With inflation creeping up, we have to be particularly alert for rising inflation expectations. It is important that inflation expectations remain stable. If those expectations become unhinged, they could rapidly fuel inflation. Moreover, as we learned from the experience of the 1970s, once the public loses confidence in the Fed’s commitment to price stability, it is very costly to the economy for the Fed to regain that confidence. The painful period of the early 1980s was the price the economy paid to restore the credibility of the Fed’s commitment — we certainly do not wish to go through that process again.
– Charless Plosser, President Philadelphia Federal Reserve, voting member FOMC, “The Economic Outlook And Challenges For Policymakers”
In an inconvenient speech today, Philadelphia Federal Reserve President Charles Plosser made the points that slowing economic growth does not always mean low inflation, as evidenced by the 1970s, and that the costs of the Fed’s losing credibility on inflation are extremely high.
Markets gave up their early gains on the speech (S&P 1 Day Chart).