Smith Faculty Opinion Article
The 30 Seconds Outlook
January 15, 2012
The Federal Reserve is a large political bureaucracy and, as such, it is not
often one reads analysis that deserves to be shared:
Charles I. Plosser, President and Chief Executive Officer, Federal Reserve Bank
of Philadelphia
33rd Annual Economic Seminar, January 11, 2012, Rochester, New York
“As growth continues and strengthens, I expect further modest declines in the
unemployment rate to around 8 percent or, in my more optimistic moments, maybe a
little less, by the end of 2012.
Just as growth has been weaker than many forecasters had anticipated, inflation
has been higher than many expected in 2011. When we last met a year ago, many were
concerned about the risks of a sustained deflation. I was not among them. Instead,
I thought we would see inflation at about 2 percent for the year.
It turns out we were all wrong. Total inflation, as measured by the CPI on a
year-over-year basis, is nearly 3-1/2 percent, reflecting strong increases in energy
and food prices in the past year. Core inflation, which excludes more volatile food
and energy prices, is running at about 2.2 percent. I do anticipate that with many
commodity prices now leveling off or falling, and inflation expectations relatively
stable, inflation will moderate in the near term. Indeed, total inflation has moderated
over the past several months.
But as a policymaker, my focus is less on the near term and
more on the medium term. Looking further ahead, I believe we must monitor the
inflation situation very carefully, particularly in this environment of very
accommodative monetary policy. Inflation most 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 that did not turn out to be true in the 1970s. Thus,
we need to proceed with caution as to the degree of monetary accommodation we
supply to the economy.”
John A. Haslem
