continue with a somewhat restrictive policy…

June 27-28, 2014: MR. PLOSSER: Interestingly enough regarding building, I had two observations from CEOs. One is CEO of a building supply company that manufactures throughout the United States and has sales of almost $10 billion. He said that, remarkably, even with what is going on with homebuilding, his sales are holding up very, very strongly and they are doing very, very well this year. Another CEO, whose company produces products mostly for residential cabinetry and other types of things, one of the largest in the country, says that, while new home sales for his work are way down, they have largely been offset by remodeling activity—people have substituted remodeling for buying a new home…. Despite the problems in subprime lending markets, however, I think the financial sector remains healthy—healthier now than it was perhaps in the early ’90s with the previous housing boom….

On the inflation front, higher energy prices have led to an acceleration of headline inflation, but there has been some improvement in core inflation measures…. Although these developments in inflation are encouraging, I remain cautious about extrapolating too much from recent data…. So I remain concerned that our core inflation rates may not continue their recent drift down. I would also caution that headline inflation, as I noted earlier, has remained stubbornly high…. Given my outlook on the underlying strength of the economy and an inflation goal of 1.5 percent for the PCE, it should not be surprising that my forecast incorporates a slightly tighter policy path… the federal funds rate rises 50 basis points, to 5.75 percent, by early ’08…

MR. PLOSSER: We have to be very careful about the fact that headline inflation has not been very cooperative recently. Inflation expectations remain somewhat high from my perspective, and based on our previous discussions, that is a worry for me. I do tend to favor our announcing an inflation target. I am not yet convinced that we will see inflation expectations where they need to be to achieve my goal by the end of 2009…. If my own goal were 2 percent, I might be more comfortable with a flat fed funds rate going forward…. In the absence of agreeing on a numerical long-run inflation objective, we, as individual members, face increasingly difficult choices in arriving at an appropriate policy stance in any given meeting and even greater difficulty conveying our Committee’s decision to the public in an informative and transparent manner…

August 7, 2007: MR. PLOSSER: On the positive side, employment and income growth remain solid…. The biggest economic news headlines since our last meeting have focused on the volatility of the financial markets and the repricing of risk. I am inclined to put minimal weight on the current financial conditions for a slowdown in the pace of economic activity going forward…. This news was reinforced to me by my conversations with area bankers, as I mentioned earlier, who say that they have plenty of money to lend to good credit risks…. I expect the economy to return to near potential real GDP growth in the first or the second quarter of 2008. I expect the housing correction to continue through the first half of 2008, but the drag lessens over the year…

August 10, 2007: MR. PLOSSER: [NO STATEMENTS]

August 16, 2007: MR. PLOSSER: It’s a bit of wishing and hoping. It may work. It may work through the signaling device, if nothing else, to signal our commitment. That brings me to the second question I have, which is how the markets will respond to this. Will they respond in a way that basically says that we will end up having to lower the fed funds rate at our next meeting or at some point? To what degree are we now or might we be locked into a fed funds rate decision?…

September 18, 2007: MR. PLOSSER: On the inflation side, I see that recent readings on core inflation have moderated. Headline inflation remains quite elevated. I don’t think that we can afford to be sanguine. I continue to see underlying inflation pressures…. I’m concerned as we go forward with potential rate cuts. I’m concerned about their remaining stable, particularly when we may be lowering rates without being clear about what our inflation goals are…. I believe that we might find ourselves in a position sometime during ’08 in response to rising inflation of having to raise the fed funds rate back up…

MR. PLOSSER: On the inflation side, I see that recent readings on core inflation have moderated. Headline inflation remains quite elevated. I don’t think that we can afford to be sanguine. I continue to see underlying inflation pressures, as has already been articulated. Long-range inflation expectations have been stable, but I’m concerned as we go forward with potential rate cuts. I’m concerned about their remaining stable, particularly when we may be lowering rates without being clear about what our inflation goals are. Indeed, I think the current situation clearly shows the benefit of having an explicit inflation goal. By anchoring those expectations, an explicit goal would mean less of a tradeoff between our two goals and so might make this policy decision easier and even perhaps more effective. Thus, while my forecast has built in some near-term policy easing partly to offset the anticipation of tighter credit conditions, I believe that we might find ourselves in a position sometime during ’08 in response to rising inflation of having to raise the fed funds rate back up.

MR. PLOSSER: My outlook for the economy has changed sufficiently for me to support a cut in the fed funds rate at this meeting…. My view that the equilibrium real rate has declined and its forecast has declined somewhat leads to my view that the funds rate needs to follow that real rate down. Also, given the current behavior of inflation, I am more comfortable moving toward what I would consider to be a more neutral rate. If we do cut the funds rate today, however, I believe that how we communicate that is far more important than anything that we may do in a long time….

I won’t be revising my forecast just because the September employment report comes in weak. It’s only when we accumulate sufficient evidence that the economy is veering from our new projected path that we would want to revise our forecast and perhaps our policy,… We might find that we’ve been too optimistic about inflation if inflation expectations rise…. I think it would be a mistake, as President Hoenig suggests, to set up expectations with our language that the rate cut today is necessarily or even likely the start of a series of rate cuts…

October 30-31, 2007: MR. PLOSSER: I suspect that at the end of our last meeting—certainly I can speak for myself—many, if not most, of us probably would not have anticipated that we would cut again at this meeting…. We wouldn’t have anticipated cutting unless we thought that the outlook for the economy had noticeably deteriorated. So what has really happened since the last meeting? Well, the collective forecasts that we submitted—in terms of risk assessments, ranges, medians, and however you want to look at them—hardly budged…. Based on that forecast and on the data that came in, I’m in a very troubled position in figuring out how to justify in my mind additional rate cuts at this meeting

December 6, 2007: MR. PLOSSER:

December 11, 2007: MR. PLOSSER: Just a quick comment. I have talked to one of the large mortgage insurance companies in some detail, and their view is that their pricing power actually is improving—that their own ability to work their way out of this thing is getting better all the time right now. Even though they are taking some very large hits in the near term, their outlook actually has improved in recent months, partly because of this…

MR. PLOSSER: We have started to see evidence of increased price pressures…. I will note that the core PCE inflation rate for March to June was 1 1⁄2 percent; and in every three-month window subsequently, the inflation rate has risen monotonically, now reaching 2.26 percent for the latest three-month period from August to October…. It appears that firms are beginning to be more interested in increasing prices and are more able to do so than they were just a few months ago…. The economy is weak but only slightly more so than I anticipated. Volatility in the financial markets continues…. Nevertheless, the spillovers from the financial turmoil seem geographically concentrated…. I view inflation expectations as fragile and see evidence that price pressures are growing and that more and more firms feel that price increases are coming and are supportable. I think we will have to be very careful not to presume that just because price expectations and prices have remained contained that they will continue to be so…

January 9, 2008: MR. PLOSSER: I am certainly open to the idea that we will have to reduce rates at our next meeting at the end of the month. I am not necessarily opposed to that…. I don’t think an intermeeting cut is either wise or appropriate at this point. As a general proposition, I oppose the idea of intermeeting cuts unless a really immediate action is necessary to deal with some severe crisis such as September 11…. Nor do I want us to be perceived as responding to near-term numbers or other pressures from the market…. I would not like to see us do something today…

January 21, 2008 MR. PLOSSER: I certainly appreciate and am sympathetic with the point of view that markets are fragile…. But at the same time I also am very concerned about the expectations this sets…. I am very concerned that we are going to be interpreted as reacting to the stock market declines…. It is not clear to me that the fragility that exists in the market in fact will be solved by rapid cuts in the funds rate…. I nonetheless would certainly be supportive of a very dramatic action at our regularly scheduled meeting. Frankly, I am very torn right now as to whether to support this intermeeting cut. My gut instinct tells me “no”…. I have a lot of concern and caution about this move. I think it is going to affect expectations of us as we move forward, and I think we need to be realistic about what it is we are buying with this…

January 29-30, 2008: MR. PLOSSER: Once the real economy is stabilized, the FOMC must act aggressively to take back the significant easing it has put in place in order to ensure that inflation is stabilized in 2010. Employment is a lagging indicator, so we will likely have to act before employment growth returns to trend, should output growth pick up in the second half of the year as forecasted. Thus, I expect we will need to begin raising rates by the fourth quarter of this year and perhaps aggressively so…

MR. PLOSSER: The current level of the fed funds rate is clearly accommodative and that we have taken out insurance against downside risk. When do we stop taking out more insurance?… Lowering rates too aggressively in today’s situation would seem to me a risky strategy, fueling inflation; possibly setting up the next boom-bust cycle, which I worry about; and delaying the recognition of losses on bank’s balance sheets but not eliminating them…. I think we need to be very cautious not to get carried away in our insurance strategies with lowering rates too much…. We are on the verge of overshooting, and I worry about the broad range of consequences for our credibility….

I believe that the Committee must undo the accommodation as aggressively as we put it in play. We need to determine what indicators we will be looking at to determine when that process should begin. When we know ourselves, we want to help the markets and public understand what our process will be as well. I strongly believe that we must be both credible and committed policymakers…

March 10, 2008: MR. PLOSSER: I am not terribly confident that this will have the effect we desire. I thought I heard Governor Kohn saying that the ECB actually does take this sort of risk and collateral and it’s not working particularly well. So I’m not sure we ought to hold out a whole lot of hope that it will have the desired effect here. That doesn’t mean we shouldn’t try it, but I’m a little dubious. I am concerned with the comments that President Lacker and Governor Kohn made about crossing a line. However, having said that, I can go along with this proposal; but to be honest, I am concerned about the exit strategy here. Mr. Chairman, you said that we would stop when the markets were no longer impaired. I’m not exactly sure how we would define that at some point. I wonder whether it might be worthwhile thinking about putting this facility in place and doing it for a fixed period of time…

March 18, 2008: MR. PLOSSER: I struggled coming into this meeting with a growing level of discomfort…. I… have responded to the incoming data with downward revisions to our forecast for certainly the first half of 2008. But our changes are considerably smaller than the revisions in the Greenbook…. I am not wholly comfortable with the Greenbook’s forecast, which I think incorporates a number of judgmental adjustments that are responsible for taking it pretty far away from where private-sector forecasts now are…. If inflation expectations become unhinged, we will face an even more difficult problem as monetary policy will feed more quickly and directly into higher inflation outcomes. The ensuing loss of credibility will be costly to regain…. We have to look for early warning signs so we can take appropriate action to ensure that expectations remain anchored, and I am concerned that we are seeing those warning signs…. Our business and consumer contacts are consistently stressing price pressures as a concern…. We have reduced the targeted funds rate by 225 basis points since August and 125 basis points in just the last six weeks…. The Greenbook suggests that the real funds rate can be negative over the next two years and inflation will continue to decelerate as upside inflation pressure is offset by greater slack in product and labor markets. I am skeptical…

April 29-30, 2008: MR. PLOSSER: I remain concerned, however, about inflation and our calibration of the appropriate level of the fed funds rate consistent with our goals. Inflation readings have abated marginally since our last meeting; but as the Greenbook suggests, there is reason to believe that this is a temporary reprieve… year-over-year CPI inflation was 4 percent in March, and year-over-year PCE inflation was 3.4 percent—well above their 2007 levels…. Markets question our willingness to take actions consistent with sustained and credible price stability. Now, we have often alluded to the idea that near-term weakness will help mitigate some of the inflation pressures. However, I would just like to remind us that this critically depends on inflation expectations remaining well anchored…. I believe that the FOMC’s commitment to price stability remains credible at this time, but just barely…. Now, I know that talking about money in the context of monetary policy is not very fashionable these days. But I would like to note that the monetary aggregates as measured by M2 and MZM have exploded…

MR PLOSSER: What I would like to do… is to make the case for why we should stand pat today…. Easing policy is appropriate in a weaker economy, but continuing to cut rates for as long as the economy remains weak is not appropriate…. A further 25 basis point cut in the funds rate at this point will do nothing to change the near-term outlook of the economy…. We are currently running a very accommodative monetary policy…. Monetary aggregates as measured by M2 and, to some extent, MZM have expanded very rapidly…. Inflation is high, unacceptably high in my view, and has been that way for a sustained period…. The FOMC’s stated goal of price stability cannot remain credible independent of our actions…. I think a pause today would send a strong signal of our commitment to price stability, which could further help anchor inflation expectations, which I consider to be very fragile…. Cutting 25 basis points won’t help the outlook for the economy very much…. I think a cut today will not be a disaster but will contribute to a further eroding of our credibility…

June 24-25, 2008: MR. PLOSSER: Despite the soft economic conditions, the most prominent concern that we have heard from our business contacts across a variety of industries is the run-up in commodity prices and other prices…. Inflation expectations cannot remain in check indefinitely in this current environment. In June, the prices-paid index in our business outlook survey of manufacturers rose to the highest level it has been since 1980…. The continued price increases, particularly in oil and commodities, have been a very unpleasant development. Certainly, economic conditions remain weak, and the recent positive news may prove to be transitory. From the financial side, credit spreads have fallen, bond issuance has risen, and it appears that financial market functioning has at least improved… the tail risk of a very bad outcome has clearly been diminished….

My concerns about the inflation outlook have increased since our last meeting. I am not alone. Inflation has become a predominant concern for many businesses and consumers…. Contributing to the increase in inflation risk is not only the surge in energy and other commodity prices; it is supported also by our own accommodative stance of monetary policy…. Can we really expect inflation expectations to remain anchored?… I have been troubled by stories in the press suggesting that we can be less concerned about inflation than we were in the 1970s because wages haven’t risen and labor unions are less prominent…. The key… is maintaining the credibility that the Fed has worked so hard to achieve…. Our credibility rests on more than just words. We must act in a way that is consistent with our hard-earned reputation…. We should take actions and take back some of the insurance we have put on in the context of elevated downside tail risks….

It seems pretty clear to me that, if the economy continues to evolve as it has over the past couple of months, we should move to raise the funds rate…. I assume that the funds rate will reach 2.75 percent by the end of 2008 and move up to 4.5 percent by the end of 2009. This steeper funds rate path is necessary, in my view, to deliver inflation that is declining back toward our goal…

July 24, 2008: MR. PLOSSER: “I’ll pass, except for just a brief comment. I agree with what President Lacker was saying about the options. If we are going to create new specialized facilities, the hurdle for the problem we think we will be solving ought to be a little higher than just, well, we think it might help a little. That’s all…

August 5, 2008: MR. PLOSSER: If we think about the phrase… “financial headwinds”…. I can also think of the financial sector as having been hit by a very significant productivity shock…. If you think that type of shock is driving potential output down… it is going to affect your estimates of the gaps and therefore your estimates of inflation [and raise them]…

MR. PLOSSER: For some time my business contacts have expressed concern about rising energy and commodity and transport prices…. On the national level, the incoming data since our June meeting have been mixed but largely in line with my expectations…. The strength is a remarkable testament to the ability of this economy to weather shocks from financial market disruptions…. My outlook for the economy is little changed, although the financial market developments since our last meeting have marginally increased the uncertainty…. I read the conditions in the financial markets and the wide spreads on selected assets as having improved…. We should not use such spreads as the primary criteria for assessing the fragility of the financial markets…. We must be cautious in using monetary policy or other tools at our disposal as a form of forbearance that delays the necessary adjustments in the pricing of various financial claims….

The inflation outlook remains a cause of concern. Headline inflation is higher, and there is evidence of modest pass-through to core inflation measures…. Markets are uncertain about the long-run path of inflation. This is not terribly comforting. It suggests that our credibility may be waning…. I remain uncomfortable with the longer-term inflation outlook. Indeed, the focus of monetary policy must be on the intermediate to longer term, and we must resist the temptation to act as if our funds rate decisions can manage the outcomes over the very near term. Year-over-year inflation, headline CPI and PCE inflation, have now been consistently above 3 percent since October 1987…. Near term, we might get some moderation in headline inflation…. The real source of intermediate-term to longer-term inflationary pressures comes from our own accommodative policy, whose consequences for inflation will be felt only over time…. Should we maintain our accommodative stance for too much longer, my view is that we are likely to see higher trend inflation in the intermediate term and a ratcheting up of inflation expectations….

To be sure, shifting policy to a less accommodative stance will be a difficult decision to make, given the continued volatility in financial markets and the projected near-term weakness…. I do not believe that we can wait until employment growth and the financial markets have completely turned around to begin to reverse course. But by our aggressive attention to short-term risk to growth and financial turmoil, we do put at some risk our ability to deliver on our intermediate- and longer-term goals of both price stability and sustainable growth…

MR. PLOSSER: We’re unlikely, in my view, to get confirming or convincing evidence about whether expectations have become unanchored until well after the fact. I agree there has been very little wage–price pressure to date. But that will be the last shoe to drop in this sequence of raising expectations, and by the time we get to that, I’m afraid it will be too late…. Monetary policy is accommodative, and with all due respect, Mr. Chairman, when I look at the data comparing the levels of borrowing rates of consumers and businesses, both the levels in real and nominal terms and the spreads, what we see in this period looks remarkably similar to what we’ve seen in lots of other recessionary, slow growth periods…. I think it’s important that we begin to prepare the markets for an impending shift to a tighter policy….

I’m pleased with a lot of the discussion around the table. We are actually beginning to talk, I think, about what our exit strategy is going to be from this…. I can accept leaving the funds rate unchanged today as long as our language is sufficiently strong about inflation…

September 16, 2008: MR. PLOSSER: I appreciate the memo that the staff produced…. According to the memo, the current stance of policy is not unusually accommodative. However, I would like to note that that conclusion depends critically on the specific forecast and the nature of the FRB/US model. A different model, one that says that inflation expectations are more forward looking, may well lead to a very different conclusion…. I continue to believe that monetary policy at its current level is accommodative and that, if this current stance is sustained, the economy will experience faster inflation in the medium term…. It is my view that the current stance of policy is inconsistent with price stability in the intermediate term…. Now, I acknowledge that there are risks to economic growth going forward…. Now is probably not the time to shock markets by raising rates. But neither is it a time to panic and lower rates. A cut today may be reassuring to some in the financial markets, but it also may serve to scare markets…. I am uncomfortable with the current Greenbook baseline path that has the funds rate remaining unchanged well into the second half of next year. In my view, that will not deliver an acceptable path of inflation outcome…. At some point, before the unemployment rate begins to improve substantially, I believe this Committee will need to raise rates in order to deliver on our inflation objectives…

September 29, 2008: MR. PLOSSER: [NO STATEMENTS]

October 7, 2008: MR. PLOSSER: I do not like intermeeting cuts. I think they signal more panic than they do stability…. I am reluctantly or modestly comfortable with this… because I don’t think that anything that we do today—cutting the funds rate 50 basis points or whatever—is going to make the next couple of months in terms of the overall economy any less painful…. I like in the statement the stressing of the point that… this is based on a deteriorating economic outlook… as opposed to just volatility in the financial markets…. I’d just like to make an observation about the sentence on inflation. It reads, “Inflation has been high, but the Committee believes that the decline in energy and other commodity prices and the weaker prospects for economic activity have materially reduced the upside risks to inflation.”… I would put on the table for discussion that we change the phrase “materially reduced” to these things have “mitigated near-term upside risks to inflation.”… I’m not necessarily convinced—and it’s very model dependent—as to what inflation might do in the latter part of ’09…
October 29, 2008: MR. PLOSSER: On the governance side, I continue to believe that the FOMC is the appropriate body for making monetary policy decisions and that replacing monetary policy with credit policies that are unconstrained by this Committee is to violate both good governance and the spirit of the operating understanding of the FOMC. Yesterday and in my memo to the Committee earlier this week, I argued that the directive and the statement should clearly state that we are in a new regime and should articulate how that new regime will operate going forward…. The proposed language… say[s] that the Board of Governors will continue credit market interventions…. The implicit message is… that the FOMC has ceded monetary policy decisions to the Board of Governors, and I think that will be damaging…. Once the Committee sets the precedent that the Board of Governors can assume sole responsibility for monetary policy, we run the risk of losing the strength and the diversity of views that the System has always brought…

MR. PLOSSER: We may well have to do more, but I think we are near the end of what we can do with monetary policy. Of course, it’s difficult to determine the appropriate level of the funds rate, and I want to draw your attention to the Greenbook, which showed that, whether we cut today or don’t cut today, the paths of GDP, employment, and inflation over the next year or two are not much different. In fact, in most models, cuts of that magnitude do not show up very heavily in real variables. I would also note that, according to the Greenbook, we could cut the rate to zero and have no effect on inflation, apparently, for the next four years. However, given the fact that rate cuts don’t have much effect, even in the Greenbook simulations, we have cut rates. It may not make much difference, as President Hoenig was saying. My preference at this meeting would be to stand pat and see how the data and financial markets improve…. Now, delaying necessary rate cuts is not desirable. But given the considerable uncertainty around our forecast, it is not clear that further cuts are either necessary or desirable or are going to be effective. And doing so for purely psychological reasons, from my standpoint, is a dubious way to conduct policy…

MR PLOSSER: The forecast… is really the result of very large adjustments to the financial constraints piece…. Those spreads… can rise very quickly, as we’ve seen. They also can fall very quickly sometimes…. If our facilities are successful, they actually may fall further—knock on wood; that would be very nice. But I get a little nervous making our forecast be driven so much by something that’s potentially very, very volatile…. The “more rapid financial recovery” scenario is what the forecast would look like had we not done the additional add factors in October…. The real data… have driven the forecast down a little, but not a whole lot…

MR. PLOSSER: I expect the economy to contract during the second half of this year and perhaps in the first quarter of next year—but that’s less clear…. By the end of 2009 we’re getting back toward what might be considered trend growth…. I expect the unemployment rate to peak around mid- ’09 at about 7 1⁄4 and then to decline gradually to its long-run rate of about 5 percent by the end of 2010…. I expect core inflation to decline gradually from the current levels to my goal of about 1.7 percent by 2010…. My overall forecast… is similar to what we talked about as the “more rapid financial recovery” scenario…. The risks around the Greenbook baseline forecast are to the upside…. It’s very risky to base monetary policy, which ought to be taking a longer-term perspective, on week-to-week movements in such volatile variables…

December 15-16, 2008: MR. PLOSSER: If we hope to affect expectations, we need to explain our policies in a way that the public can understand…. Optimal policy in these circumstances would involve price-level targeting, as I said, and it would be very difficult to explain, particularly since the FOMC has never formalized its inflation target, let alone a price-level target. I think we would be better off trying to communicate something simpler. First, we need to tell the public that we have lowered the funds rate as low as we think it is beneficial to go.

I do have some concerns about lowering the target rate all the way to zero. We still do not understand why having interest rates on reserves isn’t working to keep the funds rate at its target…. I do not want to go all the way to zero. But I think we do need to communicate clearly to the public that, when we reach whatever that effective zero rate is, we are done…. There are two additional practical advantages I see that argue for bounding our target rate above zero. First, it will allow additional time for banks to become more proficient at managing their reserves…. Second, I believe that when the time comes to raise rates, even by modest amounts, we will be in a better position to do so from a non-zero position…. We certainly need to communicate that we do not wish deflation in a very weak economy. We also may wish to convey that we are going to keep the nominal funds rate low for some period of time because we desire higher inflation….

Regarding the use of nonstandard policy tools—in my view, we are already there. With the funds rate trading below target, we are effectively conducting monetary policy through quantitative easing…. I believe we need to publicly convey that we have entered a new regime. Otherwise, it may look as though we have lost control of monetary policy…. My preference is for the directive to specify objectives in terms of asset quantities rather than the level of non-funds-rate interest rates or interest rate spreads…. Setting a quantity limit on the size of the balance sheet is more familiar—similar to our experience with operating a reserves-based target…. I would prefer to see us purchasing Treasuries rather than riskier assets, as I would favor the purchases of long-term Treasuries over new 13(3) facilities….

We also need to recognize that, as the economy begins to recover, these programs will need to be unwound, and this may occur before all financial institutions are fully recovered…. We need to be concerned about the health of our balance sheet so that we can ensure that we can finance the interest rates on reserves and pay them…

MR. PLOSSER: Although I’m still not quite as pessimistic as the Greenbook, I admit that the Greenbook is no longer an outlier as I am used to
thinking about it. The forecasts for output are nearly as bad as or are worse than the economy experienced in 1974-75. Inflation has moderated significantly, and near-term inflationary expectations have also moderated…. With the growth prospects so weak and inflation expectations decelerating, the appropriate real funds rate obviously will probably decline, raising the possibility as we discussed yesterday that the zero bound on nominal rates will pose a problem for us….

I believe that we need to acknowledge publicly that we are now in a new regime…. The Board of Governors and the FOMC will have to decide how they will handle the governance issues surrounding this new regime. It seems clear to me that monetary policy determinations should remain in the purview of the FOMC regardless of whether we are using standard or nonstandard policy tools…. We need to be explicit and to communicate that monetary policy remains under the purview of the FOMC….