Price Discovery is “Painful”, says Plosser

by StockJockey

Monday, March 03, 2008 - 12:13 pm

The President of the Federal Reserve Bank of Philadephia is offering up his take on things, and he is preaching to the choir over the recent volatility in the markets:

He said markets are now in the price-discovery process for securities tied to the housing market. It’s a “painful, disruptive process” but investors are “gradually” sorting out what’s in trouble and what’s not. Real Time Economics

Plosser is looking for stabilization in the housing market by the end of the year, but is not panicked over inflation, just yet:

Stabilization in the housing market would be “an important first step” in that turnaround but also a “wildcard” in how the economy evolves, he said, adding that he expects home prices to begin stabilizing by the end of this year.

Mr. Plosser said inflationary expectations have been creeping up; he’s “not panicked” by the uptick but watching them closely. “We can’t wait too long for inflation expectations to materialize, otherwise you get behind the curve,” he said.

The economy has seen many periods when inflation has spiked up and then come back down, he said. “This issue of inflation is both worrisome, but also highly uncertain,” Mr. Plosser said. He said he’s concerned that price increases are showing up in more items than the typical areas like fuel. Determining whether those are transitory shocks or a signal of other changes is especially difficult now, he said.

Determining when to raise rates again would be a “difficult judgment call,” he said, adding that “history suggests the Fed finds it a lot easier to lower interest rates than to raise them.” For now the Fed would have to work on managing inflation expectations and maintain tranparency, Mr. Plosser said.

While another rate cut looms, look for the punchbowl to be yanked away quicker at the first signs of the tonic taking effect:

Federal Reserve Bank of Philadelphia President Charles Plosser said the benchmark interest rate is now below the level recommended by ``many’’ monetary-policy theories and should be raised when financial markets stabilize.

``We are now, perhaps, in a period of extraordinary circumstances and have deviated from the benchmarks suggested by simple rules,’’ Plosser said in a speech to a conference in Arlington, Virginia. ``Such deviations should be temporary and limited and promptly reversed when conditions return to normal.’’

Plosser’s remarks indicate he may agree with the assessment of some Fed officials at the January policy meeting that the Fed might need to raise rates at a ``rapid pace’’ when the economy recovers. Chicago Fed President Charles Evans said three days ago that taking back rate-cut ``insurance’’ can make clear that the Fed is committed to containing inflation. Bloomberg

The recent speculation in commodities certainly harkens back to the late 70’s; and the only thing that will likely put a hurt on longs is an end to the easing cycle. The green light should be lit for at least the next six months, and traders might want to strap themselves in.

And if you ever wondered what it was like in San Francisco in 1849, well, now you know.

Recession or Slowdown, Plosser Sees Mid-Year Turnaround
Real Time Economics

Plosser Says Fed Rate Below Level Suggested by Theory
Bloomberg