CNBC TRANSCRIPT: PHILADELPHIA FEDERAL RESERVE PRESIDENT CHARLES PLOSSER SITS DOWN WITH STEVE LIESMAN TODAY ON CNBC

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STEVE LIESMAN: THANK YOU VERY MUCH, I’M HERE WITH FEDERAL RESERVE BANK OF PHILADELPHIA PRESIDENT CHARLES PLOSSER, THANK YOU FOR JOINING US.

 

CHARLES PLOSSER: GREAT TO BE HERE. LAST TIME I WAS HERE WITH YOU IT WAS DARK OUT AND ALL WE SAW WERE STARS LAST YEAR.

 

LIESMAN: ARE YOU SAYING YOU BROUGHT THE SUNSHINE?

 

PLOSSER: EXACTLY

 

LIESMAN: LET’S TALK ABOUT, I THINK THE BIG QUESTION ON INVESTOR’S MINDS RIGHT NOW, WHICH IS QUANTITATIVE EASING. DO YOU THINK IT’S NEEDED AND CAN HELP THE ECONOMY HERE?

 

PLOSSER: WELL, I THINK LIKE A LOT OF POLICY IT IS A COST BENEFIT ANALYSIS. IN MY CURRENT ASSESSMENT IN BOTH OF THE ECONOMY AND OF THE EFFECTIVENESS OF QE IS THAT I DON’T THINK IT REALLY BEATS THE COST BENEFIT TEST RIGHT NOW.

 

LIESMAN: LET’S TALK ABOUT SOME OF THE COSTS OUT THERE. LET’S GO TO THE BENEFITS, DO YOU THINK ADDITIONAL QUANTITATIVE EASING COULD BRING DOWN INTEREST RATES FROM HERE AND HELP ECONOMIC GROWTH?

 

PLOSSER: WELL I THINK IT IS POSSIBLE THAT THEY COULD BRING DOWN INTEREST RATES SOMEWHAT BUT WE HAVE TO REMEMBER, IT’S NOT THAT SIMPLE IN TERMS OF THE CHALLENGES AND HEADWINDS THE ECONOMY FACES. KIND OF THE LIKE THE HEADWINDS WE FACE THIS AFTERNOON. AND IT’S IMPORTANT THAT WE NOT TALK ABOUT STRUCTURAL VERSIONS CYCLICAL, OR SUPPLY VERSES DEMAND. IT IS UNDERSTANDING WHAT IS GOING ON IN THE ECONOMY AND I LIKE TO DIVIDE IT UP INTO TWO PIECES. THERE’S THE CONSUMER AND BUSINESSES. ON THE CONSUMER SIDE, WE FACED A HUGE AMOUNT OF LOSS OF WEALTH ON THE CONSUMER SIDE WITH THE LOSS OF HOUSING. THE REACTION TO THAT, OF COURSE, AS CONSUMERS— THE NATURAL REACTION IS TO SAVE MORE. THEY WANT TO SAVE MORE, THEY WANT TO RESTORE THE HEALTH OF THEIR BALANCE SHEETS AND RESTORE THEIR ABILITY TO SPEND IN SMOOTH CONSUMPTION OVERTIME. THAT’S A NATURAL AND ACTUALLY A HEALTH REACTION. ON THE OTHER HAND, WHAT POLICY IS TRYING TO PUSH DOWN RATES SO THAT THE CONSUMER DOESN’T SAVE. THEY, IN FACT, WANT THEM TO SPEND, TO MOVE SPENDING FROM THE FUTURE TO THE PRESENT. THAT’S HOW KIND OF MONETARY POLICY IS SUPPOSED TO SMOOTH THINGS. THE PROBLEM IS THE CONSUMERS SAY WE DON’T WANT TO SPEND. SO LOWERING INTEREST RATES AS MUCH AS WE HAVE OVER THE COURSE OF THIS RECESSION, THE CONSUMERS ARE STILL TRYING TO SAVE AND WITH LOW INTEREST RATES IT MEANS THEY HAVE TO SAVE EVEN MORE—

 

LIESMAN: YOU HAVE A RELUCTANT AGENT OF MONETARY POLICY—

 

PLOSSER: EXACTLY

 

LIESMAN: SO TO SPEAK, AND THAT WOULD BE THE POTENTIAL BENEFIT IF THEY WERE TO BRING THAT SPENDING FORWARD SO YOU DON’T GET A WHOLE LOT OF BENEFIT IN THE WAY YOU LOOK AT THE

 

WORLD, WHAT ARE THE COSTS?

 

PLOSSER: I WANT TO GO ONE MORE STEP WITH THE BUSINESS SIDE, THE INVESTMENT. BECAUSE THE OTHER HEADWIND IS NOT THAT CONSUMERS WHAT TO SAVE, BUT THAT BUSINESSES DON’T WANT TO SPEND – DON’T WANT TO INVEST. WHY? HUGE AMOUNTS OF UNCERTAINTY. TAX POLICY, THE PATH OF THE ECONOMY, THE SO CALLED FISCAL CLIFF, ELECTIONS, REGULATIONS, ALL OF THAT IS INHIBITING BUSINESSES FROM SPENDING. SO THE CONSUMER WANTS TO SAVE, DOESN’T WANT TO SPEND, BUSINESSES DON’T WANT TO INVEST BECAUSE THEY’RE FACING UNCERTAINTY, AND BOTH OF THOSE HEADWINDS ARE NOT SOMETHING THAT MONETARY POLICY CAN FIX.

 

LIESMAN: ARE YOU CONTENT THEN TO LET THINGS TAKE THEIR COURSE? WOULDN’T THAT MEAN POTENTIALLY A DEEPER RECESSION, ANOTHER RECESSION?

 

PLOSSER: NOT NECESSARILY, I THINK THINGS DO HAVE TO TAKE THEIR COURSE. I THINK THE ADJUSTMENTS THAT CONSUMERS HAVE TO FACE, I THINK DELEVERAGING IS DIFFERENT FROM SOME OTHER PREVIOUS RECESSIONS, THE AMOUNT THAT HAS TO BE DONE, AND THAT HAS TO RUN IT’S COURSE. WE CAN’T– MONETARY POLICY DOES NOT CREATE WEALTH. IT DOESN’T CREATE WEALTH.

 

ALL WE CAN DO IS BEST TRY TO REARRANGE IT A LITTLE BIT, AND EVEN THAT’S HARD TO DO, AND IN THE CIRCUMSTANCES WE ARE FACING NOW IT IS PARTICULARLY DIFFICULT FOR MONETARY POLICY.

 

LIESMAN: SO TALK ABOUT THE COSTS.

 

PLOSSER: THE COSTS ARE IN THE FUTURE, THE COSTS ARE RISKS. MONETARY POLICY TODAY IS AN AT EXTRAORDINARY LEVEL OF ACCOMMODATION, NEVER BEFORE SEEN IN HISTORY. THERE ARE UNINTENDED CONSEQUENCES THAT WE LIKE TO HAVE TO FACE, THERE IS THE RISK OF WHEN ALL OF THE EXCESS RESERVES BEGIN TO FLOW OUT, THAT’S WHEN THE RISK OF INFLATION WILL MATERIALIZE. THE RISK IS THERE BUT THAT’S WHEN IT WILL LIKELY OCCUR. WE DON’T KNOW HOW QUICKLY WE’LL HAVE TO REVERSE COURSE, BUT THE CONSEQUENCES OF THAT IN ITSELF MAY BRING ON A RECESSION AS WE TRY TO TIGHTEN—

 

LIESMAN: LET’S TALK ABOUT INFLATION. I MEAN, PEOPLE HAVE BEEN WORRIED ABOUT AND TALKING ABOUT CONCERNS OVER INFLATION SINCE THE FED INCREASED THE BALANCE SHEET. THEY HAVE NOT MATERIALIZED.

 

PLOSSER: OF COURSE NOT BECAUSE THEY WILL MATERIALIZE IN THE FUTURE.

 

LIESMAN: BUT WHEN, AND HOW DO YOU KNOW THEY’RE WORRIED ABOUT INFLATION ALL OF THE TIME. YOU COULD WALK DOWN THE STREET A PIANO COULD FALL ON YOUR HEAD BUT IT’S NOT A REASONABLE PREDICTION.

 

PLOSSER: THE PREDICTION COMES FROM THE MAGNITUDE OF THE BALANCE SHEET AND THE MAGNITUDE OF THE EXCESS RESERVES THAT ARE FLOATING AROUND THE SYSTEM. ONE AND A HALF TRILLION DOLLARS THAT HAS NOT BEEN CONVERTED INTO MONEY YET IT IS SITTING IN THE BANKING SYSTEM. WHEN THOSE EXCESS RESERVES BEGIN– I DON’T KNOW WHEN THEY WILL BEGIN, BUT WHEN THEY BEGIN TO FLOW OUT INTO THE ECONOMY THAT’S WHEN THE RISK OF INFLATION WILL BECOME EVEN MORE HEIGHTENED THAN IT IS NOW. SO RIGHT NOW IT IS JUST A RISK AND IF WE ARE GOING TO BALANCE COSTS AND BENEFITS WE ARE GOING TO HAVE TO TAKE INTO ACCOUNT THE RISKS WE ARE TAKING AND THE SIZE OF THE BALANCE SHEET IS A RISK BECAUSE WE HAVE NEVER BEEN IN THIS POSITION BEFORE.

 

LIESMAN: LET ME GET YOUR OVERALL TAKE ON THE ECONOMY. THERE WAS CONCERN ABOUT A SECOND RECESSION HERE. WE SEEM TO BE DOING 2% GROWTH, WHAT’S YOUR VIEW ON WHERE WE ARE RIGHT NOW?

 

PLOSSER: WELL, I THINK THAT’S ABOUT WHERE WE ARE AND I THINK A LOT OF IT IS THE HEADWINDS WE FACE, I THINK IT’S UNCERTAINTY, BUSINESSES UNWILLING TO SPEND, CONSUMERS UNWILLING TO SPEND. AND I THINK THAT UNTIL SOME OF THE UNCERTAINTY, WHETHER IT BE DO TO FISCAL POLICIES OR ELECTIONS, OR WHETHER IT BE DUE TO EUROPE THERE IS GOING TO BE RELUCTANCE AND THAT’S WILL RESTRAIN THE HEADWINDS. BUT MONETARY POLICY ISN’T GOING TO REMOVE THOSE HEADWINDS.

 

LIESMAN: DO YOU THINK THE FEDERAL RESERVE HAS BEEN DOING A CERTAIN AMOUNT OF EASING BECAUSE THE EUROPEAN CENTRAL BANK HAS NOT? WHICH IS ALL TO SAY, IF THE ECB DOES STEP FORWARD WITH AN AGGRESSIVE PLAN WOULD THAT TAKE SOME OF THE PRESSURE OFF OF THE FEDERAL RESERVE?

 

PLOSSER: I DON’T THINK WE ARE EASING OR OUR ACTIONS ARE TRYING TO DO SOMETHING BECAUSE THE ECB ARE NOT, THAT’S NOT THE RIGHT WAY TO THINK ABOUT MONETARY POLICY I DON’T BELIEVE. SO NO I DON’T THINK THAT’S REALLY THE CASE

 

LIESMAN: BUT ONE OF THOSE HEADWINDS THAT WE ARE FACING IS EUROPE, AND THOSE HEADWINDS ABATED THEN THERE WOULD BE LESS OF A—

 

PLOSSER: WELL IF THERE WAS A REDUCTION IN THE UNCERTAINTY. NOW WHETHER OR NOT THE ECB CAN REALLY RESOLVE THAT IS A SEPARATE QUESTION. I THINK THE ECB FACES SOME VERY DIFFICULT PROBLEMS. MONETARY POLICY ONCE AGAIN CAN’T RESOLVE THE FISCAL PROBLEMS THAT ARE INHERENT IN THE EU AT THIS POINT.

 

LIESMAN: WHAT WOULD YOU LIKE TO SEE THE FED DO FROM HERE? WOULD YOU LIKE TO SEE THE BALANCE SHEET BEGIN TO SHRINK NOW?

 

PLOSSER: I DON’T THINK THAT’S NECESSARY, BUT I DON’T SEE ANY POINT IN GROWING IT ANY FURTHER. WE’RE WORRIED NOT JUST ABOUT THE RISKS DOWN THE ROAD. IT’S LIKE WHEN WILL THE PIPER HAVE TO BE PAID AT SOME POINT. WE DON’T KNOW THE DISTORTIONS THAT WE’RE CREATING IN THE MARKET PLACE. SOME OF MY COLLEAGUES HAVE TALKED ABOUT BUILDING UP OF IMBALANCES, BECAUSE OF VERY LOW INTEREST RATES. YOU KNOW, THE FED AND POLICY MAKERS AND ECONOMIST ARE GENERALLY NOT VERY GOOD AT PREDICTING THE CONSEQUENCES OF THE TECH BUBBLE OR THE BOOM IN HOUSING AND ITS CONSEQUENCES. I THINK IT’S KIND OF NAIVE FOR US TO THINK THAT WE WILL UNDERSTAND ANY IMBALANCES THAT WE MAY BE CREATING SOON ENOUGH NOT TO HAVE CONSEQUENCES FOR THEM. SO I THINK AGAIN THAT’S A RISK, AND WE HAVE TO TAKE INTO ACCOUNT THE POLICY INCREASING ACCOMMODATION CREATES RISKS. AND WE NEED TO BALANCE THOSE.

 

LIESMAN: THANK YOU FOR JOINING US.

CNBC TRANSCRIPT: PHILADELPHIA FEDERAL RESERVE PRESIDENT CHARLES PLOSSER SITS DOWN WITH STEVE LIESMAN TODAY ON CNBC