CNBC News Releases


Steffanie Marchese

When: Today, Monday, January 30th at 10am ET

Where: CNBC's "Squawk on the Street"

Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Federal Reserve Bank of Philadelphia President Charles Plosser today, Monday, January 30th at 10am ET on CNBC's "Squawk on the Street." Additional excerpts of the interview will run throughout CNBC's Business Day programming.

All references must be sourced to CNBC.

Video: Philly Fed President Plosser on U.S. Recovery

Insight on why he is seeing more optimistic signs in the economy than the Fed statement revealed, with Charles Plosser, Philadelphia Fed President.

STEVE LIESMAN: Hey, Carl, thanks very much. I'm here in Philadelphia with the president of the Philadelphia Federal Reserve Bank, an influential member of the FOMC and also on the communication subcommittee that created all these new changes. Thanks for joining us, Charlie.

CHARLES PLOSSER: Great, glad to be here Steve.

STEVE LIESMAN: Let's talk first about your economic outlook. The statement seems to be very pessimistic. It almost seems to ignore the better economic data that's been out there. What's your take on it?

CHARLES PLOSSER: Well, I thought it was a little bit pessimistic. I would prefer it a little more optimism in the statement. I think the outlook has improved over the last several months. And it's not that we're going to take off like a sky rocket going into this year, but I do think that things are looking better -- the employment picture, the employment market, labor market looks a little better. And I think there's reason to be hopeful that we're going to make this continuous, modest progress towards recovery.

STEVE LIESMAN: Give us an idea of your GDP and unemployment outlook for this year of 2012.

CHARLES PLOSSER: Well, I'm looking for GDP over the course of 2012 and 2013 to be only about 3%. Which is a little above trend-- it's not an outrageous forecast by any stretch of the imagination. Many people are a little below that, maybe at 2.5%, but you know, frankly the difference between 2.5% and 3%, our ability forecast with that degree of accuracy is pretty poor.

STEVE LIESMAN: How about unemployment? What happens there?

CHARLES PLOSSER: Unemployment-- we've seen unemployment fall almost a full percentage point in the last year. The last time that happened was 1995. And it never fell a full percentage point in a year after the 2001 recession. So I'm a little more optimistic I mean, I think we we will be by the end of 2012 and I think unemployment will be close to 8% and on my better days maybe even a little shy, little below that.

STEVE LIESMAN: Let's talk about these interest rate forecasts that you're now publishing. There seems to be a lot of-- there's some disagreement between the statement which says that you expect it to remain-- low through mid-- through late 2014 and the forecast that came out later in the day. Which should the markets believe?

CHARLES PLOSSER: Well, I think two things. One is that interest rate projections in the SEP are not forecasts, people have to remember that they are projections of what each individual committee member thinks is appropriate policy, that is what should policy be, not what will policy be. And so they're making individual assumptions about the path of policy. And that reflects how over time that will reflect how policy evolves and the views of how the committee evolves.

In terms of the statement, the statement is a statement of policy, a statement by the committee. And it's reinforced by a vote of the FOMC. There's information content in both of those. If you look at the SEP projections of interest rates in the policy decisions you will see that there's a huge mass of people in and around 2014 and some beyond and some people sooner.

So it's not clear that the statement didn't reflect the modal view of what the committee and participants thought. But they are different exercises and so I think it's very important we understand the differences in our projections and the policy statement.

STEVE LIESMAN: If you watched the way the market reacted, they thought great at 12:30 when you said you expected it to remain low through 2014. But then we learned at 2:00 that there's not very much support for that later date on the board. Which is the right one?

CHARLES PLOSSER: Well, I think the fact of the matter is the statement's pretty clear although not as clear as it could be, that this is two-thousand-- late 2014 is contingent, it is conditional on the evolutions of the economy. Now, I think that we don't make that clear enough.

A lot of people have been reading the statement as if it was a commitment and it is not a commitment. And when you look at the SEP projections you-- it's pretty clear that everybody doesn't agree that this is a firm commitment. So it's not a commitment and it shouldn't be interpreted as a commitment. It's a conditional statement and I think revealing the projections in the SEP makes that even clearer that this is really not a commitment.

STEVE LIESMAN: So one of the things that was most interesting about it was there were six individuals who thought that -- who projected the first rate hike in 2012 or 2013. So I have to ask you which one are you? Are you in the--

CHARLES PLOSSER: Well, I'm certainly in that six.

STEVE LIESMAN: I want to pressure you though, do you think the first rate hike comes 2013 or 2012?

CHARLES PLOSSER: Well, I've said previously, even before this statement that I thought there's a possibility that rate hikes would have to come before mid 2013. I was unhappy with the calendar date in the statement, I'm still unhappy with the calendar date in the statement. I don't think that's the right way to convey policy, I think it's not good communication. So I do believe that it's likely to occur between now and mid-- before mid 2013. Whether it occurs in 2012 or early 2013, I'm kind of up in the air about it, it could go either way.

STEVE LIESMAN: But which one were you then?

CHARLES PLOSSER: I was in 2012, late 2012.

STEVE LIESMAN: So you think it could happen in 2012. If you had to choose that's where you picked?

CHARLES PLOSSER: If the economy evolves, as I think it might, then I think it's likely it might have to be sooner than that.

STEVE LIESMAN: Let's talk about the boards. The committee seems to be going in the opposite direction. As I gauge what was said by the chairman and other members of the committee, it seems like they're on the cusp of additional easing. Is that your forecast? Is that your read, as well?

CHARLES PLOSSER: Well, I'm not going to tell you what the committee thinks. I can only speak for what I think. I've already alluded to the fact I think that there's a suggestion if the economy evolves as I think it might then we actually may have to raise rates sooner, not do more. I'm very concerned about policy.

We keep saying that we've got to do more, we've got to do more, we're missing our targets. And there's some analogies of that, what I call a accelerationist policy. For example imagine you're driving down the interstate and you're going fast and it's kind of fuzzy outside, it's foggy. There was an accident this morning in Florida in the newspaper, ten car pileup.

We don't forecast very well, we don't forecast very well very far in advance. You know as you drive down the interstate you've got to make an exit. You don't know exactly where it is and you can't see very far in advance, but you know you're not there yet. So in policy what we're doing now is, "Okay, we're not there yet, so let's step on the gas faster."

Little while later you're not there yet, "Let's step on it even more faster." But pretty soon you're going to get the flashing exit sign. And when you do two things can happen. You either slam on the brakes really hard so you can make the exit to your destination in which case you may get the ten car pileup behind you losing lives and disrupting the economy or you step on it fast enough that you make the turn and you flip and you miss-- you disrupt the economy.

If you don't make the turn and you go beyond the exit you've got to go all the way to the next exit before you can turn around and come back and you miss your goals. And then you run the risk of either runaway-- in policy, runaway inflation, distortions in the marketplace, bubbles and so forth. So I think I worry about this accelerationist view that we have to go ever faster on the pedal of monetary policy.

STEVE LIESMAN: Do you think they should slow down and the Fed should--

CHARLES PLOSSER: We used to patient, we just need to stop thinking that we have to keep doing more.

STEVE LIESMAN: What about the idea though that you're not hitting those unemployment rate targets and that inflation seems to be relatively subdued?

CHARLES PLOSSER: Well, that's why. But the question is will more inflation or more policy actually help those unemployment rates? That's the short-run question. And the question about whether or not tolerating or targeting higher inflation will actually help that unemployment is a huge debate in the economics profession.

STEVE LIESMAN: Do you think that Operation Twist and some of the other quantitative easing has helped in bringing down interest rates?

CHARLES PLOSSER: It certainly has affected some long term interest rates, but we don't know quite what the distortions it's created. The misallocations of capital it may have created as we focus on some sectors and not others.

STEVE LIESMAN: There's a lot of talk about the distortions that out there that Fed policy is really punishing savers. Do you agree with that and is it something that you think is useful or warranted for the overall health of the economy?

CHARLES PLOSSER: Well, I think the judgment has been-- and the reason policy has been what it is is that judgment has been that for the sake of the economy as a whole that we're willing to tolerate if you will, that. But it's certainly true that low interest rates of close to zero are punishing savers, there's no question to that. But that-- the idea policy of that is to sort of get people to quit saving and start spending. So that's kind of one of the objectives.

But it is, the people who are on fixed incomes-- I think there are some real risks that-- if they can't get a return on their savings they start liquidating their assets, liquidating their wealth in order to live. Well, that means that in future generations who would have inherited some of that wealth from their parents let's say, aren't going to get it, it's going to be gone.

STEVE LIESMAN: I've also had portfolio managers complain to me about the Federal Reserves saying, "You're forcing me into a risk profile I do not want to be in." How do you respond to that?

CHARLES PLOSSER: Well, I think there's some cases where that's probably true. I've talked to money managers and financial managers and private equity people in the financial markets. And a lot of them do share the view that somehow in the stretch for yield many people are taking unwise risks. Now, of course the Fed has made it very clear that at times we're trying to force people to take some more risk, but we can't control how that happens.

And so by trying to push people into riskier assets as we're trying to do with Operation Twist or with an Asset Purchase Programs, we don't know the full consequence with that. And we could, could-- I don't want to say we are, we could be breeding some problems for us down the road if we don't exit in the right time. And then we go past the exit and we have another credit bubble of some kind.

STEVE LIESMAN: Would you make a case right now against the idea which seems to be prevalent on the board which is to buy additional mortgages to drive down interest rates and help the housing market?

CHARLES PLOSSER: I don't see a need for that. It's sort of counter to my intuition about us doing more-- always doing more. We have one of the worst housing markets we've seen in a generation. And we've lowered interest rates to historic lows, we are extraordinarily accommodative and yet the housing market is still in a funk. Do we think that lowering mortgage another 10 or 15 basis points will actually revive the housing market? I'm very dubious of that.

STEVE LIESMAN: Charlie, we have just another minute here, but I do want to ask you a technical question here. You have suggested in the past-- an economist said to me, "These interest rates forecast would be useful if I knew where they stood on unemployment and I knew where they stood on inflation and GDP." Are you in favor of publishing the individual rate forecasts along with the economic outlook?

CHARLES PLOSSER: Well I am inclined to say yes to that. I think there are other people who are not so inclined. They would-- if we did something like that it would clearly be anonymous. We would not attach names to them. But it would be more helpful in helping people understand where some of these rate projections come from if you saw how they matched up with that same individual's output in unemployment inflation forecasts.

That would be very revealing information and be a sort of transparency. But it begins to get a little tricky about people then trying to play guessing games of who's who and so then there are people that are uncomfortable with that. Most of the presidents by the way, if you listen to their speeches, are pretty oftentimes talk about this, are very open about it.

STEVE LIESMAN: Right. Charlie, thank you so much for joining us this morning.

CHARLES PLOSSER: Great Steve, good to be here, thank you.


STEVE LIESMAN: So Charlie, let's go back over this idea. If there's a conflict, and there was, but if there's a conflict between this policy statement of the calendar date and the SEP which one prevails?

CHARLES PLOSSER: Well, it's not clear that you want one dominate the other. One, the SEP projections are in fact the range of views of the committee. If you look at the policy statement of late 2014 and you looked at the modal value of the range of views it was probably pretty close. The idea is for them not to be.

You would think that the range of views would be captured in... I think having a calendar date in the statement is bad policy, I've said that over and over again. And by getting rid of the calendar date in the policy statement-- because I think it's bad communication, I think the SEP projections speak for themselves, they give you the view about where people currently stand.

What's important about that is that you will see over time when the next quarter comes and we do another SEP projections and you have the appropriate policy rates in there, you may very well see that change. It may go out further or it may actually begin to pull in. That's really a more informative way to think about forward guidance as we call it, from my perspective.

STEVE LIESMAN: We also didn't get a chance to talk about inflation target. Pretty historic move by the Federal Reserve, what does it mean for following the Fed and for Fed policy that you've now published the number that's your target?

CHARLES PLOSSER: I think it's very important actually. Having a central bank with an explicit inflation objective is kind of central banking 101 these days. I mean, it's done by all major central banks around-- well, except for the Fed, and we now have done that. And it's very important as means of commitment.

People seem to think we have a 2% inflation target, but we've never said it. And it's going to be very important that we keep expectations of inflation anchored. And this helps-- it helps do that. It's not the sole thing that helps do that, but it helps do that. And that's going to make monetary policy more effective and frankly it's going to make monetary policy more accountable.

Because now that we've committed to achieve this longer run objective people can hold us accountable to that. We didn't have to be held accountable before because we could always explain it away. So I think this is a very important-- it brings the reserve system into the 21st century about how to...monetary policy.

STEVE LIESMAN: Over what period of time should we be expecting the Fed to hit that inflation target?

CHARLES PLOSSER: Well, I think different people have different ideas about that. But I think if you look across central banks around the world it varies from two years to three or four years. So we can't control inflation month to month or quarter to quarter precisely, but we can over the longer term or medium term as I like to think about it. So I think of it in terms of two to three years would be my preference. Some people might want a little longer, but that's the range in which I like to think about it.

STEVE LIESMAN: If the target is 2% and you ran 1% for awhile would you and the committee tolerate a 3% inflation level in order for things to balance out?

CHARLES PLOSSER: Well, that would be a price level target.

STEVE LIESMAN: Right, and you're not doing that?

CHARLES PLOSSER: Well, that's not what we've said we would do.

STEVE LIESMAN: So 2% and that's the goal at all times even if you did run below?

CHARLES PLOSSER: Well, over the longer term. I mean, the other model would be a price level target where you make up for past mistakes. Of course if you were running 3% inflation and you took that over horizon and you said, "Well, does that mean we have to run 1% in the future in order to make up for that?"

In other words that would be a symmetric argument and a lot of people would be uncomfortable with that. So I think that there are lots of problems and difficulties in explaining going through the price level target. And this is a longer term anyway.
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