Plosser - a Realist, no Wonder he is not Fed Chief

Charles Plosser is one of the two Fed President's who has been dissenting the past 2 meetings on more rate cuts, fearing inflation. Gold stars on that point alone. Also he is extremely realistic about the issue of moral hazard (i.e. telling banks, no matter what stupidity you do, we will be here to help you out because you are too important to fail - so please go be stupid again in the future - we'll bail you out). Excellent interview this morning on CNBC, the first part (6 minutes) of which I was able to embed below and the second part (if interested) you can view here. Unfortunately, guys higher up the ladder like vice-chairman Donald Kohn feel its ok with him to allow inflation to rage for a while so as to pump up growth. That was the bedrock of thinking in the early to mid 70s too - didn't work out so well.

Now we do have to roll around and giggle at much of this - the market is getting so excited by Uncle Ben's "fight" against inflation. By "fight" it means "using strong language".... I never knew "words" could change economic cycles, but according to the traders of Wall Street, all the gods on Mount Olympus must do is utter language that inflation is a problem and *poof* said inflation is struck by a lightning bolt. So let's not get all excited until we see at least a minor bit of action, eh? Or how about a 1 point rate hike, right back to 3%ish? Then I'd actually think Uncle Ben is a bit serious. Until then we can listen hopefully to the Plossers and Lackers [Jun 5: Jeffrey Lacker - my New Favorite Federal Reserve Governor] of the world, and twiddle our thumbs waiting for this "war on inflation" (that does not exist of course) to begin. I still just cannot fathom anything other than a potentially "symbolic" 25 point rate hike before the elections; and even that is iffy. Now again, these guys are in a box - as we discussed in the fall (and it's coming true) by cutting rates they are going to stoke inflation; inflation which in many parts has more to do with a World of Shortages rather than traditional reasons. So short of pushing the world into a recession its going to be a tough beast to tame, this inflation...

And let's not forget tomorrow morning when the flock of lemmings will overreact one way or the other to a meaningless government report (CPI)... if its a "good number" everything being feared the past few weeks will be tossed out the window because of 1 number. And that folks, is the epitome of Wall Street. Pure logic at its best.

• The Federal Reserve's leading inflation hawk told CNBC that interest rates will have to rise soon in order to keep a lid on rising prices. "It is certainly clear that rates will have to rise. The question is when."
• Kohn said that when the economy is hit with an oil price shock as it has been this year, the "appropriate" Fed policy will permit -- temporarily -- both higher inflation and higher unemployment. (send this guy back to 1973 please)
• The Fed is hoping tough talk on inflation will do the job of moderating recent price increases, giving it room to avoid raising interest rates as the economy remains fragile. (isn't that an amazing theory - if we use big bad words, inflation will be defeated... economic cycles will be broken... etc etc - and these are our financial leaders)
• Plosser said the Fed has taken aggressive steps to counter both problems, but he urged continued vigilance, saying the base of inflation is broadening, and the Fed is in a unique position to act.
• Plosser feels the Fed mishandled inflation in the 1970s by acting too late, allowing a relative price shock in oil to translate into higher inflation.
• He also expressed reservations about government efforts to stimulate the economy through tax-rebate checks.