Mary Anastasia O’Grady has slightly disturbing interview with Philadelphia Federal Reserve bank president Charles Plosser in today’s Wall Street Journal:
Federal Reserve Chairman Ben Bernanke was on Capitol Hill this week to answer critical questions about monetary policy, amid rising bond yields and sharply higher commodity prices. Mr. Bernanke showed no self-doubt, and Friday’s resignation of Fed Governor Kevin Warsh, one of the board’s inflation watchdogs, means that Mr. Bernanke’s easy-money inclinations will have even fewer internal checks.
Enter Charles Plosser, the president of Philadelphia’s Federal Reserve bank. A former dean of the William E. Simon School of Business at Rochester University, Mr. Plosser is widely known as an inflation hawk. And this year he has a vote on the Federal Open Market Committee (FOMC), which sets monetary policy. He’s now a man to watch.
One of the most perplexing questions for the Fed these days concerns the continuation of “QE2,” its second round of quantitative easing, which will dump $600 billion in new money into our banking system over the first half of this year.
Mr. Plosser doesn’t see a deflation risk for the U.S. economy right now. Even those who were worried about deflation six months ago, he says, have begun to change their tune. That means that, with moderate GDP growth and low inflation in the mix, the only thing left as an excuse for QE2 is high unemployment. Can lax monetary policy change that picture?
Mr. Plosser’s answer is unequivocal: This mess was caused by over-investment in housing, and bringing down unemployment will be a gradual process. “You can’t change the carpenter into a nurse easily, and you can’t change the mortgage broker into a computer expert in a manufacturing plant very easily. Eventually that stuff will sort itself out. People will be retrained and they’ll find jobs in other industries. But monetary policy can’t retrain people. Monetary policy can’t fix those problems.”
Mr. Plosser reminds me that when QE2 was first proposed last year, he wasn’t in favor. “I didn’t think it was necessary and I thought that the costs outweighed the benefits.” He says he thought that “it carried some very significant risks” that “would not be borne today but would be borne down the road when the time comes to unwind what we’ve been doing.”
But last month, when Mr. Plosser got his first chance to vote on the FOMC, he didn’t dissent. When I ask why, he launches into a summary of his four principles of good policy-making: “clear communication of objectives,” “credible commitments toward achieving those objectives,” “transparency” and “independence.”
I say disturbing because either Ms. O’Grady is deliberately trying to make Mr. Plosser look like he has no real idea what he and the Federal Reserve are doing… Or, Mr. Plosser really doesn’t know what he and the Fed are doing. I tend to think it’s the latter, I’ve followed Ms. O’Grady’s work for several years and always found her to be credible.
What’s clear from Mr. Plosser’s comments is that neither Federal Reserve or Federal Government are willing take their medicine, instead they’re trying to micromanage the economy.
To put it bluntly the Federal Reserve knows a lot less than it pretends, and controls a lot less than it assumes. In short, they’re just guessing… or more accurately they’re making a lot of assumptions often based on conflicting data. Worse still if they guess right and what they’ve done coincides short term with improvements in the economy, it falsely leads them to believe their actions have had a positive impact on the economy… which encourages them to do more and more micromanagement, until what they do doesn’t work anymore. Then they start flailing around looking for complex technical reasons, when simple commonsense would tell them they can’t micromanage the economy by monetary policy.
The Federal Reserve’s primary responsibility is to maintain a stable currency, what they’re done is destabilized and devalued the dollar. It’s time for the Fed to take their medicine, stop the printing presses and focus on re-establishing sound money policies and strong stable dollar. The rest of the economy will take care of itself.