Why Charles Plosser voted against the FOMC policy motion

Market Realist

Must know: Takeaways from the Fed's July FOMC meeting (Part 6 of 7)

(Continued from Part 5)

About Dr. Charles Plosser

Dr. Charles Plosser has been the head of the Federal Reserve Bank of Philadelphia since August, 2006. A noted hawk, he’s been a vocal critic of the Fed’s monetary stimulus program.

Extent of economic progress not reflected in the FOMC statement

Dr. Plosser is part of this year’s policy-making body of the Fed—the Federal Open Market Committee (or FOMC). He votes on monetary policy. Out of the ten participants at the July FOMC meeting, Dr. Plosser was the only FOMC participant who voted against the monetary policy action.

Dr. Plosser was at-odds with the guidance which indicated that it likely will be appropriate to maintain the current target range for the federal funds rate for “a considerable time after the asset purchase program ends because such language is time dependent and doesn’t reflect the considerable economic progress that has been made toward the Committee’s goals.”

Unemployment rate may fall below 6% before the end of 2014

In a recent speech to the Women in Housing and Finance in Washington D.C., Dr. Plosser remarked that the “the U.S. economy is on a firmer footing today than it has been in several years,” citing improvements in the housing and manufacturing sectors. He also said that “given the recent trends, an unemployment rate below 6% is certainly plausible” by the end of 2014.

Why a tighter monetary policy is in order

He indicated that given the copious amounts of monetary accommodation added to the economy, there was more upside rather than downside risk to inflation. Dr. Plosser also believes that the Fed taper may be too slow. Given the improvements in the economy, the Fed is actually adding monetary accommodation when in fact a tighter monetary policy may be in order.

Dr. Plosser on the interest rate hike and rules-based guidance

“My own view is that, as we continue to move closer to our 2% inflation goal and the labor market improves, we must be prepared to adjust policy appropriately. That may well require us to begin raising interest rates sooner rather than later,” he said.

The use of Taylor-like rules

Dr. Plosser has also been a keen advocate of the use of rule-based policy making for the Fed’s monetary policy. He believes that the Fed should provide transparent rules-based guidance based on Taylor-like rules, which would lead to better economic outcomes.

Taylor rules and their variants use economic data to determine the base interest rate or the Fed funds rate. These rules are becoming increasingly in vogue among central bankers around the world. For more on the use of Taylor rules and Dr. Plosser’s views on transparency and communication of the Fed’s monetary policy, you can read the Market Realist series, Determining the Fed’s monetary policy needs a systematic approach .

Richard Fisher on tighter monetary policy

Another noted Fed hawk, Dallas Fed chief, Richard Fisher had also spoken of the need for tighter monetary policy in a July 16 speech at the University of Southern California. Fisher spoke of the risks to the economy by keeping monetary policy “too loose too long.” You can read about his views in the Market Realist series, Fisher on the rate rise, financial excess, and political pliancy.

Why is base rate guidance necessary?

Market participants closely watch the Fed’s actions and the views of Fed officials and policymakers because the monetary policy decisions at FOMC meetings have bearing on both fixed income (BND) and stock (IVV) markets. The statements issued at the conclusion of the Fed’s FOMC meetings are particularly relevant because they describe the stance of the Fed’s monetary policy, including the all-important decisions on interest rates and the economic outlook.

Real estate investment trusts (or REITs) like Annaly (NLY) and American Capital Agency (AGNC), which typically rely on leverage, would also be affected by interest rate decisions taken at the Fed’s FOMC meetings.

The Core S&P 500 ETF (SPY) tracks the S&P 500 Index. The index is based on market capitalization and includes blue-chip companies like ExxonMobil and Berkshire Hathaway.

In the next section, you’ll learn how bond and stock markets reacted to the release of the FOMC statement.

Continue to Part 7

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