charles i plosser : a longer - term view of the us economy and monetary policy speech by mr charles i plosser, president and chief executive officer of the federal reserve bank of philadelphia, to the charlotte economics club, charlotte, north carolina, 3 december 2014. * * * the views expressed are my own and not necessarily those of the federal reserve system or the fomc. highlights • president charles plosser gives his views on the u. s. economy and discusses why it is important to take a longer - term view of economic data. • president plosser shares some thoughts about the stance of monetary policy and the advantages of raising rates gradually and starting sooner rather than being forced to raise them abruptly later. • president plosser also discusses how policy rules can offer useful guideposts for policymakers and the public in assessing and communicating the stance of monetary policy. introduction thank you for the invitation to be here today. the charlotte economics club has welcomed many leading federal reserve voices to this podium over the years, including a number of my fellow fed presidents. you have heard from president jeff lacker of the richmond fed, which has its charlotte branch over on east trade street, as well as presidents richard fisher of dallas and dennis lockhart of atlanta. so i am pleased to have been included among your distinguished guests. on november 16, the federal reserve observed the 100th anniversary of the opening of all 12 federal reserve banks around the country on the same day. these institutions along with the board of governors in washington, d. c., comprise our nation ’ s decentralized central bank. this decentralized structure is one of the system ’ s great strengths. not only does it promote a diversity of views, but it also helps to build public trust and preserve independence. however, it requires that i begin by reminding you that the views i express today are my own and do not necessarily reflect those of the federal reserve system or my colleagues on the federal open market committee ( fomc ). your program chair, professor rob roy mcgregor, has spent a great deal of his academic career studying the workings of the fomc – including the use of power by the chair and the nature of consensus building and dissent within the committee. interestingly, some of this work has been coauthored with a former colleague of mine at the philadelphia fed, todd vermilyea, who now works at the board of governors. today, i plan to talk about the importance

actions. because policymakers do not know with certainty how economic conditions will evolve, they cannot say with certainty what policy will be in the future. but policymakers can provide information on what factors will influence their policy decisions. i have long argued for more rule - like or systematic policymaking. this means making policy decisions using available economic information in a consistent and predictable manner. we don ’ t know what the future holds, but we can be more systematic about how we use economic data in formulating our policy. currently, the fomc looks at a variety of information in formulating policy, including several different versions of monetary rules. we are some ways from choosing one rule or reaction function as a guide for policy. yet, research has found that some simple rules perform fairly well in a variety of models. these rules involve policy responding aggressively to deviations of inflation from its target and also responding to deviations of output from some concept of potential. in addition, the rules tend to involve some smoothing of the policy rate over time rather than sharp jumps in rates. the practice of looking at a variety of rules or reaction functions and what they tell us about appropriate policy imposes an important discipline on policymaking. we made some progress in november 2009 when the committee indicated in its statement that we were conditioning policy decisions on measures of inflation, inflation expectations, and resource utilization. this was a good first step, but we should go further. in addition to describing the set of conditioning variables that we consider as we formulate policy, we should communicate our policy decisions in terms of the changes in these important conditioning variables. if the fed chooses a consistent set of variables and sticks to them, the public would better understand our reaction function and thus have a greater ability to form judgments about the likely course of policy. this approach would reduce uncertainty about policy actions and promote stability. what not to do i have spent some time discussing how i would strengthen our monetary policy framework by completing our move to flexible inflation targeting. this would include an explicit numerical objective for inflation. given the current state of the economy, there has been some recent public discussion of the perceived benefit of having the fed aim for an inflation rate higher than 2 percent. some have argued that since the unemployment rate is higher than anyone would like and since the federal funds rate is stuck at the zero bound, we should target higher inflation as a means to reduce unemployment. others have suggested that higher inflation could inflate away the debt overhang problem. sometimes these