Below is the transcript of a CNBC Exclusive interview with Charles Plosser, former President of the Philadelphia Fed, and Peter Praet, former Chief Economist of the European Central Bank. The interview was first broadcast on 13 November 2019. If you choose to use anything, please attribute to CNBC and Joumanna Bercetche.
Joumanna Bercetche: So this is our monetary policy panel that we have been talking about. I have got two very high-profile guests with me right now, just to introduce them – Peter Praet, the former Chief ECB economist joins me on my left, and then to his left, Charles Plosser, the former President of the Philadelphia Fed. Thank you both very much for joining us this morning. Mr. Plosser – I'd like to start with you and just to take it back to the most recent Fed meeting they seem to signal that they are coming towards an end to this easing. Do you think that the 'mid-cycle adjustment' is over for the time being in the US?
Charles Plosser: The correct to that is who knows. I think they certainly perceive or are sending the signal that they are done at least for the time being. But I think the challenge that the Fed has is that its communication has been somewhat erratic over the last 3-4 meetings and it's kind of hard to know what are the terms and conditions under which it might act in the future. And I think that's probably for the Fed, and problematic for the markets and for the public, not knowing sort of under what circumstances will they return to easing or return and raise rates again.
Joumanna: Is that the Fed's fault though that the communication has been spotty at best, or is it a function of the decision making which has also been quite erratic especially when it pertains to decisions on the trade war?
Plosser: I think that one of the problems is that the Fed's communications about why it was easing had a lot to do with the potential for the trade war and the negative effects which hadn't really occurred yet, but they were taking out insurance. I think that was the wrong reason to justify actions. I would prefer them to take an action because they thought inflation was too low – at least that's data they can see. But I probably would have disagreed with that too, but I don't think it is that low. But anyway, this notion of making a policy decision based on some prospective decision of the administration or China or somebody else, I think is unprecedented and not a wise way to communicate your actions.
Joumanna: And of course, it has questionable effects of their economy. And Mr. Praet I just wanted to take the question to you. If we are in a situation where the Fed pauses and are done with this mid-cycle adjustment does it put the ECB in a tricky position because of course in Sept they announced this huge raft of measures including open-ended QE and strengthened forward guidance. If all a sudden the world looks better, aren't they stuck if they need to backtrack?
Peter Praet: No I would say that indeed there is a sort of malaise in the central banking community – how do you react to the sort of shocks that we have now, related to trade policy, protectionism and all that? And the malaise is not the traditional divide between the hawks and the doves, it's basically – can monetary policy do something to stimulate animal spirits and business confidence in general. And the answer is doubtful. And that experienced a little bit chaotic communications that you had in the central banking community. So it's a lot of unease.
Joumanna: So you also agree that the communication out of the ECB was chaotic recently?
Praet: I think it was a bit chaotic I would say. The measures were supported, but the communication after was indeed – there was a lot of dissonance. The dissonance was not so much the traditional one, it's relating to the sort of uneasy feeling that monetary policy can't really offset these shocks that you have.
Joumanna: Right, well ECB certainly has its critics, and I speak to a lot of financial institutions. The banking system are not happy with the negative rates for obvious reasons. But them members of the ECB were not happy with the open-ended nature of the QE programme. So two questions for you on the back of that. First, do you think that people felt a bit more emboldened because it was coming to an end of Draghi's term therefore they felt that they could speak out this time. Second do you think that if the QE programme hadn't been open-ended, that the criticism would have been less extreme?
Praet: I'm not sure, as I say I mean inflation is not what the ECB would like to see. And so you have to be consistent with your communications. So I think everybody would agree about that. The question is of course given the nature of the shock you know it's unclear to many governors that it's going to have an impact on inflation in the medium term. And so you are caught in between the necessity to do something and how do you assess the impact on inflation in general. So I think the ECB found a sort of compromise which was difficult in the package of measures that was announced. Now what will be the impact? – I mean that's the big discussion now.
Joumanna: Mr. Plosser, we've got a deeply entrenched negative rates in Europe, Switzerland, Japan – do you see negative rates as a tool that the Fed could at some point use in the future if necessary?
Plosser: Well, the answer - I don't think anyone knows for sure. But I think Chairman Powell has expressed doubts if you will about whether negative interest rates are effective and whether the Fed would want to go there. I think the Fed is mostly reluctant to want to pursue negative interest rates as a policy tool, I don't think they like to do that. I think there are lots of questions about its effectiveness, its distributional impacts in particular within the financial sector and sort of the disruptions that that causes. So my guess is if they get to the zero bound again and that becomes necessary to consider, they would probably avoid negative rates and go back to QE, which also has its problems.
Joumanna: You know central banking is not an absolute game – it's a relative game. And this is the thorn in President Trump's side because you know he doesn't like the fact that the Fed still have such higher interest rates relative to the rest of the world and indeed yesterday reiterated that point and was nudging the Fed to move toward negative interest rates so that the Fed can compete with all the other central banks. What do you make of that?
Plosser: Sounds like a race to the bottom to me. I mean I think that A – there is no economic theory – none - that suggests that nominal interest rates across countries ought to be the same. There is just no justification, no policy or theoretical reason why that has to be the case. Cutting rates do sometimes have temporary effects on exchange rates and there is a mechanism for the way that works into the real economy. But there is really no justification for trying to set interest rates at the same level as the ECB, or Japan, or as anybody else does. So I think that's really not a very good argument.
Joumanna: Isn't he right though that the fact that US interest rates are higher than the rest of the world means that money has flowed into the US and is one of the reasons why the dollar trades so strong, that's obviously not good for their economy.
Plosser: I think maybe, maybe not. I mean a lot of things affect trade balances and interest rates and exchange rates is only one of them, and by the way I'm not sure it's so bad that money flows into the economy as a good place to invest – I would be much more concerned if it was the opposite of that. So I think it's not that simple. And I think that monetary policy after all at least in the US is not supposed to worry about exchange rates and you really don't want to get into a beggar thy neighbour policy where all central banks try to catch up with the first one to the lowest rate and do that. We know the outcome of that, it's never effective and can be quite disruptive.
Joumanna: Mr. Praet, you're nodding you head, but I want to bring up exchange rates aside of things. I mean, the euro hasn't moved. The ECB came up with this humungous package in September, the exchange rate has done nothing.
Praet: Which is fine – which is fine. I have no problem with that. I think the exchange rate is not a big issue. I mean the rates are basically, I think do not create real imbalances between the two countries. I think the rates are OK. The question on the negative rate I think is a serious thing. I think it has been extremely powerful in getting out of the crisis. But the problem is the persistence of negative rates for a long period of time and the impact on the financial sector in general. So that has been taken into account by the tiering, you know by giving back some of the money that the central banks get from the negative rates excess liquidity deposits, but I mean there are limits to that. And the persistence is really a concern. That's why the debate goes from monetary policy to fiscal policy in general by saying monetary policy is not the appropriate response, you need more fiscal. And that's where the debate started.
Joumanna: A very quick final question for you – I don't want to let you go without asking you this question – do you think we are likely to see a change in the monetary policy framework under Christine Lagarde now?
Praet: I think one should reflect very carefully before changing the framework. I mean that's the strategic reflection which you know the conversation has started. One has to be very careful and know where you want to go – and not opening the door to too many ideas. I think the policy has to preserve a high degree of accommodation – I think that's clear. Do you need to do more? Do you need to have more fiscal? – I think the direction is that you need more fiscal. And that would be a difficult game of course.
Joumanna: Sirs, I have to thank you both.
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