charles i plosser : economic outlook speech by mr charles i plosser, president and chief executive officer of the federal reserve bank of philadelphia, to the rotary club of wilmington, wilmington, delaware, 29 march 2012. * * * the views expressed today are my own and not necessarily those of the federal reserve system or the fomc. introduction thank you for inviting me to speak to the rotary club of wilmington. in planning for today, i learned that wilmington ’ s business and community leaders have been gathering under your auspices at this location since 1914, longer than any other rotary club in the world. from one organization that is almost a century old to another, that is quite an achievement. since the federal reserve is nearing its centennial in december 2013, i thought i would give you a little background on our nation ’ s central bank before i talk about my economic outlook. while many americans hear about the fed in the news every day, not everyone knows how we work or how we are structured. congress created the federal reserve system in 1913. to balance political, economic, and geographic interests, the system was designed with 12 independently chartered regional reserve banks throughout the country, overseen by a board of governors in washington, d. c. the federal reserve bank of philadelphia serves the third district, which includes delaware, the southern half of new jersey, and the eastern two - thirds of pennsylvania. the reserve banks distribute currency, act as a banker ’ s bank, and generally perform the functions of a central bank, including serving as the federal government ’ s fiscal agent. a central bank also guides the country ’ s monetary policy. in the u. s., the body within the federal reserve that makes monetary policy decisions is the federal open market committee, or the fomc. the committee includes the seven members of the board of governors in washington – there are currently two open posts – and five of the 12 reserve bank presidents : the president of the new york fed and four other presidents, who serve one - year terms on a rotating basis. this structure ensures that our national monetary policy has its roots not just in washington or on wall street, but also on main street and across our diverse nation. whether we vote or not, all reserve bank presidents attend the fomc meetings, participate in the discussions, and contribute to the committee ’ s assessment of the economy and policy options. each of us prepares for the meetings by gathering information throughout our districts, around the nation, and, in some

did decline somewhat, slowing price increases, but unfortunately, they have been rising again and crude oil prices are now over $ 100 a barrel and gasoline prices are rising. oil prices have added a great deal of volatility to the overall price index. at times, sharp spikes in oil prices raise overall inflation, which is then reversed when those prices increases moderate. yet, since early 2009, when oil prices fell to about $ 60 a barrel, the trend has been upward. moreover, inflation rates that remove the effects of energy and food have been drifting upward as well from their lows of 1 percent or less in late 2010 to about 2 percent or a little higher today, depending on the particular index. thus, we must monitor these inflation trends with some care and be prepared to take appropriate actions as necessary. the public has the right to expect the central bank to keep inflation near its target of 2 percent over the medium to longer term. inflation often develops gradually, and if monetary policy waits too long to respond, it can be very costly to correct. measures of slack such as the unemployment rate are often thought to prevent inflation from rising. but the lessons of the 1970s show that is not the case. as you may recall, we ended up with both high unemployment and high inflation, which became known as the misery index. that is not a place we want to find ourselves again. bis central bankers ’ speeches monetary policy before discussing where monetary policy might go in relation to economic conditions, it might be helpful to review just how much accommodation we currently have in place. as you know, the fed has kept the federal funds rate near zero for more than three years to support the recovery. we have also conducted two rounds of asset purchases that have more than tripled the size of the fed ’ s balance sheet and changed its composition from short - term treasuries to longer - term treasuries and housing - related securities, mostly mortgagebacked securities. many of these actions were taken at the height of the financial crisis and the ensuing deep recession. yet, since then, as i have indicated, the economy has been healing, if somewhat more slowly than we would like, and the financial crisis has substantially abated. of course, problems remain, but things are not nearly as bad or as gloomy as they were in 2009 and early 2010. at its latest meeting in march, the federal open market committee continued to hold to its statement that economic conditions were “ likely to warrant exceptionally low