charles i plosser : the economic outlook speech by mr charles i plosser, president and chief executive officer of the federal reserve bank of philadelphia, at the pennsylvania association of community bankers ’ 137th annual convention, amelia island, florida, 6 september 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 economy and shares some thoughts about the stance of monetary policy. • president plosser believes that forward guidance should be adjusted to reflect economic realities and to give the fomc the flexibility to respond gradually to the evolution of the economy. • president plosser counters the view that rates cannot be raised because the labor market has not “ completely ” healed. he discusses two major risks with this strategy. first, economists do not know what maximum employment is and cannot easily measure it. second, waiting until we are completely confident the labor market has fully recovered risks that monetary policy will be behind the curve and could lead to a return to abrupt “ go - stop ” policies of the past that led to unwelcome volatility. • while he is not suggesting that rates should necessarily be increased now, president plosser sees that the first task is to change the language and to begin signaling that liftoff may occur sooner than many now anticipate and sooner than suggested by the current fomc guidance. introduction good morning. thank you for the opportunity to speak at this 137th annual convention of the pennsylvania association of community bankers. community banks have a long and venerable history in our nation, and the 137 years of the pacb is a powerful testament to your roots as stalwarts in our financial system. i would note that the longevity of this convention means that your organization significantly predates the federal reserve system, which is observing its centennial this year. my suspicion is that there are a number of community bankers here today who can trace their corporate histories to firms that petitioned for the establishment of a federal reserve bank in philadelphia 100 years ago. i actually have two letters here. one from the new tripoli national bank dated december 27, 1913, and one from the first national bank of mifflintown dated december 26, 1913, both addressed to william mcadoo, secretary of the treasury, requesting the establishment of a federal reserve bank in the city of philadelphia. over the years, community banking organizations, whether they are state member banks or

credit facilities to support particular asset classes, such as commercial paper and asset - backed securities, and in november 2008, the fed announced it would begin purchasing housing agency mortgage - backed securities and agency debt to increase the availability and reduce the cost of credit in the housing sector. these types of credit programs target particular market sectors and thereby alter the allocation of credit across markets, reducing funding costs for some sectors and likely raising costs for others. these programs departed from the usual way the fed implements monetary policy through buying and selling u. s. treasury securities, an activity that is generally neutral across markets. when the fed engages in targeted credit programs that seek to change the allocation of credit across markets, i believe it is engaging in fiscal policy. instead of the central bank engaging in this credit policy, the federal government could carry out these transactions by issuing treasury debt to support lending to the targeted markets or firms. in fact, the fiscal authorities frequently undertake such actions – think of “ green energy ” loans, small business loans, and subsidized home mortgages. such credit allocation decisions belong with the fiscal authorities, not the central bank. even the recent maturity extension program, or “ operation twist ” as it is sometimes called, involves selling short - term treasuries and buying longer - term treasuries – an action that could just as well have been conducted by the u. s. treasury. thomas sargent and neil wallace, “ some unpleasant monetarist arithmetic ”, federal reserve bank of minneapolis quarterly review, 5 ( fall 1981 ), pp. 1 – 17. bis central bankers ’ speeches once a central bank ventures into conducting fiscal policy, it may find itself under increasing pressure from the private sector, financial markets, or the government to use its balance sheet to substitute for other fiscal decisions. this pressure can threaten the central bank ’ s independence in conducting monetary policy and thereby undermine monetary policy ’ s effectiveness in achieving price stability. i have long argued for a bright line between monetary policy and fiscal policy, for the independence of the central bank, and for the central bank to have clear and transparent objectives. decisions to grant subsidies to particular market segments should rest with the fiscal authorities – in the u. s., this means the congress and the treasury department – and not with the central bank. should the fiscal authority ask the central bank to engage in lending outside of its normal operations, the fiscal authority should be willing to exchange government securities for the nongovernment assets that would accumulate on