Plosser: Fed's Short Term Focus on Data is Very Risky (Audio)

some time. Great. So the Fed uh not only didn't give us a hint like, oh, we're going to raise rates in July or September, Janet Yellen, uh, and the release of the dots showing that even even fewer FED officials are expecting two rate hikes this year sounded very devish. Are they on the right track, Charlie, Well, I think there's a lot, there's a there's Uh. They're obviously very nervous. I guess that's what one way to put it. And whether on the right track, I don't think anybody really

knows for sure. But I found it striking in her statements and at the press conference that um she said, you know, we really shouldn't be uh, people shouldn't overreact to one month labor report number. You know, these numbers get revised and they get changed, and we don't know what they mean. And we shouldn't be so data dependent that we react to one months one month's number. But my my reaction is that's exactly what they did. That's exactly what they did. They reacted to one month's bad

number in the labor market. And and you know, the previous month UM employment grew by a hundred and thirty thousand, which actually is not bad. That's about where you expect it to be to maintain, you know, maintain the employment base given a population growth and so forth and so on. So it's really one number they're reacting to, and I find I find that disturbing UM and more evidence that one of the problems the f form C has and has had had and has had for a long time.

I might add, is this very short term focus about UM, about the data. And it's one thing to be data dependent, it's so it's another thing to be whipsode by numbers that bounce around a lot, and that that's part. That's the part that kind of concerns me. I think that in terms of gradual rate increases, I think that's still what they'd like to like to see. And I also would remind the market that you know, those dots have

come down. I have everybody agrees with that, but that but but by the way, just because because they can come down, they can go back up again. And so um Janet did emphasize quite emphatically that that there's there's a lot of uncertainty about the path of the economy, and and and to sort of take the pas or take the words of the said about our implications about what they think is going to happen over the next

year or six months or a year. You know, it's you got to take that all the grain of salt, because look, because look what's happened, because they can just just needs to go the other way. Charles Plus as co author of Trends and Random Walks in macro Economic Time Series, where are we in the business cycle? And tell us if you've been reading the major history after well,

you wrote it, so I read it. So tell us if there are these are there permanent shocks that have affected GDP that we don't know about, Well, I think we do know about them. I think what we've seen, particularly in this recession, more dramatically than we've seen in many of the the post certainly of the post war era, is um is a dramatic shock to the economy that has reduced products, appears to reduce productivity and maybe even

the rate of growth of productivity. And if you look at the CBO's estimates of potential output every year, they just mark it down lower and lower and lower. And what that reflects is the fact that, um, you know, measures the potential output are sort of calculated looking backwards, and so what they're doing is they're incorporating the evidence that this shock to the economy had some permanent, long run effects to it to the economy, and that's why

they've ended up gradually keep lowering potential output. And so now there's really in terms of potential output, there's not much of a gap left anymore. And that's consistent with the people who are you're even the reform c has argued, Look, you know where we are in terms of employment. Um, we can argue whether we're at full employment or not. Nobody really knows, but most people agree we're pretty close.

And so, um, so, yeah, I think there are some permanent have been some permanent or at least very persistent shocks that have hit the economy. That's when you've got to recognize that one reason why inflation stays low. I guess you could say, once inflation moves lower or higher, it's hard to move it. That Charlie, I want to know what you say about negative interest rates, because it's not just the ECB buying bonds and helping to push a lot of European bond yields lower. It's not just

that Maga Japan going negative in January. It seems like, you know, investors, traders are now pushing more and more bonds in a negative territory. Is there a danger of some kind of negative feedback loop, a sentiment shift, some kind of expectation that works against what central banks want to do, which is boost the economy and create a little price pressure. Well, I think I think there's a lot we don't know about that, And I think the ventures into negative interest rates I have a lot of

um doubts about. I think if you look at the countries that have done it, particularly the bigger countries, and I want to emphasize that is the ECB and and in Japan. I think places like Switzerland Sweden are a little different because they're so small and so open economies.

But in those two big economies, from my perspective, I don't see much evidence that they are doing what people want them to do, that they're accomplishing very much um and so I think, uh so, if they're not accomplishing the kind of boost in either inflation or it's real economic growth, then what what are going to be the unintended consequences of that? I think these are very risky

policies for the monetary authorities to engage in. They are um yes, they have some quote theory behind them, but I'm I'm very dubious and wary of these sort of adventures into um uh negative interest rates, particularly the policy matter. I think it's very very risky. Thank you very much. Charles Plosser, former president of the Federal Reserve Bank of Philadelphia. You're listening to taking Stock on Bloomberg Radio.