Dr. Charles Plosser, President and Chief Executive Officer of the Federal Reserve Bank of Philadelphia, spoke on “Simplicity, Transparency, and Market Discipline in Regulatory Reform” at a joint conference held at the Philadelphia Fed on April 8, 2014. Plosser provided a high-level perspective on financial regulations and financial stability. In the previous articles of this series, we discussed Plosser’s views on simpler and more transparent regulation for financial markets. In this article, we’ll talk about their impact on investors.
Over the course of his speech, Plosser provided several reasons why simplicity and transparency can enable markets to price risks in a more informed manner. He has also said that systemic risk is more likely to be curtailed if markets incentivize creditors into keeping tabs on the risk practices of debt issuers rather than developing and enforcing a complex set of rules. This would benefit creditors and enhance confidence in the financial system.
Charles Plosser on inflation targeting
Plosser believes that better economic outcomes are achievable through a systematic approach to monetary policy, which will also ensure financial stability. After championing the the notion that the U.S. Federal Reserve should set explicit inflation targets, the FOMC included this in the Fed’s mandate in January 2012.
Charles Plosser on the Fed taper
While Plosser expects the Fed’s monthly bond buying program to end in November, he also indicated last month that it would have been nice if the Fed started the taper faster. However, he also said that the “hurdle rate is pretty high in either direction” for altering the $10 billion reduction in monthly asset purchases announced at each of the last three FOMC meetings.
Charles Plosser on the likely path of the Fed funds rate
Plosser has indicated through a spokesperson at the Federal Reserve Bank of Philadelphia that he expects the base rate to touch 3% by the end of 2015 and 4% by the end of 2016. This is one of the highest levels for the projected base rate expressed among all FOMC members. “I think we do have a gradual path rising up but my path is still above most of my colleagues,” said Plosser in a recent interview, referring to future increases in the base rate.
Investors can benefit from interest rate increases by investing in floating-rate fixed income ETFs like the VanEck Vectors Investment Grade Floating Rate ETF (FLTR), the SPDR Barclays Cap Investment Grade Floating Rate ETF (FLRN), and the iShares Floating Rate Bond ETF (FLOT). Inverse bond funds like the ProShares Short 7–10 Year Treasury Fund (TBX) and the Barclays iPath US Treasury 10-Year Bear ETN (DTYS) are also a good option. Inverse bond ETFs provide the inverse return of the underlying benchmark index.
To learn more about floating interest rates, please see the Market Realist series Why investors should look at floating rate notes as an option.