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Plosser on Fed’s Exit Strategy

Charles Plosser
Charles Plosser

Plosser 's Perspective

From bank failures to the recession, The Federal Reserve under Ben Bernanke has taken unprecedented actions over the past year.

Now the Obama administration and Congress are working together to determine the future of the central bank and it's potential role as a super-regulator.

Maria Bartiromo's spoke to Charles Plosser, President of the Federal Reserve Bank of Philadelphia in an exclusive interview to address all these issues. Read a complete transcript of Maria Bartiromo’s exclusive interview here.

Fed's Exit Strategy

Our central bank has taken extraordinary steps in the past year to ensure the stability of our financial system. The big question: What is the Fed’s exit strategy as we recover from the recession?

Plosser said it’s actually quite simple. "We have to begin to pull back from our extraordinary programs. We have to begin to shrink our balance sheet; otherwise we will fuel inflation in the months and years ahead."

While Plosser doesn't see inflation as a problem just yet, he added that an improperly executed exit strategy might fan the flames of inflation in the next year or two. Plosser also raised the prospect of higher rates saying, "That may mean raising interest rates very rapidly at least as aggressively as we cut interest rates when the time is right."

Plosser would not give us a time frame for his call, he said it will depend on how the economic recovery takes shape.

Commercial Concern

Data of rising factory orders and falling inventories show that our economy is improving. However, there are still other issues we need to work through. Plosser said that while unemployment is clearly a problem area, commercial real estate is also a concern. He said, "there's still lots of concerns about the impacts of declining values of commercial real estate and what that will do to our financial institutions."

Plosser did not pinpoint what he thought would be the biggest fallout from commercial real estate. He did say the FOMC's extension of the CMBS TALF program until June next year "is an important indication." He did however caution, that commercial real estate, like unemployment, is a lagging indicator.

Future of the Fed

Preserving an independent central bank has also been a major topic on Wall Street. With the Obama administration pushing for regulatory reform in the financial sector, the idea of a single regulator has emerged. While many have suggested the Fed as a potential candidate for that role, Plosser is concerned about the dual role that the central bank could take on. He said, "it's very clear monetary policy needs to be independent of the short-run political pressures that many people try to place on us."

In response to Bartiromo’s question on whether the recent financial crisis has muddied the Fed's role, Plosser said, "We have taken extraordinary actions and the Fed has pushed the envelope in terms of what we've done in the past and moved outside the box in many ways in order to preserve financial stability.”

Plosser acknowledged the challenges and concerns about the Fed's future, but thinks that ultimately, its priority should be in achieving "price stability".

The known: One thing is certain at the Fed, Bernanke will be the man in charge as President Obama reappointed him for a second-term. It’s widely expected that Congress will confirm Bernanke in the coming weeks.

The unknown: Are we headed into a double-dipped recession? Vote now.

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Questions? Comments? Write toinvestoragenda@cnbc.com

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