When: Today, April 15th at 8AM ET
Where: CNBC’s “Squawk Box”
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Philadelphia Federal Reserve President Charles Plosser today, April 15th on CNBC’s “Squawk Box” (M-F, 6-9AM ET). Excerpts of the interview will run throughout CNBC's Business Day programming. All references must be sourced to CNBC.
STEVE LIESMAN: We have Philadelphia Federal Reserve President Charles Plosser. He was the head of the Shadow Market Committee, a former University of Chicago PhD, right? And then you were professor at University of Rochester. And, just before we get on, I said, "Are you still teaching?" He said, "Yeah, that's what you do for a living--”
CHARLES PLOSSER: Well, I do. I think part of the role-- the presidents-- members have when we give speeches, and when we go out in the public, partly it's about educating the public about economics, about what the fed does, and what policies are about and how to understand them. So I feel like I'm teaching something.
STEVE LIESMAN: Let's-- teach us a little bit about your outlook on the economy. We kind of want a q-- first quarter weak with you. It started off robustly; people thought it was going to be-- a four percent first quarter. And now it feels like we'd be lucky to hit two. What happened?
CHARLES PLOSSER: Well, I think the first quarters will be weaker than a lot of people sort of thought it was. My forecast had been for about three. But I still think that three and a half percent is not out of the range of possibly over the course of the year. So-- yeah, there's been some weakness. But I still think the fun-- the underlying fundamentals of the economy, it's been-- the basis of this sort of gradual recovery is still kind of in place. We've just got some-- I think short term weakness, but I think the fundamentals are still there.
STEVE LIESMAN: What's the source of the short term weakness?
CHARLES PLOSSER: Well, we certainly had a bad winter, in terms of January. And we know that affected the numbers. We had uncertainty about Japan and the Middle East and the consequences for oil prices and so forth. And how the turmoil and the tragedy in Japan affects supply change.
And so, I think a lot of that will work itself out, it'll take some time. But I think those are the major reasons why there's a little less confidence and a little less certainty about what's going to happen in this first quarter.
STEVE LIESMAN: Do you think higher oil prices are already hitting the economy?
CHARLES PLOSSER: Well, I think they are somewhat, surely. Individuals and companies are having to pay more for oil and gasoline. They do hit the economy. But-- again, I think that we're-- haven't yet gotten to where we were in 2008. And so I think there's some reasons to be optimistic that there-- they won't dramatically affect the economy.
STEVE LIESMAN: I was talking about both sides of the ledger hree. On the one hand, we've seen the unemployment rate come down almost a full percentage point. Is that for real? Or do you think that that's an artifact essentially of the decline in the participation rate?
CHARLES PLOSSER: Well, I think it's obviously some of both. I actually think it's more important for us to focus on employment rather than unemployment. Unemployment-- is a number that's a ratio of two numbers, and that's so it can change whether the numerator changes or the denominator changes.
STEVE LIESMAN: Thanks for that, professor.
CHARLES PLOSSER: And so, I think that-- it's important for the fed, and other-- and we talk about the state of the economy, what I really look at is employment. And I think the last two mo-- months, we've had some pretty good numbers on the employment front. Both claims have continued to go down, and on a sort of-- on an average trending basis.
I'm still pretty encouraged about the labor market, and indeed, I think that's a good reason to sort of have some continuing confidence that maybe we've got a little soft patch this first quarter, but the fundamentals are still in place.
STEVE LIESMAN: In about 21 minutes-- almost 20 minutes, we're going to get the CPI data. Yesterday, the PPI was-- the headline was high.
CHARLES PLOSSER: Right.
STEVE LIESMAN: The core was even a little bit higher than people expected, at 0.3 percent. Are you beginning to get worried about inflation?
CHARLES PLOSSER: Well, I think inflation is not imminent. Serious inflation's not imminent. I've argued for some time that I think the fear of inflation, or the concern I have average inflation is not right now, but a yearand a half down the road. And-- so, are these precursors to some of that? Maybe. I don't think we know.
Clearly, there's a lot of turmoil, particularly commodity in oil markets that are-- contributing to the high rise of an-- an inflation. But we're also in a period of a very accommodated monetary policy. And-- I think one of the dangers that in a period where you already have very accommodating monetary policy, the ability of the sort of relative price shocks that come to oil, commodities and other things, to the extent they begin to pass through, which might begin to suggest that the inflation or accommodating policy is permitting that to happen, and that could lead to inflation.
STEVE LIESMAN: Is the fed, do you think at this point, behind the curve in heading off at the path of the inflation that you think could happen a year or more down the road.
CHARLES PLOSSER: I don't think we're behind the curve yet. I think that there are lots of things-- both in terms of expectations, in terms of the economy-- that bear watching very carefully. And so I don't think we're behind the curve yet, and I want to make sure that we don't get behind the curve. Because as people say, we like expectations to be anchored, but they're anchored until they're not. And then it's too late.
STEVE LIESMAN: One of your colleagues, and I think-- one of your colleagues on the same sort of spectrum that you're on relative to the hawks or the doves and Jeff Lacker has said it would be right to maybe expect an interest rate increase or asset sales this year. Is--
CHARLES PLOSSER: Well--
STEVE LIESMAN:--that in the cards for you?
CHARLES PLOSSER: Well certainly it's in the cards, but it's going to depend on how the economy plays out. There are a lot of concerns about the weakness-- we talked about the weakness in the first quarter, will that continue on or not? My forecast is that it won't continue, that the economy will turn to our-- this modest recovery that we've been having in the second and third quarters and the rest of the year.
That forecast turns out to be the right forecast, and then it's certainly not inconceivable to me that we would have to begin to take our foot off the accelerator before the end of the year. However, if the current weakness shows up and continues, there might be a different scenario there.
STEVE LIESMAN: Would you say there's no chance right now of there being a third quantitative easing round?
CHARLES PLOSSER: Not unless something very dramatic in my-- mind happen to the economy.
STEVE LIESMAN: How do you, as a Federal Reserve president, view the budget battle going on in Washington? How does that factor into your economic forecasting, how much concern do you have that the debt ceiling will not be raised?
CHARLES PLOSSER: Well, I think that this country faces a fairly serious fiscal policy problem. Making fiscal policy sustainable and viable is important. The chairman has indicated numerous times that we need a long range plan for fiscal policy. We need a way for us to-- commit in some form to being able to have a sustainable fiscal policy.
We're a long way from having accomplished that yet. And-- we seem to be tied up in short-run battles over the debt ceiling or what-- what are the cuts that are going to occur this year. And the real problem is the some more longer-term commitment we need to make. So, I think we will have to raise the debt ceiling, but it will be-- a political discussion, in just sort of who gets what in exchange for that. And so hopefully we can get beyond that, and begin focusing on the longer term.
STEVE LIESMAN: Speaking of longer term commitments, you've been the first with the most when it comes to the concept of the fed laying out an exit strategy. And you have-- a really detailed plan, and I want to just show some people one of the-- some of the things that are out. You can sort of see it in the monitor there when it pops up, there's one.
So this is the sort of idea that you have. Raise rates, sell assets along with it, tie the pace and of sales to rate--. Talk about this last idea, which I heard you say a couple weeks ago, get out as fast as you got in. Why should the pace of asset sales equal the pace of asset purchases?
CHARLES PLOSSER: Well, there's no particular reason why it has to. I think the judgment there is, how do we judge the impact on the markets of the pace of sales. And we do know that as the-- as the-- the fed went in, and we bought assets, particularly in this last round of-- of-- asset purchases for treasuries-- we did not disrupt the function in the markets very much.
And then there's a huge debate as sort of what the-- how many basis points of long term rates we're affecting. But so as a starting point, it seems to me, and obviously a place to start is say, "Okay, well here's the pace that we bought them, let's try to sell them at about the same pace, it couldn't be any more disruptive going out than it was going in."
STEVE LIESMAN: I would like you to-- President Plosser, to weigh in on the debate we have every morning on Squawk Box, which is the use of the headline index versus the core index. Where do you stand on that issue? What's the right way to look at inflation on a short-term, medium-term, or long-term basis?
CHARLES PLOSSER: Well, over a long term basis, the-- it's all in the headline for that. In the medium to long. Only headlines--. Because ultimately, the idea of controlling inflation is to control-- the price of all goods and services in the economy, not just some of them. So, it's only headlines that matters.
The only usefulness that core might provide is if core is a good predictor of the longer term headline. And there are plenty of debates about that, depending on which measure, whether you use the PCE or the CPI, in some cases the core is a pretty good prediction, other cases it may not be. So-- core is just a useful guideline. It is not-- it is not the objective. It is not the objective. And it shouldn't be the objective.
STEVE LIESMAN: Professor Plosser, thank you for joining us, and thank you, you've agreed to stay, and we're going do a little bit more, and we're going bring you somewhere in an hour or two on tape.
STEVE LIESMAN: Do you think that Federal Reserve policy has been responsible for high oil and commodity prices?
CHARLES PLOSSER: It's a very tough question. I think clearly, particularly ha-- in oil and commodities, we do see global demands growing. And we have seen concerns about supply shrinking. That should help-- that should be higher prices. But what we don't really know for sure is whether or not the anticipation that accommodated monetary policy is somehow making that more possible to tolerate that.
That's why the worry is that it begins to pass through the core, then that's a sign that in fact, it's monetary policy that's the-- What high oil prices don't cause inflation cause is inflation. The cause of inflation is monetary policy at the end of the day. So we have to be careful not to let those higher prices get translated--
CHARLES PLOSSER: --into more broad base higher inflation.
STEVE LIESMAN: Do you think that the Federal Reserve policy should be used to address high commodity prices?
CHARLES PLOSSER: No. Be more-- we shouldn't be addressing higher oil prices, wheat prices, automobile prices. We shouldn't be targeting relative prices of any commodity or asset for that matter. That indeed, we should be looking at the overall inflation. Now, those changes in relative prices may help us predict overall inflation at some point. But, it's not that we should be trying to control any set of oil prices. That would be a very big mistake.
STEVE LIESMAN: You have a vote on the FOFC this year. You haven't used it, though, to oppose the set-- the quantitative easing program. How come?
CHARLES PLOSSER: Well, my view is, it's no secret, I was not a big fan of the program. I didn't think it was necessary. I thought last summer and fall-- late spring and summer were sort of a soft patch. But I do think that to me, credibility of the institution is very important. And if the fed said it's going to do something, it should do it.
And I think that the reason to change policy is that there's a change in the outlook or a change in the economy that warrants a change in policy. So my view was, that once we decided to do it, we needed to follow through with that, unless there was a good reason to change it. I don't think that policy, whether it be monetary policy or anything else ought to be-- bouncing around and changing every meeting or so. Should-- we shouldn't be day traders, as I say, right?
And so we need to keep focused on the longer term. And so date, there's nothing been substantially changed about the economy from last fall, in my mind, to warrant motivating a change in policy at this point. We will reach another, you know, decision point here, and soon. But we're not there yet.
STEVE LIESMAN: Do you think it's possible to have an inflation problem without having a wage price spiral? Do those go together in your mind?
CHARLES PLOSSER: Well, a wage price spiral depends on whether-- what's the chicken or the egg here, right? A lot of the empirical data about inflation and wages-- there's a whole history of empirical work that says actually, inflation leads wage prices, wage inflation. So-- I think it's a mistake to think about it in terms of-- wages have to rise before you get inflation. It can-- it can occur the other way around.
STEVE LIESMAN: Charlie, I just want to give you an opportunity, is there anything else you want to add? We had a pretty long discussion, and a pretty good discussion. Is there anything else that you didn't-- or I didn't cover--
CHARLES PLOSSER: Well, I think one of the interesting things we talked a little bit about the exit strategy earlier. I do think it's terribly important that we have a plan. To get out from under this extraordinary-- degree of accommodation and our balance sheet, we need a plan to exit and get to a more normalized operating arrangement for monetary policy.
And I think having a plan that tells and communicates to the market something about how we propose to do that, and communicate as much as we can about that plan, rather than just saying, "Trust us," it's better to have the plan and articulate it. Both in the name of communication, and in the name of transparency. And it's not only about raising rates, selling assets.
I also think that one of the things that could help us during this transition out of this economy policy, is reassert our commitment to inflation target in a public way. What that will do is to help anchor those expectations, communicate to the public that we're going to exit in a way that's not going to result in higher inflation.
When you put those two pieces together, it seems to me you've got a coherent way of approaching, transiting ourselves as the economy improves, back to a more normalized operation.
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