MNI INTERVIEW: Plosser Says Fed Policy Echoes The 60s and 70s

Federal Reserve policy and the U.S. political backdrop offer eerie reminders of the period before and during the Great Inflation of the 1970s, former Philadelphia Fed President Charles Plosser told MNI.

"Today Fed policy sounds a lot like it did in the 60s and 70s -- all we have to do is keep monetary policy easy and accept a little inflation and we'll march down the road to lower unemployment," Plosser said in an interview. "For them to argue the outcome will be different -- well prove it to me, show me the evidence."

Congress has pushed trillions of dollars of stimulus money into an economy hit by the Covid pandemic supported by Republicans and Democrats alike, sparking inflation worries among current and former Fed officials and staffers. The Fed also updated its policy framework committing the central bank to aim for a modest overshoot of the 2% inflation target and defining full employment more broadly.

"It's not just policy but the political environment of the late 60s and early 70s sounds a lot like today -- the massive fiscal policy of the war in Vietnam and the Great Society, the focus on the importance of unemployment," said Plosser.

Fed descriptions of inflation as transitory also echo speeches in the late 1960s and early 1970s that dismissed price pressures as largely outside the central bank's control, said Plosser, who received his MBA and PhD from the University of Chicago in the 1970s.

ROCKY TIME COMING

"That sounds exactly, in different words" like that past era, Plosser said. "They're going to create inflation and march up the Phillips curve and lower unemployment, and more inclusive employment."

Plosser fears the Fed's approach of discussing how to make up for inflation undershoots but not how it might grapple with overshoots means less clarity for markets on the central bank's reaction function.

"There's no way they can achieve an average of 2% if they only offset undershoots," he said. "Their commitment to not preemptively act on inflation but to react for actual inflation was a recipe for guaranteeing that they were behind the curve no matter what."

Such worries came into fresh focus after recent inflation data came in stronger than expected, with the consumer price index climbing 4.2% in the year to April while the Fed's preferred PCE measure climbed 3.6%. Plosser says while some of those gains are transitory, others are likely more persistent.

"We're in for a rocky time," he said. "If this inflation continues for a few more months, maybe not as hot as last month but in the 3%-4% range, the Fed is gradually going to begin to back off. And when they do the political pushback is going to start. So they're running a very interesting experiment."