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Philadelphia Fed President Plosser Gives Statement on Dissenting Vote at the
Federal Open Market Committee meeting of July 29–30, 2014
The economy has improved significantly this year, and inflation and unemployment have moved much closer to the FOMC's longer-term goals. However, neither the pace of the reduction in asset purchases nor its end date has been modified, nor has the time-dependent language associated with the projected liftoff of the federal funds rate been adjusted. Thus, I cast a dissenting vote because I opposed retaining the statement language that reads "…it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends." I viewed such language as an inappropriate characterization of the future path of policy and so may limit the Committee's flexibility going forward.
In December 2013, the FOMC began to taper its asset purchase program, indicating that it was not on a preset course, but that the pace depended on the performance of the economy. The Committee also indicated it was likely that it would be appropriate to maintain the current range of the federal funds rate well past the time that the unemployment rate declines below 6.5 percent. At the time this decision was made, the unemployment rate was 7.0 percent, and year-over-year PCE inflation was 1.0 percent. With the recovery appearing somewhat unsteady and with the possibility of inflation falling further, caution and patience seemed prudent.
My own assessment at that time was that the economy would gradually recover. I projected that by the fourth quarter of 2014 the unemployment rate would decline to 6.2 percent, and year-over-year PCE inflation would rise to 1.8 percent. Consistent with that view of gradual economic recovery, I believed that an appropriate monetary policy would require the funds rate to rise to 1.25 percent by year-end 2014. Moreover, I anticipated continued progress toward economic health in 2015, with the unemployment rate reaching 5.8 percent and inflation running at 2.0 percent. Consistent with these outcomes, my associated funds rate was in the neighborhood of 3.25 percent at the end of 2015.
My views on the appropriate funds rate settings were — and continue to be — informed by Taylor-type monetary policy rules that depict the past behavior of monetary policy, which I find useful for benchmarking my policy prescriptions. With the economy having already reached my year-end 2014 forecast for inflation and unemployment, and appearing to be well on its way toward achieving my 2015 forecasts approximately a year ahead of schedule, the funds rate setting remains well behind what I consider to be appropriate given our goals.
In addition, the economy today is very close to achieving the central tendency outcomes for 2015 reported in the December 2013 Summary of Economic Projections. Specifically, the central tendency projection for unemployment at the end of 2015 was 5.8 to 6.1 percent, and that for inflation was between 1.5 and 2.0 percent. From this perspective, we are nearly 18 months ahead of where the Committee thought we would be just seven months ago. Consistent with these projections for 2015, 14 of 17 participants indicated that the federal funds rate should be above zero, with a median value of 75 basis points. Yet the Committee's statement does not appear to reflect what was once thought to be appropriate policy based on the behavior of unemployment and inflation.
Thus, given the clear progress we have made toward achieving our long-term goals over the past year, and the progress and momentum that appears to be building in the economy and in the broader labor market, I no longer believe that the forward guidance language in the statement is appropriate or warranted.