Philly Fed President Plosser Doesn’t Favor More Stimulus, Sees “Underlying Strength” in Economy

Federal Reserve Bank of Philadelphia President Charles Plosser spoke with Bloomberg Television’s economics editor Mike McKee about the outlook for the global economy. Plosser says that he sees no need for more monetary stimulus now while noting the fundamental strength in the economy.

Here are the key highlights from the interview, courtesy of Bloomberg Television:

Plosser on whether his economic views have changed:
“I haven’t changed my forecast very much, that’s certainly true. We’ve had a lot of data come in over the last couple of months, but a lot of it has been complicated by special events whether it be the tax credit in housing or the crisis in Europe or the census hiring on the employment side.  I think I’m waiting for some of the noisiness in the data to sort of clear up over the course of the rest of the summer and early into the fall to get a good sense of where the underlying trend of the economy is. I do not want to be taken aback too much by just month-to-month changes.”

Plosser on where he sees strength in the economy:
“I think the strength was there before the noise came in. I see some clouds on the horizon if you will, with some increased risk due to the, particularly Europe and how that might play out. But I think as we go through, we’ll see confidence return, and a little more assurances that we’ll get through this and when that happens, the consumer will come back and businesses will begin investing again. They were very aggressive in the first part of this year. I see no reason why they wouldn’t do that, particularly given that their earnings, the prospects they have. So I think there is underlying strength that is still there.”

“When we have been through a financial crisis, we suffer enormously because of the financial crisis. There’s a lot of uncertainty, a lot of things people have never seen before.  So when the Greek challenges came upon us, it’s natural that people were a little skittish about what might happen again.  And so I think they pulled back. We will have to wait and see how this plays out.”

On whether the Fed should be doing more to stimulate the economy:
“I do not think there’s any call for it at this point. Like I said, I haven’t changed my forecast that much. So I don’t think there is any role for the Fed, at least in the near term.  Of course, things could change, the economy could take a much worse path than I think it is. But if it did, we have ammunition to act if we want to.

“But I would caution people that the Fed will look at both the cost and benefits of any action we undertake and we have to understand that the actions we take may not be the right medicine for the disease that we have and we would sort of have to look at that very carefully.”

On Bernanke’s suggestions in changing the Fed statement including buying more securities, mortgage bonds, lowering interest rates paid on reserves:
“They might [benefit the economy], depending on what we think the diagnosis to the problem of the economy is…The Fed has supplied a lot of liquidity to the system right now.  We have to proceed very cautiously as to whether or not anything we would do – lowering the interest rates closer to zero –could have very  disruptive of the effects on the financial markets. If we bought treasury bills, we could un-anchor expectations on inflation because the public might begin to think we’re going to buy up the public debt. And so we have to be careful about how we proceed going forward.”

Plosser on whether businesses are projecting stronger earnings:
“It certainly seems to be true in corporate America, for big businesses right now. They seem to be growing in confidence about the outlook; they seem to be, as you said, raising their guidance. That’s all part of the underlying strength, I think, of the economy going forward. Small businesses have a little different story. They still see weak demand. Not all of them, but many do. And so there’s still challenges left ahead. But I think the response of corporate America and big firms, in large part, is a good sign.”

On public concern over deflation:
“I don’t think deflation or sustained deflation is a real problem at this point. It is hard to imagine how you can get that when you have $1 trillion in excess reserves sitting in the banking system or as long as expectations of inflation are well anchored.”

“I think we’re going to see some low inflation numbers. We don’t have deflation right now. Low inflation is not a bad thing. As long as expectations stay anchored, I don’t believe we will risk any sustained amount of deflation.”

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