Friday, February 6, 2015

The Fed's Charles Plosser: Raise Rates Sooner Rather Than Later

During an interview with NYT,   Charles Plosser, president of the Federal Reserve Bank of Philadelphia, said:
We have had a better economy than we thought it was going to be; we’re way ahead of where we thought we were going to be. As a committee we say we’re data dependent. And if we’re going to be data dependent, we need to explain why we’re ignoring the data, why we’re not reacting to the data. Our forecasts are changing. Why aren’t we changing the message?...
Plosser is correct here. The Fed is data driven, It is a point I make regularly in the EPJ Daily Alert.

It is because of this data driven approach, and the fact the data is showing an improved economy, that the Fed will begin to increase rates at some point later this year. There is zero chance of a new round of quantitative easing any time soon.

Plosser then went on to discuss increasing interest rates, and again he is on line with my discussion in the EPJ Daily Alert, where I consistently say, the Fed is going to raise rates much too little, much too late, but that it will be market forces that force the Fed to raise rates. Plosser gets it:
[T]he risk is that we wait until the point where markets force us to raise rates and then we have to react quickly and aggressively. I believe that if we wait too long, then we run the risk of falling very far behind the curve or disrupting the economy by rapid rate increases...One of the things I’ve tried to argue is look, if we believe that monetary policy is doing what we say it’s doing and depressing real interest rates and goosing the economy and we’re in some sense distorting what might be the normal market outcomes at some point, we’re going to have to stop doing it. At some point the pressure is going to be too great. The market forces are going to overwhelm us. We’re not going to be able to hold the line anymore. And then you get that rapid snapback in premiums as the market realizes that central banks can’t do this forever. And that’s going to cause volatility and disruption.


  1. "...the Fed will begin to increase rates at some point later this year. There is zero chance of a new round of quantitative easing any time soon."

    Peter Schiff argues the exact opposite asserting the US debt interest payments would become unmanageable if rates were raised so the Fed will resort to more QE to maintain the prosperity bubble. I'd like to see these two opposing views debated.

    1. Schiff has already been proven wrong. Interest rates fell after QE3 ended. The 30 year treasury hit a record low a few weeks ago. Furthermore, interest expense is a mere 1.2% of GDP right now. Back in the early 90s, it was around 6% and the period that followed was an economic boom. Interest rates can rise substantially before creating any problem for fiscal policy.

    2. I am not an economist, which is why I want to see Schiff debate RW. Both are Austrians. Each makes dramatically different predictions.

      Rothbard might disagree with you that Schiff has been proven wrong just because interest rates fell after QE3: According to Rothbard, interest rate drops after artificially produced money supply increases are temporary. And concomitant inflation from money printing is inevitable, even if delayed, as it is currently.

      According to the numbers I'm looking at for fiscal 2014, U.S. interest expense was $430B on debt of $17,824B. Thus the average interest rate on all current U.S. debt outstanding is 2.4%.
      GDP is $17,710B. So interest expense is 2.4% of GDP. After one adjusts the GDP number for government spending, current interest expense is actually 3.0% of GDPP and 21.3% of GDPP is already being taken by taxes. Any tax increase would only reduce productivity, jacking that percentage.

      Sure, interest rates could be allowed to rise to 2% or so with no problem. But if the average interest rate on all U.S. debt outstanding climbed just back to the historical U.S. interest rate mean of 5.2%, that would require an additional $500B annually to pay off. Federal tax receipts in 2014 were $3,021B and federal spending was $3,504B.

      Average annual GDP growth is only around 2% so productivity increases are not going to raise the extra $500B annually. Good luck getting popular support to generate $500B via a 20% increase in taxes or a 20% cut in federal spending. So where would that $500B come from?

      Notwithstanding a possible token rate rise to 1% or 2%, more QE seems to me the only politically palatable path open to politicians to keep the grins painted on everyone’s faces and the can safely kicked down the road.

  2. From 2/3/15 Peter Schiff piece "the Bravado of Borrowers":

    "President Obama's newly unveiled 2015 budget includes almost $500 billion in new spending; effectively dispensing with the token austerity that Washington had imposed on itself with the 2011 "Sequester." In my opinion, the U.S. has virtually no hope of paying for all of our spending through taxation, the budget busting proposals should be viewed as a message to our foreign creditors that we plan on borrowing plenty more, and that we expect that they will keep lending for as long as we want."

    Do you really imagine the Fed raising rates under these circumstances?

    1. Our foreign creditors lend to us because of the trade deficit. Schiff's comment is ignorant.