District 3 - PHILADELPHIA

1. District 3 - PHILADELPHIA President – Charles I. Plosser Presented by Mallory Holden & Colette Dubicki

2. Charles I. Plosser INFLATION HAWK! BEWARE

3. State of the National Economy • Decreased consumer spending decreasing overall: • Retail Sales • Domestic Tourism • Service Industry • Increase in the input costs to produce goods: • Increasing prices of manufacturing and retail goods • Overall prices have increased • Causing moderate pressure to increase wages • Real estate markets continue to appear dim • Inventory of homes remains high • Financing is becoming harder to attain • New construction has slowed

4. State of District 3’s Economy • Manufacturers have experienced a steady rate of business • Several manufacturing industries • Others reported an increase • Retail sales continue to fall • Auto sales have also decreased • In the financial market: • Banks are limiting loans made for real estate projects • Credit quality has decreased • Outstanding loans have increased • Consumer lending has increased slightly • Residential real estate has shown some signs of increase in home sales • Inventory of houses on the market remains high • Commercial real estate has decreased • Prices have risen • The price of imports has gone up. • A reduction in expansion and business activity

5. Headline Inflation Increased by 0.6% Core Inflation Increased by 0.2% Inflation in the National Economy

6. The Job of the Fed • The Federal Reserve’s main responsibilities lie in providing our nation with price stability and promoting sustainable economic growth.   • “Indeed, ensuring price stability is one of the most important contributions a central bank can make toward promoting sustainable economic growth”. • This is done by changing interest rates.   • Remember: When you lower interest rates there is a higher demand to hold money which in turn leads to higher liquidity of money and higher inflation. 

7. The Job of the Fed • The economy cannot constantly be stimulated for growth since it has no long-term advantages. • It does not decrease unemployment nor increase output; it just leaves us with higher levels of inflation which hinders economic growth because: • The change in prices are hard to determine why – whether it’s for higher demand or just due to inflation • It creates uncertainties about future inflation which makes business reluctant to expand operations • Fixed values become distorted • It tends to redistribute wealth from lenders to borrowers

8. The Job of the Fed • More importantly, because everyone is combating their time, energy, and resources against inflation, more productive opportunities are missed. This is why price stability is so important and why we must fight the inflation that we are facing today.  • “The best way for central banks to foster sustainable economic growth and prevent instability is to keep inflation under control”. • We must not have the public lose confidence in the Fed as was the case in the 1970s otherwise it will be a downward spiral.

9. The Job of the Fed • Remember: Monetary policy works with a lag so we cannot depend on it to solve all of our problems. • The markets will have to solve their own problems which is going to take time, but the Fed can help by promoting financial stability.

10. What Should Be Done? • Raise the Federal Funds Rate 25 basis points From 2% to… 2.25% How much should we raise the Federal Funds Rate? How much should we raise the Federal Funds Rate? This much!

11. Statement The state of the economy is weak, but slowly looking optimistic. However, we cannot allow public confidence to wane as was the case throughout the 70s. Otherwise this will put a damper on economic growth. If the public is more concerned with inflation, other, more productive measures are wasted. We cannot control the actions the market takes against rising energy and food prices, but we can help by ensuring price stability and restoring consumer confidence. Business cycle trends are hard to predict or influence, because productivity determines them, but in the long run they equalize. The only way to influence them is by allowing productivity to not be focused mainly on inflation.

12. References • "Another Double Dissent: Dallas’S Fisher and Philadelphia’S Plosser." The Wall Street Journal 30 Apr. 2008. 19 June 2008 <http://blogs.wsj.com/economics/2008/04/30/another-double-dissent-dallas-fisher-and-philadelphias-plosser/?mod=WSJBlog>. • Chatterjee, Satyajit. "Real Business Cycles: a Legacy of Countercyclical Policies." Federal Reserve Bank of Minneapolis. Mar. 1999. 19 June 2008 <http://minneapolisfed.org/pubs/region/99-03/cycles.cfm>. • "Federal Reserve Statement on Rates." The Wall Street Journal 25 June 2008. 25 June 2008 <http://blogs.wsj.com/economics/2008/06/25/federal-reserve-statement-on-rates/>. • "Fedspeak Highlights: Plosser on Inflation and Fed Actions." The Wall Street Journal 18 Apr. 2008. 19 June 2008 <http://blogs.wsj.com/economics/2008/04/18/fedspeak-highlights-plosser-on-inflation-and-fed-actions/?mod=WSJBlog>. • "FRB: Beige Book --Summary --June 11, 2008." The Federal Reserve Board. 11 June 2008. 19 June 2008 <http://federalreserve.gov/fomc/beigebook/2008/20080611/default.htm>. • Molinski, Dan. "Jump in Retail Sales Lifts Dollar." The Wall Street Journal 13 June 2008. 19 June 2008 <http://online.wsj.com/article/SB121327652195167793.html>. • Plosser, Charles I. "The Economic Outlook: Challenges for Policymakers." Vital Speeches of the Day (2008): 217-221. • Reddy, Sudeep, and Phil Izzo. "The Dissent: Fisher Stands Alone." The Wall Street Journal 25 June 2008. 25 June 2008 <http://blogs.wsj.com/economics/2008/06/25/the-dissent-fisher-stands-alone/>. • "The Big Easy." The Wall Street Journal 1 May 2008. 19 June 2008 <http://online.wsj.com/article/SB120959818459057709.html>. • "US Monetary Policy: the Fed's Goals." Federal Reserve Bank of San Francisco. 7 Nov. 2007. 19 June 2008 <http://frbsf.org/publications/federalreserve/monetary/goals.html>. • Watts, William L., and Kate Gibson. "Dollar Rises with U.S. Store Sales." The Wall Street Journal 13 June 2008. 19 June 2008 <http://online.wsj.com/article/SB121331593172870103.html>.