Transcripts of the monetary policymaking body of the Federal Reserve from 2002–2008.

  • Good afternoon, everybody. I’ll call on Governor Ferguson.

  • Thank you. The first order of business is to elect a Chairman and Vice Chairman of the Committee to serve until our first meeting of 2005. The floor is open to nominations for both of those positions. Maybe Governor Kohn would like to make a nomination. [Laughter]

  • I’ve been in the undecided category for a long time. Today’s the day to make a decision.

  • We can’t have a primary, though. Why don’t you put forth your nominations so we can move on?

  • I nominate Alan Greenspan to be Chairman and Tim Geithner to be Vice Chairman of the Committee.

    SEVERAL. Second.

  • Any objections? Any other nominations? Hearing no objections and no other nominations, by acclamation we have a newly elected Chairman and Vice Chairman to serve for the year. Congratulations!

  • Democracy moves quickly.

  • I understand that. With respect to staff officers, I’ll call on our Secretary to read the nominees.

  • The list of proposed officers is as follows: Secretary and Economist Vincent Reinhart Deputy Secretary Normand Bernard Assistant Secretary Michelle Smith General Counsel Virgil Mattingly Deputy General Counsel Thomas Baxter, Jr. Economist Karen Johnson Economist David Stockton

    Associate Economists from the Board Thomas Connors David Howard Brian Madigan Larry Slifman David Wilcox

    Associate Economists from the Reserve Banks Christine Cumming, proposed by President Geithner Jeffrey Fuhrer, proposed by President Minehan Craig Hakkio, proposed by President Hoenig Robert Rashe, proposed by President Poole Mark Sniderman, proposed by President Pianalto

  • Are there any objections? If not, so ordered. We now need to reaffirm the selection of the Federal Reserve Bank of New York as the Bank to execute transactions for the System Open Market Account.

  • I move that we select the Federal Reserve Bank of New York to execute transactions for the System Open Market Account.

  • Without objection. We have a memo from Mr. Kos on the Authorization for Domestic Open Market Operations. Do you have any further comments on the memo, Dino?

  • One amendment to the authorization is proposed, and I think the memo speaks for itself on that. I’d be happy to answer any questions.

  • If there are no questions, so be it. We obviously forgot to grant Dino the authority to act in the capacity in which he just acted. So I will ask someone to move the reaffirmation of Dino Kos as the Manager of the System Open Market Account.

    SPEAKER(?). So moved.

  • Is there any objection? If not, so ordered. Now we’ll go through a regular review of the Foreign Currency Authorization, the Foreign Currency Directive, and the Procedural Instructions with Respect to Foreign Currency Operations. Again, I call on Mr. Kos.

  • I recommend that the Committee reaffirm those three documents as they currently stand. Again, I’d be happy to answer any questions.

  • Mr. Chairman, I have a question and a comment.

  • I didn’t see a reference in the memo to a warehousing limit, but maybe I missed it. Is there a dollar limit on warehousing that this Committee votes on?

  • There is a $5 billion warehousing limit, which is a part of the package of authorizations and instructions under which we operate. That limit was mentioned in the memo.

  • That’s in there. So there’s a $5 billion limit?

  • That’s right. The Committee voted to revert to a limit of $5 billion in 1997 after it had been raised from $5 billion to $20 billion in 1995 to facilitate U.S. participation in the program to aid Mexico.

  • If I may, Mr. Chairman, talk just a little about that?

  • I spent a lot of time digging into the history of this, reading the memorandums of discussion from the early 1960s and the transcript—I think from 1990—when warehousing was discussed at length by the Committee. I want to discuss the wisdom of our having that warehousing authority. If we look at the domestic portfolio, the Federal Reserve Act prohibits the Federal Reserve from buying obligations directly from the Treasury, though there is a $3 billion emergency line, if you will, that the Treasury can call on to sell obligations directly to us. And I think that that’s a sound provision. We do not have an obligation to buy—and in fact, we cannot under the Federal Reserve Act—unlimited amounts from the Treasury. The problem on the warehousing side—given the history on this and given that the Treasury clearly has the lead responsibility on international issues—is that, when the Treasury comes to us and says it wants another $5 billion, we can find ourselves in a box under present circumstances. I think it puts us in a very awkward position.

    In my view there’s something to be said for making the warehousing limit $3 billion, which would correspond to the $3 billion emergency amount available on the domestic side. I think that would send the right message—that the Treasury does not have an unlimited line on the Federal Reserve. My goal would be to try to prevent our being in the situation where, because the Treasury takes the lead on the international side, somehow the view is that we’re supposed to ante up whenever the Treasury asks us to. That’s the awkwardness that I see in this situation.

  • Yes, there are a number of awkward relationships that we have in our role as fiscal agent, none of which to my knowledge has ever triggered any event that would be of concern to us. I would assume that we could batten down a lot of different holes here and there. I’m not certain that that would serve a useful purpose. But that’s a judgment of the Committee, and I open up the floor for any comments anyone would like to make at this particular stage. Remember we had a very extensive discussion of the warehousing issue, as you point out, in 1990.

  • Which was only fourteen years ago! [Laughter]

  • I’m not proposing that we redo that by the way! That was a very long discussion, and it took a good deal of time just to read it.

  • What I would suggest you do, if you would like, is to write a memorandum on this, adverting to the comments and conclusions of the 1990 discussion, and we will circulate it. If there is significant interest in doing something of the nature that you are proposing, I would suggest that those who agree with that view make that known to Vincent Reinhart. He can then create whatever vehicle would be required to put that issue before the Committee for consideration. Is that satisfactory?

  • The next item on the agenda is—

  • The Committee needs to take a vote on this item.

  • I’m sorry, I beg your pardon. Do you object to a vote being taken at this point?

  • Without objection. I assume that the vote is in the affirmative on the recommendations in this memorandum. We also have a memorandum from Vincent Reinhart on the Program for Security of FOMC Information. Do you want to go beyond what you said in the memo?

  • I have nothing to add.

  • Next is item 6 on the agenda. Dino Kos has provided an evaluation of the use of GNMAs in outright transactions for the System Open Market Account (SOMA). Do you have comments on that?

  • I was just going to summarize briefly some of the points that were made in the memo and discuss the one-page set of graphs that I circulated today. The Committee will remember that this topic goes back to the time when we were worried about the stock of Treasuries shrinking rather than expanding and we were looking at alternative assets for the SOMA. The Committee in November 2002 directed the staff to continue to look at GNMAs as a possibility and to come back with a proposal about how we might use them in transactions for the SOMA if the Committee decided to do so. The memo describes how we might do that. We would propose to have the Desk do the front office tasks in house but to outsource the back office work—the clearing, settlement, custody, and associated tasks as well as the prepayment estimations.

    I think we learned some interesting information in the course of this exercise. Clearly, this is an important market, and it has become more important. The top chart in the page that I circulated today shows the growth of the mortgage-backed market in totality and the fact that it has outstripped the Treasury market over the last few years. However, the GNMA market itself actually has been shrinking both on an absolute basis, as can be seen in the middle panel, and on a relative basis compared with Fannie Mae and Freddie Mac, as depicted in the bottom panel. Despite the growth in the mortgage-backed market, Ginnie Mae has had trouble competing, given that Fannie Mae and Freddie Mac have specifically lowered their standards in an attempt to build up their assets of lower-income housing, which they’ve been very successful in doing. But that has had a cost in terms of Ginnie Mae’s success in competing, and that’s something the Committee may want to think about. The point that I made in my cover memo was that, on the one hand, the Committee may want to approve going ahead with this if it sees the benefits of transacting in this market to be of sufficient value. Indeed, there may be some value in the central bank’s being in this market. On the other hand, it would take about three years to implement this program, and there is some expense involved.

    Moreover, the fiscal situation has changed quite a bit since the Committee last talked about this. At that time the forecast for fiscal year 2004 was a surplus of about $150 billion. Yesterday the CBO came out with an estimated deficit of $477 billion for this fiscal year. So, to the extent that this was seen as a hedge against the possibility that the Treasury market might begin to shrink, that reason has gone away. Again, there is the issue of the shrinkage of the Ginnie Mae market itself. Even in the most favorable scenarios, it’s hard to see how GNMAs would make up more than 2 to 3 percent of the System Open Market Account. I’d be happy to answer any easy questions. Bob Elsasser is here to answer any difficult questions.

  • It certainly strikes me that the reason we moved in this direction was for contingency purposes—and necessarily so—but it turns out in retrospect to have been unnecessary in that respect. I think we should not move forward and expend additional effort or funds on this. I would put aside the work that has been done, and in the extraordinarily unlikely event that concern about the availability of Treasury securities reemerges, there’s more than enough time to readdress the issue.

  • By that time, the Ginnie Mae market may have disappeared totally. [Laughter]

  • That’s what I was going to say!

  • Dino, I thought this memo was superb, and I learned a lot from it. But I want to mention two arguments not discussed in the memo for why being in the GNMA market might be attractive to us. I realize that we certainly don’t need GNMAs for the original reason that we embarked on the study. First of all, developing and maintaining in-house expertise in this market may be helpful in carrying out other parts of our responsibilities, particularly in the bank supervision area because banks hold a lot of this paper. It’s obviously a very huge market and a complicated one, so I think there is a case on that ground for having expertise in that market. The other thing that strikes me is that we may end up in a somewhat adversarial relationship with the GSEs in regard to the housing issue. So from that perspective, there may be something to be said for being involved in supporting housing through a Ginnie Mae portfolio.

  • On the first point, our focus in the memo was on what it would take to get the program going. Clearly, there are some broader policy questions that we didn’t think were for the staff to be opining on. But if the Committee feels that it’s important to be in this market for whatever reason, the Committee can direct us to do so.

  • That issue is independent of this memorandum and indeed just came up. But it’s an interesting issue to keep in the back of our minds depending on how the discussion relating to GSEs evolves. It could move in the direction where it might be a reasonably sensible U.S. government policy to enhance GNMA as an operating agency, in which case we may or may not decide at that point to do anything about it.

  • I have a comment on President Poole’s comment. I saw an advantage in going this route in terms of our being consistent across securities; we would buy everything that was backed by the full faith and credit of the U.S. government. But I also saw it as adding in some sense to the adversarial relationship with the GSEs because it accentuates that difference among them. And we’re addressing that in other ways. Given that doing this is a lot of trouble and we don’t need to do it because of the volume of Treasuries, I wonder if it’s more trouble than it’s worth. So even though adding Ginnie Maes to the SOMA would leave us in a little purer position on the full faith and credit principle, I think I would follow the Chairman’s advice and drop it for now. Dino, the market knows we’re looking at this. Do they expect anything? Will they be surprised?

  • No, I don’t think they will be surprised. I think this veered off their radar screen maybe twelve to eighteen months ago.

  • I think the costs of this are high and the benefits are very, very slight. We have been taught to make decisions using these comparisons. I would say, along with the Chairman and my colleague on the right, let’s put it on the shelf for now

  • I’d like to speak to President Poole’s first point because I do agree that these are very important markets and that understanding how they operate is important. We only have to look at what was going on last spring to realize the importance of understanding how the mortgage-backed securities market works. But I think that’s different from actually operating in those securities. Yes, we would learn a little from some hands-on experience, but we would have to outsource a good deal of the work, buy forecasts, and do a lot of things that we really don’t need to do to understand the market. I’m sure there are people at the New York Federal Reserve Bank who do understand this market. The fact that we had these memos is proof of it. So I would think that we could keep up with this and be on top of the situation without being in that market.

  • I agree with those who have suggested that we put this on the shelf for now. The original purpose is being dealt with in other ways, and the cost seems to be sizable for this particular very narrow dimension. If we need to, we can bring it up at another time. I think it’s better shelved for now.

  • Does anybody object to that as a conclusion of the Committee? If not, we’ll assume that is the decision. Now we go into our regular meeting agenda. Would somebody like to move approval of the minutes for our December 9 meeting?

    SPEAKER (?). So moved.

  • Hearing no objection, they are approved. Now we turn to the Working Group on Communications. Governor Ferguson and Vincent Reinhart.

  • Thank you. I’ll be very brief. Vincent is going to do most of the heavy lifting in terms of describing a number of different options and conclusions—both on issues that the working group looked at and on a number of issues that I asked the staff to address in the memos they prepared. In my introductory remarks I’d only point out that as we go into this it would be nice, of course, if we were to find a consensus. But frankly, if at the end of our discussion today there is no obvious consensus, then by definition the Committee can decide to come back and think about this topic further. Or as someone said to me before the meeting started, the subject of communications is probably going to be on our agenda in some way, formally or informally, for a long time to come. If we can resolve some of the issues today, that would be great. But if we can’t, then we’ll move on. I will try to be sensitive to the fact that we also want to move on to other elements of the agenda. So at some point I’m going to suggest a go-around—I don’t know how long it’s going to take—but ask that we leave time for Dino’s presentation on the Desk’s activity that goes with the discussion for tomorrow. Vincent, why don’t you pick up from here with this document that was distributed?

  • Thank you, Governor Ferguson. I’ll be referring to the material called “The Committee’s Communication Strategy” that was handed out to you before the start of the meeting.

    Next week marks the tenth anniversary of the Committee’s first public explication of a change in its intended federal funds rate not associated with a change in the discount rate. But increased openness has not been a U.S. phenomenon alone. Across the industrial world and in many emerging-market economies, monetary policy makers now provide real-time information on their forecasts, the risks to those forecasts, and their goals and objectives, often accompanied by narratives explaining their strategies. These come in the form of statements, policy (often called inflation) reports, and regular press conferences.

    The Committee has been riding that wave of increasing communications. In some ways, it has been ahead of other central banks. For example, no other policymaking body immediately releases the vote tally at its meetings. However, in other ways, the Committee has not been at the leading edge. On page 2 of your handout, I provide a reason why you may have felt it important to be measured in changing your information policy: Your words matter. The bars plot the market response—as measured by the change in the two-year Treasury yield in narrow windows surrounding the events—around the release of the Committee’s statement (the top left panel), its minutes (the bottom left panel), and the Chairman’s semiannual testimony (the top right panel) since 1997. (The reason I describe the top left panel as exclusively the response to the statement is that I have used federal funds futures rates to strip out the portion of any market surprise about the level of the funds rate.) The responses both to statements and to testimonies have been sizable. Except for the most recent release, though, minutes have tended to be much less of a market event—presumably because of their publication lag. As shown in the table at the bottom right, your statements and the Chairman’s testimonies have had effects on market prices that, on average, have been as large as those associated with releases on the employment situation and larger than those associated with the publication of data on the ISM index or consumer prices.

    Another point to make about your ten-year experience with statements: At least as can be judged from the transcript of your meeting on February 4, 1994, Committee members may not have fully appreciated that they were setting a precedent with a public announcement. In the event, the response to that short paragraph was so positive, you could not go back to signaling policy changes through open market operations. That might be a lesson to remember as I outline various potential changes to your communications strategy in the rest of my briefing.

    Page 3 gives a roadmap of the rest of my remarks. The options confronting the Committee are interrelated. To facilitate your discussion, my briefing will have five parts. I intend to lay out the range of plausible options before the Committee at the outset and then speak about them in more detail. Those include alternative formulas for the risk assessment of your statement—that is, I will report on the progress of the working group chaired by Governor Ferguson. Then I will discuss the pros and cons of expedited release of the minutes, which were given more completely in the memo by Brian Madigan that I circulated, and of an enhanced role for the FOMC projections, which were examined in a memo by Benson Durham. I will end about where I start by repeating the “Chinese menu” of possibilities so that you can begin the hard work of determining how the pieces might fit together.

    Your first look at that Chinese menu is provided on page 4, which gives a broad overview of options across three main communication issues on today’s agenda. The left column lists the possibilities for the paragraph in the Committee’s statement that gives an assessment of risks to the outlook expressing a probabilistic assessment of the uncertainty surrounding the dual goals of inflation and output. To some, this serves to hint at the direction of future policy without offering a commitment. This being a central bank, it is always an option to maintain the status quo in which the drafters start from a formulaic assessment of the risks to inflation and output but have some discretion in the exact wording—with the expectation that the result will preserve the three-part assessment of risks used since May. This approach allows some consultation with Committee members through the Bluebook.

    The option dubbed “gradual evolution” involves expanding both aspects of the process by allowing more discretion to the drafters to alter the words according to evolving economic conditions and to provide more discussion of the words of the statement in the Bluebook. However, there would be an explicit expectation of including a forward-looking aspect to the statement and an assessment of risks, except on those rare occasions, as last March, when no such assessment could reasonably be made. If you would like, we could structure the forward-looking portion of the Bluebook around two or three draft announcements keyed to conveying to the public possible changes in either the outlook or policy. Those alternatives would provide the basis for your policy discussion and vote, and one of them—with whatever last-minute changes you wanted—would be released to the public. If events between the publication date of the Bluebook and the Committee meeting changed the situation sufficiently, we would circulate a Bluebook supplement that suggested more appropriate wording.

    Another set of possibilities is to adopt new formulaic language, as you had with the “balance of risks” from 2000 to early last year. In just a bit I will report on the three formulas that the working group forwarded to the full Committee. Lastly, you could choose to discontinue the assessment of risks portion of the statement, accepting that substantial criticism would ensue for backsliding away from openness. In principle, that need not be backsliding if the Committee decided to alter some of the other margins of its communication policy. Of course, such other changes also may be viewed as desirable in conjunction with retention of the risk assessment. One possibility would be to expedite the release of the minutes, the subject of the middle column. About two weeks is the barest minimum required for the Secretariat to draft, circulate for comments, and release finished minutes, but you may see some benefit in providing a bit wider cushion by releasing minutes, say, three or four weeks after each meeting. Another possibility is to enhance the role of the economic projections of the Governors and Bank Presidents as outlined in the right column. You might want to increase the frequency with which the survey is conducted, lengthen the projection period, or increase the number of variables projected. You might want to continue to release those projections in the Monetary Policy Report, but they could also be part of expedited minutes or the subject of a separate release.

    As you could probably tell from the thirty-page memo that circulated last week, the working group and its staff devoted considerable attention to alternative formulaic language. Page 5 reviews some of the key lessons learned. In particular, members settled on six important design principles that any formula should satisfy: (1) Good governance suggests that the Committee should vote on the exact wording of the risk assessment. (2) The statement should not hamper the policy discussion, nor should the Committee feel constrained in its choice of action by a formula. (3) The statement should be flexible enough to encompass the Committee members’ views about the operation of the economy and the concepts that can be usefully measured. (4) The statement should be clear to the public, or at least as much as it is possible for central bankers to endeavor to be. (5) The statement should cover the range of feasible contingencies so that the formula would last, if not for the ages, at least a few years. (6) The statement should avoid the use of potentially charged terms, such as “risk,” when referring to outcomes that may be seen as positive. For example, the statement should not convey the mis-impression that the Committee is against strong economic growth for its own sake.

    While the working group settled on these six principles fairly quickly, three questions remained unresolved, which are provided in the column at the right. In particular:

    • Should the wording of the risk assessment be in terms of the levels of output and inflation or their changes? Conveying a sense of levels may make it easier to describe economic performance relative to the benchmarks of potential output and the Committee’s inflation goal. However, such specificity may be seen as a drawback because there is a range of opinion among members about appropriate benchmarks.

    • What conditioning assumption for monetary policy should be employed? The forecast could be based on the assumption of unchanged interest rates, as was the case with the old balance of risks language, but that presents problems for projections far into the future should that assumption diverge significantly from what is built into financial market prices. The alternative would be to assume a historically normal policy path; but if the Committee does not reveal that assumption, the public may have difficulty understanding the message of the risk assessment.

    • Over what period should the outlook and risks be considered? A shorter period—that is, the next several quarters—has the advantage of limiting the factors that influence the outlook. However, such a horizon may not be sufficient if you think the lags in the transmission of policy are substantial, suggesting that you should look forward to the foreseeable future.

    Confronted with different potential reasonable answers to these questions, the working group narrowed the field of potential formulas to three: two stated in terms of levels but differing as to the policy assumption and period, and a third stated in terms of changes. I should note that the three alternatives do not explicitly mention the conditioning policy assumption. In principle, that design feature could be conveyed to the public when the new policy is announced and mentioned periodically in the minutes as a reminder. The “levels A” alternative is provided on page 6, with the left column repeating what was in the memo you received on January 20. As noted in red in the text and highlighted at the right, this alternative is stated in terms of levels of inflation and economic activity and makes explicit reference to benchmarks for inflation and output. While the paragraph is silent about the conditioning assumption for policy, it is based on an assumption of “normal” policy. In addition, as shown in blue, the horizon is “several quarters,” but outcomes are described relative to paths that extend further into the future. The “levels B” alternative provided on page 7 shares a focus on levels and explicit benchmarks (as noted in red at the right) but differs in two important dimensions. First, while it is also silent about the policy assumption, the drafters assumed that the implicit forecast is based on an unchanged policy stance. Second, as shown in blue, the horizon is “the foreseeable future,” that elastic concept borrowed from the old balance of risks language. The “changes” alternative given in the left column of page 8 focuses, as indicated in red at the right, on changes in output relative to potential and changes in inflation. Presumably, if the Committee saw fit, the prior paragraph of the statement that describes economic conditions could refer to levels and benchmarks. As in the “levels B” alternative, this formula is based on the undisclosed assumption of unchanged policy and applies to the foreseeable future.

    Staff subjected these three alternatives to a variety of stress tests to gauge their performance both in scenarios that seem likely in the near future and that have challenged the Committee in the past. I am not revealing any secrets of the working group by indicating on page 9 that problems emerged with all three formulas. In particular, measurement issues arise when words with vague or multiple meanings are used, such as the “long-run trend of potential” or “long-run sustainable pace” or even an unquantified notion of “price stability.” In addition, you may feel uncomfortable about the clarity of any statement that relies on words such as “path consistent with,” which may admit many possible trajectories, or “the foreseeable future,” which, for some, appears to have meant a period as short as the intermeeting period and to others a period measured in years. Lastly, the conditioning assumption used in the implicit forecast introduces a fundamental question as to the purpose of the risk assessment. Do you want to send hints about the future direction of rates (which seems easier to do with the assumption of unchanged policy), or are you conveying qualitative information about the fan chart surrounding your forecast (as seems the case with the assumption of “normal policy” or the related assumption of “appropriate policy”)? The working group decided that its mandate was to present information to allow the Committee to determine an acceptable tradeoff among the various pitfalls, recognizing that abandoning an attempt to arrive at a formula is also an option.

    No doubt, this decision also interacts with any you might make about expediting the release of the minutes, the subject of page 10. Central banks that do release minutes before their next scheduled meeting, such as the Monetary Policy Committee of the Bank of England, stress advantages such as a desire to provide more timely information to the public consistent with their responsibility to be transparent and accountable. In addition, minutes provide a platform to present the outlook and policy strategy in a more nuanced fashion than is possible in an immediately released statement. And relevant to my earlier discussion, expedited minutes may make you more comfortable in trimming the statement.

    The disadvantages mostly seem related to possible effects on Committee dynamics and other aspects of your communication policies over time. You might be concerned that, as the minutes increase in market importance because they are released in real time, mention in the minutes would be viewed as a chip in the bargaining process in arriving at a policy decision. The quality of the minutes might suffer over time if they were “scrubbed” to mitigate potential market reaction. In particular, you might be hesitant about including conditional statements in the minutes, such as a desire to change policy at the next meeting if intervening data run in a certain direction or to hold an intermeeting conference call. The bottom line is that experience has shown that market participants tend to overreact to contingent statements, and fear of possible inappropriate market response might be viewed as a decided negative. In addition, the Committee, and future Committees, would have to exercise some self-discipline so as not to succumb to the temptation of using the minutes to send signals in response to developments after the meeting.

    Some thought would also have to be given as to the timing of the release of the minutes, particularly on those occasions twice a year when the Chairman delivers the Monetary Policy Report to the Congress. Indeed, as a general principle, the prospect of creating an additional news event in which market participants and reporters await some fixed release from the FOMC may seem especially daunting. And in that regard, the Committee may want to review its policy regarding blackout periods so that the release of the minutes marks the first news about the thinking of policymakers at the previous meeting.

    Twice a year, the minutes include the central tendencies and the ranges of the Governors’ and Bank Presidents’ forecasts of key macroeconomic variables. Early release of the minutes naturally raises the question of the role of those projections, as is discussed on page 11. There are several margins over which the Committee could enhance the role of those forecasts. In particular, you might want to (1) increase the frequency of the survey to every meeting or every quarter; (2) increase the length of the projection period, thereby giving the public some sense of the Committee’s views of the longer-term prospects for the economy; (3) increase the number of variables in the projections, perhaps to include core PCE inflation, which seems central to the deliberations of the Committee. Indeed, you might view the projections as a means of conveying to the public your view of the longer-term elements essential for policy, such as the growth rate of potential output and your individual working definitions of price stability, and perhaps the degree of uncertainty about that outlook, by including the width of uncertainty bands about each variable forecasted. The latter might be particularly attractive, as wide bands would reinforce that monetary policy is as much about controlling potential risks when a forecast, almost inevitably, does not come true as it is about making projections. At a practical level, the Committee will also have to decide whether it is appropriate to separate its projections from the Monetary Policy Report and testimony.

    The pros of an enhanced role of the projections given at the top right should seem familiar. By getting them out earlier, you would be providing more-timely information to the public, both about your central tendencies and range of opinion, thereby increasing transparency and accountability. Some might find a particular attraction in substituting a survey of numbers that is mechanical for the risk- assessment portion of the statement, which requires consensus. The cons relate mostly to the Committee’s process and market participants’ interpretations. You will have several decisions as to whether the forecasts should be included in the minutes of the meetings, can be revised after meetings, or their release augmented with explanatory text. The public might not understand the conditional nature of the projections and ascribe to them more weight than they actually receive in the policy process, thereby creating another news event in intermeeting periods and impairing your reputation as forecast errors cumulate.

    With the last page in your package, I deliver on my promise to end where I started. Page 12 repeats the Chinese menu and underscores that I am seeking direction from the Committee on all aspects of its communications policy. Many of the options that are listed will require much more staff work to arrive at a solution acceptable to the Committee. That is, the discussion to follow will not be the end of work on communications policy, but I am hopeful that it is the end of the beginning of work on communications policy.

  • Thank you, Vincent. We know it’s not the beginning of the end. Having done this a few times, I know that there will be deep emotion, short speeches, and long speeches, which is all fine. That’s what democracy is all about. To help us try to figure out if we have a consensus, though, Vincent has given us what he describes as a Chinese menu here. It would be very helpful if in your comments you could at least touch on each one of these three topics—as I’m sure most of you will—so we can keep a record as we’re going through this. With that plea, why don’t we open it up for discussion and see who wants to start. Chairman Greenspan, do you wish to start this round?

  • Yes, that’s what this signal means. [Secretary’s note: The Chairman had raised his hand.]

  • That might end it!

  • Yes, so much for democracy! Chairman Greenspan is recognized, and then my list says there are others who wish to follow.

  • There are a number of very interesting ideas in here that have the characteristic that they are irreversible upon implementation. Hence there is a certain barrier above which I think a proposal has to rise before we move forward on it. I was a little distressed that my alternative to a number of these issues, which I hadn’t thought of before, didn’t get considered!

  • It’s in there somewhere! [Laughter]

  • I’ve given considerable thought to various formulaic procedures that we could use in trying to craft our post-meeting statement. While I was one who thought in the beginning that it would be possible to use a formulaic approach to that endeavor, I’ve concluded at the end of the day that there’s something fundamentally wrong with such a process. That is, the statement either has to have too little specificity—which means it doesn’t give us the flexibility to pick up nuances reflected in our discussion—or it becomes extremely complicated because we are forced to put into a small number of alternative phrases very complex judgments about what the Committee is doing.

    As we’ve gradually been going through this process, we have come out with a number of ad hoc statements, which I frankly think have not been bad. The reason they were not bad is that they were tailored to some very specific and complex discussions that had taken place at our meetings. And I think we readily communicated our judgment about the alternatives we had, our true assessment of the balance of risks, and most importantly the inclination of the Committee. We used a number of different ways to convey that, and the reason we did was that each meeting was essentially different. It had a different mold to it. The main concern in doing this is the basic problem, which I think we have all eschewed, of writing a communiqué authored by nineteen people at the end of the meeting. That is physically impossible in every respect that one can conceive of.

    Cathy Minehan, as I recall, raised a point at the end of the last meeting about restricting the number of words in our statements. As I’ve thought about it over the intermeeting period, my impression of what we ought to do—and I grant you it is not in these materials—is to continue the type of statements we have now. We have a statement that gives our view of the outlook and indeed of what has been happening. I think there has been almost no dissent on the words we’ve used even though they’ve been different from meeting to meeting. We then give some sense of where we think the risks are, and unless I’m mistaken, in virtually all cases—even though at times we’ve used more words than we would have liked—we were able to describe that in a relatively few words. The important advance of communicating several wording options to the Committee through the Bluebook prior to the meeting—associating alternative statements with various policy choices—struck me as a working model.

    So I’m of the opinion that we really don’t need a significant alteration in what we’re doing. I would prefer that we continue to try to do this the way we have been doing it, but with two caveats if you will. One is that we use the Bluebook to provide alternative wording suggestions, and two is that we adhere to what I would call the Minehan restraint. My impression is that would work; I don’t know that for certain. It has worked to date. I’m very uncomfortable with the elaborate formulaic announcements largely because I think they will force us into rigid forms of communication. If we have an economy that is continuously changing, I think it is going to require us to be flexible in our language and in our approach. We always have the capability of going from what we’re doing now to formulaic language in the future. We probably have the capacity to reverse a decision to use formulaic language and to go back to something like we’re doing today, though not without some negative cheering from outside observers of Fed policy. But we can live with that. Nonetheless, I don’t think we need to go with formulaic wording. That’s my view on this particular issue.

  • I think I would describe that, in terms of the options Vincent has laid out, as gradual evolution.

  • It gives us greater flexibility and involves using the Bluebook to provide alternative wording for the statement.

  • I will grant you that that is probably the right characterization of my view.

  • Since you have the floor, do you wish to go on to the other two topics on the menu, earlier release of the minutes and the role of the projections? Or would you like to hear more discussion?

  • If I may suggest—since this is going to be a long discussion and each of these is a relatively separate issue—I think we’d be better off doing risk assessment first, then release of the minutes, and then the role of projections. After we’ve done that I’d go on to the fourth item, which would be the coordination of these various aspects of our communication policy, because there is interaction among them.

  • How they all work together.

  • Okay. This being a committee, people will either accept or reject that approach. I have President Hoenig next on my list.

  • Given the suggested approach that you’ve just outlined, Mr. Chairman, I’ll confine my comments. On the risk statement, if that’s what we’re narrowly focusing on, I don’t have any difference with you. But I’d start out by saying that I wish we could get rid of the risk assessment in the statement. I’d like the statement merely to say this is the action we took. It’s the risk statement that always seems to hang us up and raise other issues.

  • Is that option listed? Oh, here it is.

  • That’s the very last one on the list—to discontinue the assessment of the risks. I’m not sure if you’re saying you want to go with that one or with something else.

  • Well, that’s what I would prefer. But barring that, depending on how this Committee discussion comes out, my second choice would be the gradual evolution option.

  • Okay. Do you want to stop there, or do you want to address the other topics?

  • I’ll stop there.

  • Okay, why don’t we keep going in this mode. We seem to have fallen into focusing mainly on the risk assessment. President Santomero.

  • Following that model, I too found myself in the situation when I had finished reading the document—while it was well prepared and helped me think about the process—where I wasn’t particularly happy with the set of options. I’m trying to decide whether I am in Chairman Greenspan’s camp or President Hoenig’s—whether my preference is an evolution or an evolution to a shorter statement. In fact, in the formally prepared comments that I have with me today, I ended with a line similar to President Minehan’s view, saying that in many cases less is more. I don’t think any of the options that we have before us quite gets us where we want to be. It’s hard to talk about levels without talking about growth rates. It’s hard to talk about where we are without making a statement about whether or not it is in fact a desirable place to be. I found myself looking at and reviewing the options and finding different subtleties and implications associated with the different statements. As a result, I felt as if we were actually moving backward rather than forward.

    My own sense is that we would be better off saying less. I’d begin by saying where we are currently, as we do in paragraph 1. Second, I think we should give some context to the decision, similar to what we do now but perhaps expand it a bit. As in our last statement, we might also comment on whether or not our current policy is accommodative, and then we could include information on what we think about current and future economic conditions. Paragraph 3 would relate to what we think the outlook is for GDP growth as well as inflation. Importantly, in my opinion, we should have an assessment of whether or not the growth rate is problematic, and I’d be more symmetric in terms of the words “problematic” or “worrisome” that appear in our statements every once in a while. With that I think we could stop. So in that regard I am closer to President Hoenig’s position, but I think we can get there over time by essentially stopping at that point.

  • Tony, that would be a shorter statement?

  • It would be indeed. It’s almost what we’re doing now; it just doesn’t go on into detail with the formulaic language regarding our assessment of the risks. I do worry about the formulaic wording. As I was reading the memo, I asked myself, Does this tell us the same thing using formulaic approach A, B, or C? And frequently my answer was “no.” Second, I thought it would tend to force our discussions into something that seemed quite constrained.

  • I must say, Tony, as I listened to what you said, it struck me as not very dissimilar from the gradual evolution approach because you want to talk about the future. You used some phrases that dealt with whether or not the outlook was problematic, which I think is what was intended by the gradual evolution option. But I think I understand where you are. The next one on my list is President Stern.

  • I was part of the working group, but I certainly agree that none of the alternatives is perfect. Confining myself to the risk assessment, if I were going to select formulaic language, I would select the “levels A” alternative—for very practical reasons. When I ran through the stress tests, that alternative seemed to me to do the best job of conveying to the public the situation and the prospective stance of policy given what we knew at the time. Others may disagree, I realize, but that’s where I came out. However, I would have no trouble—as you know, Roger—going with gradual evolution. Indeed, if you look at the criteria on page 5 in Vincent’s memo, I think that approach may well do a better job on items 2, 3, and 4. So I have no problem with that approach and would be very comfortable with it.

  • I have Governor Gramlich next.

  • I began the exercise thinking that we could come up with a formulaic statement that would work most of the time. In working through it—I was also part of the working group—I now think we can’t. I’m pretty much in sympathy with the Chairman in believing that we will face situations where we may think the differences are subtle and not that great but in fact they are. In going through the stress-test exercise, as was done in the memo, I found that nothing here appealed to me very much. Not only do these options not appeal to me, I think they are worse than what we’re doing now. So I would be for gradual evolution. I actually recommended a sentence limit before. Maybe Cathy’s word limit is better than a sentence limit. I don’t know. But I do think that we ought to keep it short.

    I would like to address a different issue. The one cost that has been mentioned is that associated with writing a new statement each time—that it is too hard for us in terms of the process. You pass out a draft, we’ve got to read it and think about it, and so forth. I’ve actually thought about that issue, and in my view, it is less of a problem than we may think. First, in the way these statements have gone, they really haven’t changed all that much from meeting to meeting. Second, in the last few Bluebooks, Vincent has described how the statement might change, so we have some warning or advance notice. Consequently, when we see the final statement, I don’t think it’s that much of a shock. In terms of the process, I believe it’s something we can handle at each meeting. In sum, I think the formulaic approaches don’t really do it. Second, I think we have overrated the cost of writing a separate short statement each time to convey exactly what it is we want to convey.

  • I have President Broaddus next.

  • Let me approach it this way: In terms of the chart here, I’m probably going to come out with respect to the risk assessment somewhere in the gradual evolution area. But to me that’s closely related to the early release of the minutes. I view that as an integral part of the communications effort—as sort of a package. And even though at the end of the day I have difficulty with a formulaic approach, I think we ought to have some discussion of the proposals in the memorandum. We received this documentation, and it’s very involved. I’ve tried to think through these options, and I believe that can help to illuminate some of the issues we’re discussing. So let me make just a couple of comments that I worked up before I came in. They may be a little off the immediate mark, given the direction of the conversation.

    The first thing I would say is that I think the working group made a very constructive and helpful effort in trying to look at this and I learned a lot from it. It taught me, among other things, that even minimum clarity requires that we be willing to describe our thinking in terms of levels of economic activity and inflation in relation to their potential or desired levels. Two of the three proposed approaches do this. As I worked through the language itself, I didn’t think it was successful in pulling it off. For what it’s worth, let me suggest why I think that’s true. I focused mainly on the two alternatives labeled “levels A” and “levels B.” You know, there’s a lot in this memorandum. I looked primarily at scenario one, which seems to be the closest to where we are and where I think the balance of risks lies going into this meeting. To my mind, it may be helpful to consider why the suggested language doesn’t quite achieve what we want.

    The levels A alternative assumes that the public understands that the funds rate has to rise at some point down the road, which seems to accord with the facts. But for me the problem with the particular language in that alternative is that it doesn’t give a clear sense of the current magnitude of the output gap. Nor does it convey our expectation—and I believe this is the expectation of many of us—that that gap will close only gradually over a two-year period. It seems to me, however, that that’s precisely the kind of information the markets and the public need to be able to form their expectations efficiently and effectively. In some sense the language we’re using now does a better job with the “considerable period” phrase.

    Then I looked at the levels B alternative; that language is at the bottom of page 20 of the memo. In this case it is based on the assumption of a constant funds rate. That boils down to a statement that, in the absence of a funds rate increase, the output gap is likely to turn positive at some point down the road. But again, in my view, the language doesn’t give a clear sense of how quickly all of this might happen or how it might evolve, which I think is what the public needs to know.

    Having gone through this thought process, I think if one were to work through the other six scenarios there would be similar problems. So I conclude that it just may not be feasible to convey in a few short sentences what we need to convey to allow the public to form its policy expectations efficiently. We might be able to do it if, in addition to the suggested language, we stated explicitly and separately our current view about the sign and magnitude of both the output and the resource gaps and how quickly we think they will be eliminated. At some point, if we were following a procedure like that, we could even add, as we have done with the “considerable period” language, some explicit reference to the funds rate target. Of course, the problem is that, if we have all those sentences, it’s going to be nearly impossible to talk about it and vote on it in this Committee.

    So that takes me back to where I was in September, when I felt that it might be a good idea to advance the publication of the minutes—and I’ll come back to that later. Before I do, let me make one last point. Whether or not we decide to alter the statement language, I think we could sharpen our discussion at our meetings in the spirit of your committee’s levels A and B proposals, Roger, by talking more explicitly and quantitatively about the roles that the output and inflation gaps play in our analysis of the economic outlook and in our discussion of short-run policy alternatives. Whether or not we move up the release of the minutes, I think a discussion of the gaps, along the lines that I just outlined, could improve our external communications at least by making the minutes more explicit and clearer.

    To reap the full benefits of this, though, I think we would need to maintain a working estimate of the path of potential GDP, and I would argue that we would need to share that with the public. If we did that, we would obviously need to drop the other shoe and indicate publicly the quantitative range for inflation that we think is consistent with price stability. I won’t push that last point any further. I did that last time, and I don’t want the Chairman to throw me out of the meeting or maybe out of the window! [Laughter] That’s where I’d come out.

  • Thank you. This exercise shows us that achieving clarity and transparency for a large and diverse committee is quite difficult. But it’s also very important both in our role as a public institution and for the efficacy of monetary policy. So I hope, even though it’s a very difficult task, that we don’t let ourselves backslide in this effort.

    I want to say that I’m actually sympathetic to the view of gradual evolution in the policy statement. We saw last week a statement by the Bank of Canada that was quite a model of clarity. In simple English it explained conditions in the economy, and it explained why policy steps were taken. In that respect I thought it conveyed everything without the need for formulaic language. But as we go to a simpler and shorter statement, I would hope that we would increase the information we provide in other dimensions, particularly the minutes and our individual projections—and we’ll come back to that later.

    Let me say a word about the statements. Very briefly, I agree with President Stern. My preference among the three statements would be levels A for two reasons. The first is that I do think it’s important to describe the outlook in terms of levels relative to benchmarks. The changes statement requires unspecified preliminary language in order to make it clear, which I think is a major drawback to that statement.

    My second point has to do with the conditioning policy assumption. A number of central banks do use the constant interest rate assumption in making their projections. This assumption has been very strongly criticized by a number of observers, including Glenn Rudebusch and Lars Svenson and by Mike Woodford in his book and other places. There are two problems with the constant interest rate assumption. One is theoretical, and the other is practical, and they’re related. At the theoretical level, the constant interest rate assumption is usually not well defined in the sense that many forward-looking rational expectations models simply do not have equilibriums or they have multiple equilibriums under that assumption, whereas backward- looking models tend to diverge and have unstable behavior. In practice, that means showing paths in the projections that look very unrealistic. As a practical matter, the constant interest rate assumption is really not well specified because it doesn’t specify what financial markets believe, for example. Do they believe that interest rates are going to be constant, or do they have the current market revealed preferences? How long will the constant interest rate path be maintained? What would be the policy after that path has ended? It’s not really a very useful conditioning assumption, and therefore, I just warn you that there are some serious reservations about that approach. Thank you.

  • Thank you very much. President Minehan.

  • Thank you, Roger. For the record anyway, I expressed the view last time that I was in favor of fewer moving parts, although I think that would translate to both fewer words and, I hope, fewer sentences as well. I think we should focus a little—and this picks up a bit on what the Chairman was saying—on the problem that we’re trying to fix here. Until last spring, I for one thought our communication wasn’t too bad. We were misinterpreted for a lot of different reasons last spring, some of which related to what was happening in the economy and some of which related to our ongoing discussions about what we would do if deflation were actually staring us in the face. I think splitting the risk assessment in our statement, while it seemed logical and felt right at the time, probably played into that a little, and we were in some sense forced to add the “considerable period” language in the summer to try to get market expectations back on track. I’m not particularly comfortable with that language, though some of the rest of you may be.

    I think it’s entirely appropriate to tell the markets what we did—we owe them that—and why we did it, though the latter involves a degree of forward-looking analysis. But I don’t think it’s a good idea to be speculating on what we might do over an uncertain period of time, given a number of specific assumptions. Any one of the formulaic statements we’re looking at requires a short course in macroeconomics to be understood. I don’t think we’re speaking to the academics with these statements. In my view we’re speaking to the markets and the public. And in that regard I have a lot of sympathy for the idea of either discontinuing the risk assessment or going back to the simpler risk assessment we had before we split it into addressing the two risks separately. The simpler assessment worked for us for a number of years. Maybe that’s gradual evolution. The sense I got of gradual evolution from Vincent’s comments was that we were going to get Bluebooks of forty pages in length, three-quarters of which would be devoted to explicating three different presentations of the three different ways we could change the various aspects of the risk statement. I’m not in favor of that.

    We need to figure out a simple way to convey what we want to say about the future, and I think we ought to have some agreement on that. But there seem to be very big differences of opinion among us on that, and maybe it’s foolish to try to reach a consensus here. Do we really feel obligated to tell people what we might do, given an uncertain future? That’s not necessarily what I would vote for, nor do I think that it would be helpful. If we’re going to try to hint at our future policy with a risk statement, I’d rather go back to some variation of what we used to do. That’s all I have to say for now.

  • Thank you. I began this process as a member of the working group leaning toward formulaic language, and the alternative that seemed most appealing to me was the “levels A” one. But it became clear to me that, even in our group of seven, it would be extremely difficult to get a consensus built around that alternative. In fact, I wonder whether we can build a consensus of nineteen around any of the three alternatives, which leads me to believe that probably the approach now being referred to as “gradual evolution” might be the correct route to go. It seems to me that, if we have language in the Bluebook that is specific to the policy alternatives, then the discussion of the words associated with whatever policy we want to follow should be rather simple, requiring relatively few changes. Of course, Ned, the policy decision would determine the statement we would issue; it would be based on that vote. So I come to the conclusion that, given our different views of how the economy works, we probably ought to look more at the gradual evolution alternative.

  • I came to this meeting somewhat fearful that we would do something fairly dramatic and possibly make a big mistake. So I was very reassured by the Chairman’s opening remarks, which I would characterize as saying that the status quo is not all that bad. I think the gradual evolution alternative involves more gradual than evolution, which is an approach I agree with. I’ve long been in favor of discontinuing the statement of risks, and I still am. I agree with Cathy that announcing what we did and why we did it provides enough context about the future. In my view we make a mistake if we go further than that; it creates one more thing to be wrong about or to appease people about. So I’m for gradual evolution, but I would hope to fold discontinuing the risk assessment into that process. Preliminarily, I’m content with the way we’re doing the minutes and the projections now. But if we have to make some changes in those areas in order to justify eliminating the risk statement, then I would be in favor of that.

  • We’ll come back to those issues and explore them. President Guynn.

  • Thank you. When Roger called me and I asked him if an option was “none of the above,” I shuddered, thinking that I’d be the only one with that preference. But I gather from the comments thus far that I’m not alone. So let me just say up front that I certainly share the view that we ought to resist the temptation to tinker at the margin at this point.

    I, too, found the working group and staff papers helpful, but for a reason other than the reasons that have already been articulated. I think those materials exposed some very fundamental issues that we simply haven’t come to grips with. I would suggest that the more we’ve tried to say and the more we’ve tried to sharpen up the language of our post-meeting statements, the more we have bumped into some very frustrating fundamentals that I don’t think we’ve begun to agree on around this table. Not only is that going to get in the way with regard to what to say in our post-meeting statements, but I think it’s going to carry over into the discussion of the minutes.

    In that regard, I don’t think we’ve really decided what information we ought to provide to the public. I agree with Presidents Minehan and McTeer that we have not even necessarily agreed that we ought to be in the business of providing short-term—and I underscore short- term—guidance to financial markets. We differ in our views as to whether that has been helpful and appropriate. In my opinion, it has created a very short-term focus on policy that has not been terribly helpful.

    So to my mind there are some very fundamental questions along those lines. I don’t think we’ve even begun to deal with some of the basic questions about how to communicate our policy objectives and benchmarks. In fact, we haven’t even agreed on the definition of some of the very fundamental terms that Vincent highlighted, such as “sustainable growth,” “long-term potential,” and “price stability.” Until we’ve defined those kinds of terms among ourselves, it seems to me that such concepts as “gaps” have no meaning. They certainly have no independent meaning; they have meaning only in the context of the Phillips curve framework, a construct on which at least some of us have very different views. So how do we anchor the forward-looking portion of our post-meeting statements on some kind of agreed-upon targets and objectives? The notion of our targets and objectives creeps into those statements even by the way we construct them now. What is the relationship between the post-FOMC statements and the semiannual Monetary Policy Reports to the Congress? Those are questions we need to talk about, and I think we’ll have some interesting discussions

    In sum, my view of the work that has been done is that we should use it to highlight some of the very fundamental issues that I think are going to be with us whether we’re talking about the post-meeting statements or the minutes. Until we can come to grips with those issues, I think we’re going to continue to struggle. And the more we try to say, the more difficult it will be for us to be comfortable with the post-meeting statements. I’d like to come back and add some further thoughts when we talk about the minutes and our semiannual forecasts. Thank you.

  • Okay. President Pianalto.

  • Thank you. I also found the work of the working group helpful in thinking through some of these issues. Like others, I began the exercise thinking that formulaic language would help the Committee communicate because it would narrow the range of words we would be using and the markets would become more comfortable with the phrases and then interpret them in the same way over time. However, as I reviewed the alternatives presented by the working group and also the concerns listed in the document and the pitfalls noted on page 9 of Vincent’s report today—measurement issues, clarity, and the conditioning assumptions—my preference became gradual evolution. I favor telling the markets what we did and why we did it. I don’t think it’s appropriate to signal future policy action. And I strongly support having explicit language alternatives spelled out in the Bluebook.

    That said, I have favored for the past several months discontinuing the assessment of risks portion of the statement. But I didn’t think that was an option. When we were discussing our communication with the markets, I thought we took off the table the possibility of going backwards, so to speak, and communicating less. I thought taking something away would not be an option. So for now my preference is gradual evolution, but depending on how we come out on the earlier release of the minutes or the role of the projections, discontinuing the risk- assessment portion of the statement might be a possibility.

  • Like several others, I found the efforts of the working group very helpful in terms of laying out the issues we’ve been talking about at the last several meetings and putting them all together in one place. I also thought that, if I went through all the formulas and the various scenarios, one of them would really appeal to me. I did go through them, and I must say that, while I like the levels B alternative in principle, I didn’t like the answer it came out with in some of the scenarios. That led me to the view that a formula isn’t going to work for us. To my mind, what we have to talk about in our statement is what we believe is the most important issue. In the little over two years that I’ve been on this Committee we’ve faced a lot of volatility in that we’ve had to deal with a number of unforeseen events. So if nothing else we need flexibility because financial stability is one of our objectives, though we usually don’t talk about that explicitly. But we are seen as one of the forces that keeps the market stable in part because we have a reputation for integrity, which I think is very important.

    Let me make just a couple of general comments. One, I like the idea of eliminating words like “risk” that may have different connotations to the public. I say that as a former risk manager. I also like the idea of a little ambiguity in some of the alternatives we’ve discussed because around this table we all come at the policy decision from different points of view. And we know that in economics there are alternative paths to achieving our objectives going forward. So I’m not troubled by some ambiguity in the statements that we issue. Also, while the idea of setting benchmarks has been discussed, as we start to move toward defining those benchmarks, I think we’ll find that our different points of view will become more of an issue. Some of the alternative wording proposed I found very troubling because I don’t know if we can come to a consensus on what the benchmarks are.

    As I thought through where we’ve had communication issues—particularly in the last few months—one of the things that struck me is that we actually have described very well the data that drove us to the decision we took at each meeting. As a few people have suggested with regard to fitting in the conclusion of the risk statement, maybe we could do a better job by adding an extra phrase or words about the incoming data. Maybe we could characterize economic growth in terms of the output gap or better describe the risks of inflation rather than adhere to a fixed formula that is so rigid that it doesn’t allow us the flexibility to respond to unusual developments. While I don’t want to see a statement that goes on page after page, I’d almost prefer to drop the part of the risk assessment about the output gap and inflation and add a few well chosen words to describe the incoming data that drove us to our action. I think that actually would make the statement more concise and clear, and perhaps it would deal better with the ambiguity that was pointed out in some of the scenarios under the various alternatives.

  • We’re using the word “evolution” here. If I could use a genetic analogy, I think we want to be careful that we have some highly selected breeding and not random mutation. [Laughter] To begin my remarks, let me reflect a bit on how we got to where we are—some of the past evolution. Originally, of course, there was no statement issued at the end of the meeting, not even a release of the policy decision. I think it was in the early ’80s that the Committee started to vote on a bias or asymmetry in the directive, but that was not released until a few days after the next meeting. Then in 1994, almost ten years ago to the day, the Committee agreed to release its policy decision on the day of the meeting. Initially the practice was to make an announcement when there was a change in the intended federal funds rate and no statement otherwise. So, clearly, the original idea was to provide an explanation of what we had done and why. After all, a decision to keep the intended funds rate unchanged is also a policy decision, but we did not have a statement at the end of every meeting. So the original idea was to explain why we did what we did. A little after that we made the decision—and I think this was after I came on board—to release the bias statement. Subsequently the bias was viewed as a problem, and we substituted the balance of risk statement for reasons that we discussed at length. I won’t go into that. Now we seem to be focusing on the balance of risk statement, and to me we’re not focusing adequately on the explanation of why we acted as we did and what the background was for our decision.

    There have been many expressions of unhappiness with a formulaic approach or standard language, so I raise this point. To me the problem is not so much with standard language but that there is no way to construct standard language or any other kind of language that does a good job on a forward-looking commitment—or quasi-commitment or whatever it is—regarding where policy is going to go in the future. But I do think it is quite possible to come up with some standard phrases or summary phrases to describe the policy decision that was taken. Now, that’s not the issue the working group investigated. What it did investigate and what I think is being revealed in this discussion is that it is very hard to come up with standard language—and I’ll predict any language—that we would regard as satisfactory in terms of the forward-looking nature of the policy decisions. I think we need to provide forward-looking information about where we expect the economy to go and that probably has to be nuanced depending on the facts case by case and meeting by meeting. But I believe that we ought to be able to come up with some standard language that says, for example, that we decided to raise the federal funds rate for this basic reason or we decided to leave it alone for this basic reason.

  • Thank you, Governor Ferguson. I think there should be forward-looking elements in what we announce to the public when we make our policy decisions. The reasons for our decisions, as President Poole was suggesting, always have some forward-looking elements in them. But I think we can be a little more helpful than that in the sense that the Committee has an idea of how the economy and inflation will evolve over time and we could convey that notion. Not only is that judgment a factor in the current decision, but also it would give people some sense of how policy might evolve in the future. I’m not in favor of making commitments on the short-term path of the federal funds rate. I think what we did last August and have done since then with the “considerable period” language was an unusual step taken in unusual circumstances. I’m not in favor of that as standard practice. But I do think that we have some ideas and some analysis that it would be beneficial for us to impart to the markets, which would help them act in a more stabilizing way, consistent with accomplishing the goals we want to achieve.

    On the balance of risks language, I agree with President Poole’s history. We got to the wording we use today in a rather unusual way. But in some sense that language evolved as a substitute for the forecasts that other central banks provide. Other monetary authorities are able to issue more straightforward rationales for their actions in the sense that they have very specific forecasts and ways to discuss economic developments relative to those forecasts. There’s a very clear sense of how they see the balance of risks going forward. I don’t think that this group of nineteen people will ever have a forecast that it can agree on that will perform that function. So the balance of risks language has substituted for a forecast in giving us a forward-looking element in our statements. I agree that none of the formulas for the balance of risks has worked well. I came in favoring the change alternative. I thought that was the cleanest way to talk about what might be influencing the direction of rates going forward, but other people clearly don’t agree. And in my view, both levels formulas have problems. So, Mr. Chairman, I support your proposal for lack of any better alternative, acknowledging that where we are isn’t so bad as a starting place for a gradual evolution in the language. I do think it needs to evolve. The Committee members don’t quite agree on the meaning of some of the language we use now. So I think we need to have that language evolve, and it needs to happen gradually in accordance with the situation that we’re facing.

    I do have some reaction to the general notion of shortening the statement. I think it should be as concise as possible to get our basic ideas across but not more concise. I’m a little concerned that arbitrary limits on sentences or words—even though I realize that people don’t mean that literally—will not afford us adequate flexibility to convey the important notions that we need to convey. So yes, it needs to be concise, but in my view it would not be a good idea to drive for it to be so short that it didn’t contain adequate information. We have some information to impart to the markets about where we think the economy is going, which will be helpful to them, and I think we should communicate that information in a very general way.

  • I, too, was in the working group and, as you can see, there was obviously not a consensus among the group on how to move forward. I was attracted to the formulaic language, though I recognize that there are some difficulties with it. It doesn’t apply to every specific circumstance, but it does provide a very good framework for the Committee to express its views, recognizing that we can always amplify those views in earlier paragraphs of the statement. The formulaic language doesn’t prevent us from doing that, and we would clearly have to do that in some cases. But obviously there’s no consensus in going forward on a formulaic approach today. So I won’t push it.

    Just to be on the record, I favor the levels B alternative. I found some problems with the levels A alternative. The phrase “the path to” I found very confusing. There are many different paths that would enable us to reach our ultimate objectives for output and inflation, and I think that phrase would be very hard to explain to the public. So I have serious questions about whether levels A would be helpful to us, and I thought levels B was easier to understand.

    In terms of the gradual evolution approach, which we seem to be evolving to gradually [laughter]—or maybe rapidly—I would just say this: I think putting the statement in the Bluebook is a very constructive step. I believe it is very important for everyone on the Committee to see the draft wording ahead of time. If there are last minute changes to the draft statement, which I think was a possibility mentioned by Vincent, those addenda should be sent out as rapidly as possible to the members of the Committee. I do think this process will require more of our time as a Committee, which I’m sure is fine with all of us, and I think we should recognize that prospect, in terms of the discussion of the specifics of the statement at our meetings.

    In terms of the nature of the forward look at policy, I agree with what Don Kohn said, but I’d add another point. I think there’s a practical issue here in that it’s very difficult for us as a Committee to back away from providing that forward-looking insight into policy. I think it would be viewed by the markets and by the public as a big step backwards no matter what we do with the minutes or even with our individual forecasts. When we get to the discussion of the minutes and the other communication issues, I think we can formulate a package. So I’ll hold off on the rest of my comments until then.

  • Vice Chairman Geithner.

  • Let me just make a complicating observation, which is that I’m not quite sure what we think we mean when we say we’re in favor of “gradual evolution.” Many of you who have spoken today of gradual evolution have somewhat different views about the future statement in terms of what the third paragraph should be. So I was just going to ask this complicating question of you, Governor Ferguson: What does greater flexibility in assessing the risks mean in terms of which direction you want to see flexibility?

  • I’m glad you asked because I was going to try to summarize the discussion and be more explicit about where I think we are. I’ve listened and written down some notes. Clearly a number of you—though not a majority—would like us to discontinue anything that looks like a risk assessment. I’m interpreting that even more broadly, which is that this group doesn’t want to give what might be perceived as hints about future policy. That said, as I listened, most people seemed to evolve to the following view: Pre-set formulaic language at some point will fall apart. The formulaic language we used previously lasted for a few years. This language may last, but it will never cover a very subtle and complex situation. However, I sense that most people also agree with Governor Kohn, President Moskow, and a few others that either for practical reasons or for theoretical reasons we do need to provide something that is a bit forward-looking. In part that’s because it may help explain our policy and in part because it may help us communicate to the markets—not in the sense of giving hints about policy but of fostering an appropriate mindset in the markets with respect to the incoming data and what we are worried about. That has been described as a balance of risks assessment, but it doesn’t have to be.

    So what I think we’re agreeing to here is a commitment among ourselves, and frankly with the market, that we will continue to provide some forward-looking language that may have the flavor of indicating that the Committee tends to be more worried about X than about Y. And how we say that has to be tailored a bit each time to the particular circumstances. If we are far away from what the Committee generally thinks of as an acceptable level—it could be a growth rate, but let’s say level—then presumably we’re concerned about that gap, whatever it is. On the other hand, if we are close to whatever we view as the right level, then presumably we are worried about the point at which things may change and veer away—and we would be likely to move. So I think what we have agreed to here in this gradual evolution approach is that each statement will have something that is forward-looking but it has to be tailored to the particular circumstances that are prevailing at that point. The language may or may not include a summation—what used to be the old balance of risks—indicating that we are more worried about X than Y or that we are equally worried about both. There may be times when we clearly are more worried about inflation going lower or rising higher than we’d like. But we don’t necessarily have to commit to exactly when we are going to tie together our assessment of the risks.

    The other thing that I detected was a strong sense that, because we’re giving the staff greater room to maneuver in drafting the language—not reducing it to a formula or to choosing from column A or B—it’s important for various alternatives to be shown in the Bluebook. We’re not talking about forty pages, but there should be explicit examples of how the forward- looking part might emphasize one current or potential development more than another. I think those are the things that we agreed to. Another point, which I believe Vincent mentioned, is that being flexible by definition means that we also have the option not to include a forward-looking element in the statement if we simply can’t come to a common point of view. I think what I have outlined here reflects the general consensus, though there are some outlying points of view for sure. I believe that’s what we’re agreeing to, and that strikes me as not a very bad outcome. That’s my own summation. Is that helpful?

  • Yes. I’m happy to associate myself with that consensus.

  • Okay, that is the broad consensus. Let me say one other thing. Though the Chairman introduced the subject and got us somewhat focused on gradual evolution, from some previous discussions I think that is also a reflection of the broad middle view among the Committee members after having looked at the pros and cons of the formulaic language. I’m not at all surprised that we came to the sense that we want to be forward-looking but not tie ourselves to a formula.

    Now I’d like to introduce the second topic, which is the release of the minutes. What I propose to do is to call on you in exactly the same order as before in lieu of asking people to raise their hands again. This topic was covered in one of the memos that were distributed, and I think that memo lays out very clearly the pros and cons. This strikes me as an area in which we are once again balancing a lot of considerations. My view on this is that, if we decide to release the minutes earlier, that is a decision we cannot adjust—unlike the risk-assessment issue that we just discussed, where I believe we can choose to include a risk assessment or not. If we move up the publication of the minutes, we are stuck with that decision—not just for this Committee but for a very long time. Therefore, as the Chairman indicated in his opening remarks, on this one we have to be very, very careful. If we were to decide to release the minutes early, in all honesty I think it would be roundly applauded by many people—academics, perhaps other central banks, and even the markets. I had a discussion on another issue with the board of directors of the Bond Market Association, and a number of them independently came up to me afterwards and said, “Release those minutes earlier.”

    Having said that, I have come to the conclusion that, on balance, doing so may not be well regarded in the long run. The reason is that I firmly believe that there would be an obvious interaction between that decision on the minutes and the discussion at our meetings. One of two things would likely happen over time. One, the discussion itself would become less thorough and rich. The members would express fewer opinions about what might happen should some development emerge. I suspect the conditional statements we often make would not be expressed so fully, and I think that would limit our ability to share our views and understand each other. Or two, which is equally bad, the minutes would become a less accurate reflection of the discussion that took place at the meeting. That is, we might have these forward-looking conditional discussions, but they wouldn’t be captured in the minutes out of anxiety that the markets would react negatively. Vincent’s chart points out that, in fact, our minutes have served us quite well because they are very full and complete but they really haven’t moved the market, with one noticeable exception. I’m afraid that if we accelerate their release so that they are closer to real time we would find ourselves intervening with the market more often.

    That leads to my second concern, which is the announcement effect of the minutes. I believe it is far better for this Committee to speak once contemporaneously with the decision and then let the markets look at the incoming data and react as opposed to coming back two or three weeks later with another round of Fed interaction with the market. I think that doing so, if anything, will limit our ability to read the market fully. The reason I chose to speak first on this topic is that I believe that it’s extremely important to think of this in a risk-assessment context. While many people would argue that the benefits outweigh the risks, I am firmly of the view that that is not necessarily the case. So before we move headlong down this path, we need to think about it very, very carefully. Having had my intervention first, let me go next to President Hoenig.

  • I’ll combine a couple of things at this point. Let me start out by saying that, if the consensus conforms with the view that you have just summarized, I can live with that. I originally was in favor of releasing the minutes earlier, and my thinking was that doing so would allow us to get rid of the risk statement. I know there is the thought that we can’t move back from a decision to accelerate the release of the minutes, but I think the quid pro quo of eliminating the risk statement could be favorable. So that has some appeal to me. Plus the minutes give the market a more complete reflection of the broad views of the Committee members, and there is perhaps a benefit from that.

    I think that assessment still holds. However, I recognize your main point. I’ve been down that road before: You jump, and then you’ve done it, and you can’t back out. So I don’t have a problem with approaching the decision slowly, with a lot of thought. But I think it is a step worth considering and deliberating. As for some of the comments that arise in our discussions, certainly if the minutes are not released for two or three weeks, what we say in public statements during that period can be more complicated. But I think we live with that to an important degree now. So I don’t see that as a very significant complicating factor. The news event of the minutes could be an issue if somehow the minutes give a completely different view of our assessment of the balance of risks than the statement did when we released it. So I think the proposal to advance the publication of the minutes deserves continual thought if not acceptance at this point.

    Finally, I’m just going to go ahead to the next item, the role of our individual projections. My thought was that, if eliminating the risk statement were viewed as a backing away, the projections could be the substitute in terms of filling in for information that is forward-looking. That’s not as critical to me as the idea of releasing the minutes sooner to make public the general views of the Committee. I’ll stop there.

  • President Santomero.

  • Thank you. I don’t view releasing the minutes earlier as necessarily a bad idea. I do have two caveats associated with that view, and they are important to me. The first is that we should not do so and also expand the “blackout period” so that we end up with three or four weeks of blackout, essentially moving us backward rather than forward. Second, we should not release the minutes with such rapidity as to get ourselves into a mechanical problem that could later become a political problem. What I mean by that is that, in my view, every member should have an opportunity to see the minutes and be comfortable with them. We don’t want to find ourselves in a situation where there is a difference of opinion about what should be in the minutes or what was said in the meeting and have no way of resolving it because of the pressure of time. The way I expressed it in my notes on the subject is that at a different time with a different staff we could find ourselves in a contentious environment, with disagreement among the Committee members as to what we wanted to say in the minutes. I would hate to have a situation where the resolution is rushed because the minutes have to go to bed by Thursday, say, or otherwise the markets will see that there is discord in the Committee.

    With that mechanical piece of it resolved, I think we could in fact release the minutes somewhat more rapidly. When I was thinking about all this, I wondered how rapidly that was. Are we essentially talking about moving up the publication by a week and then getting into an overlap with the next FOMC meeting, or are we talking about releasing it in two weeks with plenty of time for everybody to get a chance to review it? I thought perhaps we should consider doing a dry run without actually releasing the minutes early. We could say suppose we were to release the document in three weeks, what would be the mechanics? Could we get there? I’d try that during 2004 and see, with the benefit of a year’s history, if we are comfortable with the prospect of accelerating the preparation and release of the minutes. So that’s where I am.

  • So you come out with trying the mechanics of this without going to the last step of releasing the minutes?

  • Yes, to make sure that we’re happy with the results. We can have a whole year of experience. We could ask ourselves, If we were going to release these minutes, do we think that would change the market? Why or why not? Do we think the mechanical issues would make it impractical to release the minutes for four or five weeks and then would that interfere with the next FOMC meeting? A dry run would give us an opportunity internally to see how this would work.

  • Okay. President Santomero has laid a third alternative on the table. President Stern.

  • I’ve long been relatively enthusiastic about releasing the minutes earlier, and that continues to be my view. I think Tony’s suggestion for doing some dry runs is a constructive one. I’ve basically thought that the minutes are an underappreciated asset. They contain a lot of information, but people don’t pay any attention to them because of the timing of their release. So I’m interested in having them taken seriously. I’m making what is perhaps a naïve assumption that the substance wouldn’t change. After all, the minutes are based on a transcript of the meeting, so to some extent I think that’s a reasonable but not foolproof assumption. Your comment, Roger, about hitting the market a second time and perhaps creating more chaos than being helpful gives me a bit of pause. My ultimate reaction to that, though, is that there’s bound to be some learning period that’s going to go on for I don’t know how long— months, quarters, or maybe even a year. But I would think that over time market participants would come to understand what’s going on. And in my view, the better communication is worth the price.

  • Thank you. First, Roger, I thought you had a very good summary of the first discussion. There was something you said then that I would like to emphasize regarding the last item in the first column in Vincent’s table, “discontinue the assessment of risks portion of the statement.” I believe that you said we would be flexible about the risk statement but we would not eliminate it. That happens to be my position. I think that from time to time people are going to want a bottom line, and I think we ought to give it. We can be flexible with it—we have been flexible with it—but I wouldn’t want to eliminate it.

    On the minutes, I frankly used to agree with you that it was good to release them after the next meeting and keep them out of the news. But this latest episode has turned me around because it is now clear that many people think—even though it is not true—that we used the minutes, say, from our October meeting to amplify our December message. While that is not true, once the suspicions are out there it’s hard, no matter what we say, to get rid of them. So I am somewhat reluctantly going to the notion that maybe releasing the minutes earlier is in order. That is, after we have the meeting, then two or three weeks later—whenever the staff can prepare them—we publish the minutes. I think we ought to keep the minutes just the way they are now. I agree with Gary that they are an underappreciated asset, and I wouldn’t change their substantive content at all. I’m persuaded that the Committee is quite ethical, and I don’t believe we would change them. I think the process would go forward just as it does now with the one exception—that the minutes would come out three weeks, say, after the meeting.

    I would agree with Tony in that I would not change the blackout period. Pretty soon we could be blacked out totally! So I’d keep the blackout period the same. We’d really do everything as we do now except that we’d release the minutes three weeks after the meeting.

    On the experiment, it’s my impression, Vincent, that you already did that. You accelerated the preparation of the minutes this last time, and I didn’t notice any loss of output or productivity. Maybe somebody did, but I thought they were just as they always have been. So even provisionally I don’t think we need to experiment much.

  • We did the easy part of the experiment, which was the staff side. Well, it may not have been easy for the people actually drafting the minutes. We created a rough draft by about this time next week. We’ll do that again. The harder part of the experiment is resolving how you will comment on the draft. Will you want to see other members’ comments? How will you know that the Secretary has incorporated your comments and weighed various suggestions against each other? How will we deliver it to you electronically in a secure manner? So there is some work to do. Also, we need to think about the rules associated with the production of the minutes, such as the deadline for submitting comments and other items of that nature.

  • President Broaddus.

  • I strongly favor moving forward the release of the minutes, but let me review briefly how I get there. I go back to the basic principle of the way I understand how monetary policy affects the economy—what we used to refer to as the transmission mechanism. Namely, what we do and what we say affects expectations about future policy and interest rates generally. That is the foundation on which I build all of my thinking about this. With that point of view, it seems to me inescapable that we have to have forward-looking statements. And to me it’s highly desirable for us to try to give some sense of how we see the balance of risks in the outlook. So I come out on that where Don and Mike did. I feel strongly that we have to have a forward-looking element in our statement; I don’t see how we can do without that.

    Going back to our earlier discussion, it’s also clear to me, largely from the work of Roger’s working group, that it’s going to be very difficult and probably impossible to convey this forward-looking assessment with a brief post-meeting statement. Even if we had some additional sentences, I just don’t think that’s likely to work. So that is what leads me to conclude that we need to consider moving the minutes forward. The minutes are detailed enough to convey—as they already do—both the majority and minority opinions about the outlook and the balance of risks, and they do it reasonably robustly. Also in terms of transition, the public and the markets are familiar with the minutes. Yes, I realize there’s a risk that they may change if we change the regime here. Still, the general form and content of the minutes certainly are going to be similar, so they will be familiar to people.

    There are obviously drawbacks. It’s not a freebie. It’s not a panacea. A lot has already been said about that. Obviously, too, staff and Committee members are going to have to be willing to devote time in the period right after the meetings just to go through the process of getting the minutes ready for release. And that’s not trivial. It’s going to require changes in schedules and practices. I don’t see how in the world we can make a blackout work. So there is the risk that statements we make will add some noise to financial markets. But markets know how to discount that type of thing already, so I’m not terribly concerned about that.

    I must say that some of the points you raised, Roger, are worth thinking about. I’m not sure that I’ve thought them through completely enough yet. On the point about our hitting the markets a second time, my initial reaction is to try to imagine what this new regime would be like where we are continuously releasing much earlier a lot more information about what went on at each meeting. It may well be that, in that sort of atmosphere, it wouldn’t be news in the same sense that the statement is news now. I just haven’t thought that through completely, but it’s a point worth making. In any event, for all these reasons I think releasing the minutes earlier is our best alternative. If we did that, we should continue to issue a statement immediately after the meeting. And that’s how I got to the conclusion earlier that something on the order of the gradual evolution path would be okay for the statement if we took these other measures. But I can’t separate them.

  • Okay. Governor Bernanke.

  • Thank you, Governor Ferguson. One of the reasons we find it difficult to issue a policy statement is that there’s such a wide divergence of views around the table. The special advantage of the minutes is that they represent the diverse views and give some perspective and depth to the discussion. They also include a lot of valuable and interesting information from the staff presentations about the state of the economy. So I would be very much in favor of moving up the publication of the minutes. I would note, to address Governor Ferguson’s concerns, that we would not be the first central bank to use the minutes this way. Many central banks around the world do that without problems as far as I’m aware.

    With respect to the blackout, I think extending the blackout period would be counterproductive for many reasons. One of them is that it would be like a drum roll up to the minutes that would in fact exaggerate the impact of the minutes. So I would favor keeping the blackout as it is. No one has mentioned this—the Chairman might want to weigh in on it—but it might make sense on the regularly scheduled two-day meetings to hold the minutes until after the Chairman’s testimony but just in those two instances.

    Finally, with respect to the idea of dry runs, perhaps one or two might be worthwhile but it seems to me that, if we are going to make some changes, it would nice to be able to announce them as a package. Doing dry runs for the whole year would limit in that respect the impact of the overall change, if there is one, in our transparency policy.

  • Thank you, Roger. First of all I’d like to congratulate you on your somewhat brilliant description of gradual evolution. I think there was something in there that everybody could hang onto and like.

  • Oh no, you caught me!

  • It’s going to be interesting to see this evolution. But as you’ve described it, I’m comfortable with it, and I think that’s the way we should go. I must say that I thought Governor Bies was correct and conveyed my sense of the value of ambiguity in a short statement. We’ve used it a lot. If one goes back and looks at the statements we’ve issued over the last three or four years, they’ve contained a lot of vague wording. But they’ve also conveyed a decent sense of where the Committee was going without tying us down. So I think there is some value in ambiguity—and not just because it may result in a shorter statement or any reason like that. So I want to put in a little vote for some constructive ambiguity, if I may call it that.

    I have long been in favor of releasing the minutes early and had begun to question myself a little on that for some of the reasons that Roger just mentioned. But as I throw my concerns back and forth I come out on balance in favor of releasing the minutes early. I was looking at it as a quid pro quo for eliminating the risk statement. I’m not so sure we can use it that way. I tend to agree with President Moskow that totally eliminating the risk statement might be viewed as taking a step backwards, but I’m not sure about that. There is an issue that nobody has talked about with respect to the release of the minutes that goes to the diversity of opinions that are expressed in them. If we put the minutes out early, those opinions are public at a time when they have some meaning with regard to the next meeting. Suddenly there may be a drumbeat from the press and other places as to who said this and who said that and who said the other thing. There’s a possibility that that could affect us, although I don’t agree with a blackout either. In any event, it may be obvious by the time the minutes come out where the nuances of perspective are at least among some of the more publicly active members of the Committee.

    I think President Santomero has a good idea—and it’s one that I had in my notes as well—in suggesting that we should parallel test this. If I recall correctly, not only the December minutes but even the minutes from the meeting before that were done somewhat earlier than usual. But I didn’t look at them in the same way that I would look at them now—in terms of what they say versus the prevailing views in the market and whether there would likely be any market implications when the minutes are released. Do I think they would have a big impact or not? So I would favor a period of parallel testing of this if people think it’s worthwhile going to the extra trouble to do that. Frankly, I wouldn’t make any discernible changes in our communications process before doing that or much before midyear or so. I don’t think the gradual evolution in the statement would be viewed by the market as a major change. And if we’re going to release the minutes early, we need some time to really think about that as a group and see how we feel about it when we review what’s in the early renditions of the draft minutes that we get.

  • Thank you, Cathy. I always make it a practice of calling for a coffee break whenever anyone says something nice about me. This seems like a good time to have a coffee break.

    SPEAKER(?). Now I’ll know in the future!

  • [Coffee break]

  • I’m interested in but not yet enthusiastic about accelerating the release of the minutes. I think the information advantage to the markets of getting the minutes roughly in their current form several weeks earlier would be meaningful. But since the earlier release of the minutes would become a significant policy event in itself and since it precedes the next FOMC meeting, I am concerned that the accelerated minutes would be different and perhaps less informative than the current ones. I also worry that our discussions would be affected by the knowledge that the market would focus more sharply on the minutes than they do now. That leads me to the view, if we’re going to pursue this—and I’d certainly be supportive of going the next step or two—that we should have trial runs or parallel processes. For me the issue is not getting the minutes drafted—I think the staff can do that readily—but the process of editing and resolving any disagreements that may arise with regard to specific editing changes. So in my view there’s room to look at this further.

  • Thank you. President McTeer.

  • Governor Ferguson, I think Cathy described your summary of the risk- assessment discussion as somewhat brilliant. I agree with that although we don’t need another coffee break! [Laughter] When you summarized the discussion I thought you had left open the possibility of discontinuing the formal risk-assessment portion of the statement. But Governor Gramlich indicated that he thought you hadn’t. I would urge you to keep considering that option. Many of you have emphasized the value of continuing to have something that is forward looking, but I think there is the possibility of having forward-looking, relevant information in backward- looking statements. When we take an action at a meeting and we say why we did it, we are giving information about the kind of development that triggers an action by us. If those conditions change or if they don’t change in the next several weeks, then market participants can form their own conclusions about the implications of that.

    Moving on to the release of the minutes, I thought your preemptive description of that was brilliant, not just somewhat brilliant. I agree with all of it. I was prepared to trade away something on the minutes for the elimination of the risk assessment. But I agree that what we have in the minutes now is very good, and given my druthers, I’d stay with our current procedures. By our releasing them after the next meeting they’re available for scholars, economists, and others to do what they want with them. They don’t disturb the markets. Putting them out before the next meeting I think inevitably is going to disturb the markets. The only time the minutes could come out before the next meeting and not do damage would be immediately after the meeting they’re describing, which is obviously impossible. So I agree with everything you said about releasing the minutes earlier. Of course, this puts us on the wrong side of what people perceive as inevitable history. We’re not going to be regarded as progressive in terms of transparency. But I do believe your position is right

    With regard to blackouts, I think the blackout period after our meetings is already an anachronism, and we ought to be considering shortening rather than lengthening it. To me the blackout several days before the meeting is useful. But once we began issuing statements on the day of the meeting, the post-meeting blackout no longer served a useful purpose.

  • Thank you, Governor Ferguson. I agree with your characterization of the way to think about this as being risk management. That’s a concept the Chairman has used in other policy discussions. I don’t think the risks are so large in terms of the process of producing the minutes, though I see some small risks there. And like most others who have spoken, I don’t like the idea of a blackout of essentially half of the period between meetings. I think that would be a terrible step backwards.

    To me the larger risk—and this is going to seem strange, but I take a different view from the one you expressed—is that, rather than being less informative, the minutes could become more informative in an unfortunate sense. You were saying that perhaps the discussion would be more careful and more circumspect and as a result the minutes would not be as informative—a point that Bob Parry also mentioned. I think it’s possible that it could go the other way and that some people would be trying to get into the minutes their own particular way of thinking about the economy. That could inadvertently lead to a lot of time being spent in the meetings trying to get our preferred points of view into the minutes and more time spent arguing during the editing process about how much of that language survives. And it seems to me, as Cathy Minehan suggested, that the minutes will be read more carefully if they come out before the next policy meeting. So depending on whose views the readers pick out of the minutes, if we have that kind of jousting for phraseology and language in the minutes, we could in fact end up with minutes that are more informative than we really want them to be. I see that as a larger risk, as strange as that may sound. I just don’t think we need to go in that direction right now. And once we do, we’ll have a very hard time going back the other way. So I would strongly prefer to sit tight.

    I also originally thought of the early release of the minutes as a possible tradeoff to get away from the risk assessment in the post-meeting statements. But I think there’s another way to make that kind of trade and it’s in the Monetary Policy Reports. We’ll come back to that shortly; that’s an issue I would like to keep open also, as President McTeer suggested. Thank you.

  • President Pianalto.

  • Thank you. For all the reasons that were listed as pros in Vincent’s presentation, I was leaning toward supporting early release of the minutes. However, some of the cons listed on the same page and in Brian Madigan’s memo are more troublesome to me. I think they also present some greater risks, especially the temptation to send signals and the ability to make conditional statements—some of the points that President Guynn just made. Also, there’s the issue that President Santomero raised about the ability to work out differences among Committee members or the Committee and the staff in a timely fashion. Those concerns cause me to step back and not support early release at this time. I was also going to recommend, as President Santomero did, that we do some dry runs if the Committee at some point feels compelled to go in this direction. I think we really do need to have some practice with this process to make sure that we are working out all of these issues, especially those that are listed on the “cons” side. So at this time I’m not willing to support early release of the minutes. I want to have a better understanding of some of the issues that have been raised.

  • Thank you. Governor Bies.

  • Thank you, Governor Ferguson. I’m going to come out on the side of supporting earlier release of the minutes. Let me tell you why. In response to the comment that the early release of the minutes would be another news event and could move the market, I’d point out that we are out giving speeches all the time. Our public statements all have the potential to move markets on occasion, and in fact it has happened. To my mind we’re better off releasing the minutes. At least then there’s a balanced approach, with the diversity of views presented at one time rather than the views that get press attention being dependent on whose speaking engagements come where on the calendar. So I think that the earlier publication of the minutes would diminish the news events. It would help put into context when a Bank President or Governor is speaking where their views are in the continuum of views expressed at the meeting that had just occurred. I believe it actually would help lessen the “news” impact compared with the reaction to our speeches. I also don’t want to extend the blackout period because I think our public appearances are a critical way for us to communicate between meetings. We can communicate when economic conditions have changed from those that led to the decision we made at a meeting; new data may get us moving in a different way. So I would hate to extend the blackout period.

    Let me comment on one of the alternatives regarding how to handle the approval of the minutes—whether we should do that as a subcommittee or not. I strongly disagree with the subcommittee approach. I think all of us need to be involved because these are our minutes and they are very important. I would feel very uncomfortable having a subcommittee perform that function. I also would like to see us go ahead and do the dry runs where all of us have to make sure we schedule time to read and comment on the minutes. Given that we couldn’t pull back from the release date—but we could always release them earlier—I would suggest that, if we do go forward, we release the minutes with a relatively long window for the drafting and approval process. If we get better and faster at it, we can move up the publication date, but we can’t go the other way. So I would leave us some room and start with a longer period initially.

  • Thank you. I’m quite skeptical of early release of the minutes. Let me say that I start from the position that the minutes must absolutely be true to the transcript that is going to be released five years later. We can’t have a discussion of an issue that might be sensitive and leave it out of the minutes entirely; somebody will look at the transcript later and say that the minutes just didn’t reflect what happened at that meeting. So I think that’s a very important consideration.

    As I think about my own experience, not too long after I came here in 1998 we had the problem of the Long-Term Capital Management hedge fund and the related upset in the securities markets. If I recall—and my recollection may be wrong, but that doesn’t matter for this purpose because we could imagine it taking place—at our August meeting of that year we had some discussion of what was going on at that fund. And we had an interim conference call discussion before the September FOMC meeting. If we had released the minutes for August on some standard schedule along the lines of what is being considered now, they would have come out just at the time that all hell was breaking loose, if I may put it that way, in the financial markets. Now, unlike Governor Bies, I think there are times when it’s very constructive to be quiet and not to say anything. Even if one has a scheduled speech, there’s a way of giving a speech and not saying anything about the FOMC and monetary policy. I think we’ve all been there. But if the minutes are coming out and they’re going to be true to the transcript, we may not have any choice but to say in the minutes what went on at the meeting. So, that’s one of the reasons that I come out against early release of the minutes.

    There’s also a practical issue that was not discussed in the working group’s report; I don’t know whether they considered it, but I think it would need to be considered. What happens if we want to have an interim meeting a couple of days before or a couple of days after the date the minutes are to be released? How does that complicate our situation? Does the release of the minutes then muddy the message that comes from a policy decision at an interim meeting? Or if the minutes are released a couple of days before an interim meeting, what do we do? What is the release schedule for minutes of an interim meeting because, as I recall, those traditionally are attached to the minutes of the earlier meeting? I don’t know whether or not those issues were discussed, but it seems to me very important that we think through how we would handle those types of situations. I’m quite skeptical about moving up the release of the minutes because when we look at all this carefully, I think we’re going to find a lot of very sensitive and potentially unfortunate interactions of that kind.

  • Thank you, Governor Ferguson. On balance I’m leaning in favor of early release of the minutes. I think there is a lot of information in them. It’s a much more complete explanation of why we did what we did and how we look at the future—points that I made before in talking about the statement. And as President Minehan said, the minutes do give a sense of alternative perspectives. Partly because we have so few dissents on the Committee’s policy decision, I think it is important to get the sense out there that there are alternative reasons for arriving at the same decision. Consequently, though I do think early release would move markets and it could be uncomfortable from time to time, on balance I believe that over time it would result in markets being more stabilizing by moving in directions we want.

    I do recognize the concerns that President Poole, President Guynn, and Governor Ferguson have raised. They also have raised some technical issues about intermeeting moves or discussions that we need to think about carefully. And I do think it would require some discipline on the part of the Committee to avoid having the earlier release of the minutes cause feedback effects on the Committee’s deliberations. I like the idea of the dry run. I’m not sure we need to go through a whole year of dry runs, but we should do them at least for a while. And it’s not only a production issue. It’s a matter of thinking about what these minutes would do to the markets if they came out today. Now, the value of the dry run is limited because, with our knowing that it’s a dry run, we won’t get the feedback of the minutes on the deliberations. But I think it can at least help inform a decision later if we have a number of instances of the dry run.

  • Thank you. President Moskow.

  • This is a very important issue, and on balance I come out favoring early release of the minutes. It might make us a little uncomfortable at times; but I think, as the document said, it will also make us more accountable, and in my view that’s a plus. It’s a real positive in that it improves our transparency. Quite frankly, in this age of rapid communication it’s hard to justify holding off for six to eight weeks before we release them. It’s a red face test that I find difficult. I know we can always say that we have to approve them at the next meeting, but again in this era of communication I find that hard to justify. I think the minutes are a supplement to the statement that we release shortly after the meeting. I don’t view them as a substitute for that in any way. So to me it’s an additional bit of transparency. I think Tony’s suggestion of a dry run is a good one; we need to work out the mechanics and to set the rules for processing the minutes. I don’t think a full year is necessary, but it would be helpful to have a dry run.

    Let me touch on the two points that Roger made, which are both very important. One is that it may affect the Committee’s discussion. On balance I really don’t think it would affect the comments at the meeting all that much. The only time it might have an impact is when we make conditional statements—for example, that if certain developments occur, we may need to have an intermeeting telephone call. I think we’d have to work out some way to deal with those types of circumstances. I don’t know exactly what that should be, but we do have to address that. Other than that, I just don’t see it affecting the discussion at the meeting any more than the release of the minutes after the subsequent meeting does. As for the other point about speaking once in our post-meeting statement and then letting the markets interpret the data, I think Susan Bies put it very well. We are all individually speaking at various times, and in the process we generate a lot of news events. The press is covering us more than we would like. That’s just part of the process, and if we release the minutes earlier, the markets and the press will become accustomed to it.

    On the blackout, I agree completely with Bob McTeer that the blackout period after the meeting is obsolete. I think it could be shortened quite considerably. We did shorten it about eight years ago as I recall. It used to go through the weekend, and we pushed it back to the close of business on the Friday after the meeting. In my view, we could easily move it back earlier. As for Bill Poole’s comments about the timing of interim meetings, I think these are important issues to think through ahead of time, but on balance I believe they’re manageable.

  • Vice Chairman Geithner.

  • Coming new to this discussion, I have been more moved by the arguments in favor of accelerating the release of the minutes than I am troubled by the arguments against. But the arguments against are proliferating, and those arguments are significant. Some of them I hadn’t thought through, and I believe they’re worth thinking about carefully. My general sense is that we should try to get ourselves more comfortable than we are now as a group with moving toward early release. Whatever ways we can get ourselves more comfortable are worth investing in. I would offer the qualification, just to amplify what Don said, that I doubt a dry run is going to tell us much about what’s really material to the choice here. It won’t tell us anything about the market dynamics. It won’t tell us anything about how the decision will affect the dynamics of the discussion. It won’t tell us anything about how hard it is to get a consensus on the minutes if the differences of view become consequential. My sense is that we should think through these two specific questions of whether it complicates an intermeeting decision or reduces our discretion on intermeeting action. And we should explore a bit Bill Poole’s question about whether there are discussions we would have in this room—on subjects such as a major financial system issue—that we would not want to mention publicly within six weeks much less three weeks or two weeks. I think those matters are worth exploring, frankly, before we take this next step of going into a dry run. But just to end where I began, I think it’s worth trying to see if we can get ourselves more comfortable with moving in this direction because I suspect the returns are worth it.

  • May I ask the Vice Chair a question?

  • What do you have in mind? Let me put it this way: A dry run as an abstraction obviously has a purpose. You’re suggesting that it won’t work. Nonetheless, you’re agreeing with the purpose of it, which means you have an alternate suggestion.

  • Why don’t we ask the barons of this place to explore a bit some of these technical questions that haven’t been explored in detail in the paper? Why don’t we ask them to do that, and come back to us before we go through the mechanics of launching a dry run? I suggest that because I think those issues are more important, frankly, than what we’re going to learn in a dry run.

  • Let me give Governor Olson a chance to speak, and then I’ll try another summation—or the Chairman may want to speak, and then I’ll try another summation.

  • Let me make a couple of points. First of all, I think there are two goals in this process: clarity and transparency. Going back to the risk-assessment issue and speaking as a gradual evolutionist—regardless of what alternative we might have chosen among the risk- assessment alternatives—in spite of the fact that we think we do a pretty good job of communicating, not everybody in the market agrees. So no matter what we might have decided on the risk-assessment issue, some people would have said that we had not increased either the transparency or the clarity. As for moving up the release of the minutes, I don’t see how there can be any question that doing so would be an improvement in our efforts toward both goals.

    I haven’t been involved in this process on this side of the walls for as long as many of you, but I started following the Fed from a public policy point of view over thirty years ago. And it seems to me that something the Fed has done to improve itself is to increase its transparency. The statement on the policy decision, the expanded minutes, the concurrent release of the vote, and the release of the transcript all have helped to reduce some of the mystery regarding the Fed. I think that the Fed operates in more anonymity than almost any other public or quasi-public body. And how we continue to deal with the question of transparency is a matter that I think we want to control and not have somebody suggest to us that we ought to be doing more.

    Having said that, I want to come back to Governor Ferguson’s opening remarks because I think what he said is critical. In this instance, once we have made the decision, we can never go back. So of all the options we’re looking at, this is one that we need to consider with the most deliberation. I would suggest that, if we move in this direction, we do a dry run and simulate the process at the same time. Even if it doesn’t change much—and I think it will—it has the potential to change a great deal, and the simulation may suggest to us issues that we may not have thought of. So I’m in favor of the early release of the minutes, but I’m in favor of doing it under a variation of the Santomero approach—that we test it very carefully before going forward.

  • Chairman Greenspan on the early release of the minutes.

  • There is a major issue here that I find troublesome, and I don’t know how to get around it, though I recognize that it may be feasible to do so. It’s the issue that Tony Santomero has raised. We have very scrupulously avoided a nineteen-member communiqué-type discussion of the post-meeting statement. Now, if we take this issue of individually editing the minutes seriously, it involves a very standard procedure that, if we actually followed, we would never finish by the time we now release the minutes. That’s because we all would have suggested additions and deletions. And additions and deletions change the context of what we have in the minutes. At our meetings we typically have three or four hours of discussion, and writing the minutes to fully capture what went on is an art. The notion that we would all decide on what to include in the minutes that would fully reflect our discussion or that we would agree on how to say it is just not believable. It’s not a big deal now because the impact on the markets and the impact on what we do is not very large.

    I do think that this is really an unknown. We have no idea how this process would work. It is quite conceivable, if we go ahead and subsequently find out that we can’t make it work because we are running into the equivalent of a nineteen-person communiqué, that we’re going to have some very serious difficulties. It may mean that we will so diminish the minutes that the issue Bill Poole raised—namely whether they will look like an accurate reflection of the transcript released five years later—will become a very serious credibility issue. I frankly don’t know the answer to that. That’s one of the reasons I think the trial runs, or the equivalent of what the Vice Chair is talking about, have a certain ring of desirability.

    My judgment, as I’ve said before, is that in a very general way we ought to be seeking to find as our ultimate communication vehicle a way that, when we make a statement after meetings—regardless of whether we act or don’t act—nothing happens. What that suggests is that anything we can do to converge the amount of information currently available in the intermeeting period to the point at which we make our decision is to the good. Theoretically that would suggest that we definitely should speed up the publication of the minutes because by construction that would do it. We have one problem, however. The problem is that apparently the markets overreact to whatever we say. If that is indeed the case, then to move up the release of the minutes could be counterproductive to our goal. Frankly, I don’t see how one can know the answer to that particular question.

    There’s very little doubt that a goodly part of our deliberations has become increasingly conditional. Indeed, the whole pattern of the most recent period has been characterized by this evolving “considerable period” discussion, which is a contingency if I ever saw one. And we’re going to do more of that because a risk-management mode is invariably emerging as the way we operate. What I was identifying in the AEA paper I delivered at the beginning of the month was actually what had evolved in this Committee. I was not suggesting that there was some point when we said: “We are going to take a risk-management view of monetary policy.” It didn’t happen that way. It was, as we like to say today, gradual. The reason that has happened is that these markets are changing and becoming ever more sophisticated, so our approach is of necessity trying to match that degree of sophistication and is continuously evolving. Consequently, I think it’s very difficult to know whether releasing the minutes earlier will be a plus or a minus.

    A number of things could start to happen of which I don’t think we’re aware. Nobody has mentioned the obvious thing, which I’m sure will start to occur, which is that there will be pressure to identify the people who took various positions. We don’t get that now because virtually nobody except the academics reads the post-meeting minutes. But I don’t think it’s credible to believe that that’s not going to happen. Susan Bies made a very important observation—namely, that there is a tendency for our speeches not to be uniform. We have nineteen members in this group, and I will submit to you that the distribution of words uttered publicly between meetings by members of this Committee is highly concentrated; I would say that most of the statements are made by significantly less than half the members. And I don’t think they are necessarily a representative half. So in that respect it’s useful, as Susan said, to get the minutes out to provide some specific context for the policy decision.

    Having listened to the conversation today—and I must admit that I have been on all sides of this issue over the years—my sense is that it gets more and more complex. The one thing I’m sure of is that we ought to be reasonably certain how we think this is going to come out before we move. I don’t know what vehicles we could use to become reasonably certain. I do think the trial run is not going to solve the problem, as the Vice Chair points out, but it will give us some insights. And I’m sure that trying to work our way through what we would do under various conditions will be helpful. The crucial question, however, is what we will do about contingent statements. If we decide to leave them in, there is a fairly significant risk that we’re going to increase the volatility going into the next meeting. If we take them out, we are doing an injustice to the intent of conveying what actually went on in the meeting; and without them, we may in fact make the meeting minutes incoherent. In other words, somebody will note that something obviously went on that’s not mentioned in the minutes because the discussion doesn’t seem to track. People are not reacting to each other’s views. When the contingency statements are put in, it all comes together.

    So of the three issues that we’ve raised here, I think this is the toughest one. I understand the notion that we are a public institution and we have an obligation to the electorate to be forthcoming in all respects short of that which diminishes our capability to do what we are statutorily required to do by the Federal Reserve Act. And we are the only ones who can make that judgment unless we do it so poorly that somebody else will impose a different judgment on us. But we can be certain, as someone said—I believe it was you, Mark—that the judgment imposed on us by somebody else would scarcely be better than one we would make.

    So the way I come out at this stage is that I’m a little concerned about moving forward on this. But because of the public nature of this institution, I do think that we have to try to see if we can move forward on it. Before we act, though, we have to be reasonably convinced that it will not make our job on monetary policy, which is the most important issue here, more difficult to implement because we’ve set up barriers to our ability to function effectively. If that in fact happens, we are doing a grave disservice to our mandate. I think the crucial issue here is not an issue first and foremost of being transparent. The crucial issue is to do the right thing in terms of our monetary policy decisions. Being transparent merely involves explaining what we did and what we might do. But if in the process of the explanation we undercut our ability to do the best thing, that to me is a net loss.

  • Thank you. Let me first disclose what I think the tally is. There are, I believe—it’s hard to get all the nuances right—seven or maybe eight people whom I would describe as not enthusiastic. The remainder apparently feel that they’ve weighed the pros and cons and on balance are more comfortable going ahead with an earlier release of the minutes. The obvious middle ground is to undertake some form of testing as best we can, understanding that what Tim Geithner said is true—the ultimate test will not occur until we actually release the minutes. However, I suspect we all believe, since no other approach immediately comes to mind, that we ought to try a bit of a dry run. That’s one thing to do.

    Another thing we can do, which I have done, though maybe a lot of you have not, is to read some of the minutes from other central banks. We can ask the staff to circulate them, and you’ll see that some look familiar in terms of being consistent with what we do. Some, such as those from the Bank of Sweden, are very much in the mode that Tony Santomero suggested: One member said X, another member said Y, and when you’re through what you get is a one- paragraph version of the transcript. So there’s a range in the way the minutes could be formulated. I propose that we circulate some examples so people can see what minutes from other central banks look like. I would propose also that the staff go back and develop a way to work through Tony’s thought of having a bit of a dry run for long enough to test some of the concerns we have raised. Doing a dry run for just one or two meetings this year may not prove to be much of a test because the probability—though I can’t predict it fully—that we’re going to be in a mode where we’re talking about contingencies and potential changes in interest rates doesn’t seem so high. On the other hand, if we conduct dry runs for a year, I think we will get to a position where we are at least having more serious discussions of changes.

    So I think we could conclude by saying that we should go forward with some sort of concept of a dry run, with the staff trying to give us an idea of how the minutes would look and how this process would work. We could proceed down that path, recognizing the concerns that have been raised and the fact that, as Tim has picked up, this is a very close call. Even those who are enthusiastic see some risks, and a number of other people clearly are not enthusiastic. Does that seem like a reasonable place to end this discussion, knowing that we’ll have to come back to make a decision on how to do the dry run and then once the dry run is done we’ll look at this again? Cathy Minehan.

  • I would just like to interject that I think we can make the dry run a bit more effective, recognizing that, as Tim said, we won’t really know what the market feedback would be. Nonetheless, we should put some effort into addressing the minutes issue by preparing them for publication and then reading them again at the time they would have been released in the context of what’s going on in the markets. We could then come to some assessment of what the impact of their release might be.

  • Yes, I think that’s an important point. We’re obligated to take this test seriously. Unless that is done, we’re going to learn nothing. If we all essentially try to replicate what we would do in the real game, I think we’ll learn something.

  • I think the staff needs to help us figure out if there’s a way to look at the content of the minutes at the time they are completed as well as the incoming data since the meeting and judge what the market reaction might have been. We need to try to get an approximation, though admittedly a very rough one, of how the markets might have reacted.

  • You know what we’ll learn? We’re going to learn how many iterations we need.

  • Oh, we’ll learn that.

  • That’s one of the crucial aspects. I’ve sat through the writing of too many G-7 communiqués, and that process makes the old sausage factory analogy seem benign. And the FOMC has more members than the G-7.

  • Could I suggest in the interest of time, unless someone has a burning issue here, that we move on to the third topic, which is the role of projections. That is also very important to a number of people. Can we start our go-around on that? Would you like to start, Mr. Chairman?

  • I might as well since I have the floor.

  • You always have the floor! You can exercise that prerogative.

  • I have very considerable concerns about this. Let me say, first, that if somebody is merely arguing that we should substitute core PCE for the CPI in our projections, I think that’s fine. If somebody is discussing the width of uncertainty bands for the projections, I’m all for that. But remember what these “forecasts” are. I say that because every six months I have to struggle when I appear before the Banking Committees to try to explain what these forecasts mean. Everything I am discussing at those hearings—which is a reflection of what we said at our previous meeting—is full of vaguenesses here, imbalances there, and my endeavor to convey a fairly broad sense of where the risks are. And then we have point estimates with no specification of what the assumptions are and no specification of what the analytical structure of the forecast mechanism is. What we call the range of forecasts is not the true range. It’s the range of means. And that, as everybody knows, is smaller than the range of potential outcomes seen by each individual.

    I would almost prefer, if we are going to continue giving these sorts of projections, that we just show the ranges without a central tendency. The reason I say that is that the central tendency isn’t a reflection of the way we function. These forecasts were largely provided to avoid having to put out what would really be an interesting forecast—the staff forecast. That forecast is an internally consistent forecast with explicit assumptions and explicit exogenous variables in it, and therefore one has some way of evaluating it. I submit to you that there is no way to evaluate what one is looking at in the forecasts we provide. To make them more elaborate would involve a very difficult process. And to try to average a group of heterogeneous statistics is particularly counterproductive to the subtleties in which we are engaged when we are trying to make very nuanced monetary policy decisions.

    Remember that we don’t actually function off these forecasts. It is quite conceivable, as has been the case on many occasions, that our “maximum likelihood” estimate—or median or central tendency or any other term you can think of to describe it—is overwhelmed by a particularly low probability event. That low probability event, if it were to occur, is so important that it overrides the central tendency forecast. The issue of deflation, for example, has been a concern. In none of our forecasts last year did we project anything resembling deflation. Yet I would submit to you that the strongest aspect of our monetary policy had to do not with the forecast or the expectation of the most likely outcome but with that low probability, high difficulty problem.

    I have always tried to decrease the exposure of these forecasts, and I’ve tried very specifically to avoid them as much as possible in my semiannual testimonies on monetary policy. Indeed, as you may have noticed, on occasion I don’t mention them in my testimony but they are in the Monetary Policy Report. The reason is that it is very difficult to handle, in part because the outlook might have changed since the forecasts were made. At the point when I’m testifying, these forecasts are three or four weeks old. A short-term forecast that is three, four, or five weeks out of date is really very peculiar looking, and it’s hard to have to sit there and try to explain what that forecast is supposed to mean. I’ve personally found having to deal with that during my testimony psychologically debilitating. [Laughter] But that, I grant you, is not a reason not to provide it.

    I certainly think it’s wise to put in the core PCE, largely because that doesn’t change anything I just said. I don’t see how we can widen the uncertainty bands without defining what we mean by them. To talk about uncertainty bands for a set of projections that have no appropriate statistical characteristics to add them up strikes me as stretching our knowledge with regard to the nature of measuring probabilities.

    So I think there’s nothing to be gained—for myself anyway—by expanding the role of the projections. If we really want to move forward in this respect, then basically it becomes a question of whether or not to provide a staff forecast. We can decide what the exogenous variables are and instruct the staff to change variables X, Y, and Z on fiscal policy, say, or even monetary policy for that matter, and then we’d have something that has statistical characteristics. I’m not sure I’d be in favor of doing that. It’s a huge job.

    I don’t think expanding the role of our projections is going to help us very much because I don’t think these forecasts really correspond all that much to what we say about the economy. At the July meeting I sat there with everybody’s forecast in front of me as you all discussed the economy, and I had great difficulty matching the forecasts with the commentary. And I will tell you the reason. When you talk, you speak in probabilistic terms; when you put down your forecast, it’s a specific number. If the forecasts really mattered greatly in our deliberations and in our policy decisions, then I think we’d have an obligation to make that clear in order to be transparent and to communicate to the markets that those forecasts are what we’re looking at. But we’re not. So, to focus on those forecasts would in my view actually be counterproductive to our purpose of being transparent. I think we would be confusing the markets by leading them to think that the forecasts provide a basis for our operations. The markets would react to changes in the forecasts when in fact those forecasts have very little to do with the way we function.

  • Thank you. Let me just say that the idea of using the projections came to me perhaps more as a reflection of how much I disliked the risk statement than how much I really liked the projections. So, given the almost brilliant discussion of the risk statement, I’m not married at all to the projections. I understand all the issues and concerns, and I agree that we’d have a very difficult time making that work going forward. But I suppose it did serve my purpose in the sense that it illustrated my willingness to get rid of the risk statement. With that I’m going to be quiet.

  • Okay. President Santomero.

  • Are we still on the risk statement? [Laughter]

  • We’re theoretically on the role of the projections. You have the floor.

  • Well, I concur with the Chairman on this one. I think we have to keep in mind that we’re not in the forecasting business. And we should not do anything to reinforce the notion that eight or ten times a year we have a forecast of the macroeconomy, no matter what its statistical validity. It takes away from what people should be focusing on as our responsibility. Moving from two to eight forecast releases each year with our thirteen staffs working on the projection estimates would take up a lot of time. And explaining our forecasts on an ongoing basis—discussing their accuracy or inaccuracy—doesn’t particularly make sense to me. So from my perspective twice a year for the Monetary Policy Reports is fine.

  • I’m not in favor of changing the way we currently deal with the forecasts. When the idea first surfaced, I thought it was intriguing. But the more I thought about it, the more I thought it would raise more questions than it would answer. We would get into the business of trying to explain or trying to qualify what all these numbers meant. And that would not be likely to turn out to be a productive exercise; or at least, as I tried to go through that exercise for the moment, I couldn’t come up with a satisfactory way of doing all that. So I would put this idea on the back burner.

  • I agree with everybody else and in particular with the Chairman. I’ll make an admission here. I don’t really forecast. I have forecasters on the staff over there, and they do a thorough job. They run alternative simulations. If something looks a little funny to me, I can pick up the phone and ask why that is and dig into it to any degree I want. I don’t put down a coherent forecast when I prepare for our meetings. What I do is to try to think how I ought to vote on monetary policy. I was curious on why this interest in our forecasts came about. I read appendix A in the document. It seemed to stem from a somewhat contentious debate between Chairman Miller and Chairman Burns and various members of the Banking Committees when the first report on monetary policy was required. So I agree with the Chairman that there is zero information here. There is a lot of confusion. To be perfectly blunt about it, if there were some way to get rid of giving our forecast in the Monetary Policy Report, I would even favor that.

  • President Broaddus.

  • I think Ned’s comment is a good one. I would like to find a way to get rid of that obligation as well. If there were some possibility of communicating the staff forecast—or whatever kind of consistent forecast we could possibly develop—and talk about how that outlook deviates from our ultimate objective, that’s what I think the public and the market need to know. None of these alternatives to our current forecasting procedure would come anywhere near that. So I wouldn’t want to go in this direction. Again, I think we ought to consider whether there’s some way we can stop doing these Committee member forecasts.

  • Thank you, Governor Ferguson. Basically I’m just going to make a few suggestions for marginal changes in our current practice that might be useful. But then I want be the devil’s advocate at the end of my remarks. First, I think we should substitute or add the core PCE because that probably is, after all, the measure more relevant to policy. Second, I think it would be useful to add six months to the January forecast so that it has the same time horizon as the July forecast. That would not be changing anything substantive. Third, to address an issue that the Chairman raised, I think we should revise our forecasts as close to the release date as possible so that they are not dated or stale when they come out. And finally, I do have a thought on the standard errors. Concerns have been raised in earlier discussions of the projections that they might be considered objectives or goals, for example, rather than forecasts or that, by making a forecast, we risk our credibility in some way. Obviously, we can put in standard errors to make it clear that they are forecasts and are subject to error and so on. One simple way to put in standard errors would be to ask each forecaster to put a 25-75 bound around their estimates—the 25th percentile and the 75th percentile. Then we could take the average width of those bounds across the people whose forecasts are included in the central tendency forecast. That would give an estimate of the average uncertainty among the forecasts of members who are making forecasts. There are ways, I think, to add that. I just wanted to raise that as something to be considered.

    Let me be the devil’s advocate for just a minute, although I’m not proposing any changes. Statements have been made that these forecasts have no meaning and that they don’t guide our policy in any way. I think that’s an empirical question, and most of the empirical evidence that exists goes exactly against that. Work that has done at the St. Louis Fed suggests that FOMC forecasts are better forecasts of inflation than the Blue Chip forecasts, for example, over long periods of time.

  • So far, and that’s all we can evaluate the forecasts on. There’s also evidence that suggests that the Taylor rule based on FOMC forecasts is a better descriptor of Federal Reserve behavior than other naïve type of Taylor rules. So I think it’s an empirical question whether or not they’re useful. Again, I’m not suggesting a major change in the way we use them, but I would ask us to leave open the issue of what information they contain.

  • Thank you, Roger. I think the question of whether or not we should release forecasts is intriguing. But on balance I come to the view that we should not for many of the reasons others have talked about. I also think we ought to be clear as to what we’re talking about because it seems to me that two different proposals have been made here. One has to do with the staff forecast, which is incredibly deep and intensive and is produced through the efforts of a number of people here at the Board. It is extremely helpful in its Greenbook formulation in terms of providing a base and a framework for us to think about the outlook.

    I view that forecast differently from the numbers that I provide for purposes of the Monetary Policy Reports. The four or five people we have working on our forecast in Boston are very good economists, but they can’t substitute for the depth and breadth and experience of the staff at the Board. Let’s say I had to produce a forecast for every meeting, or even quarterly, similar to what we do for the January and July meetings—based on the “appropriate monetary policy” assumption, which would be different from everybody else’s assumption, I suppose. I’d have to add a lot of people to my forecasting staff to be sure it was a forecast that I could defend or be proud of. There would be a continuing issue about the quality of the forecast I was releasing. Now, if mine got merged with a number of other forecasts and the public saw a central tendency and didn’t see highs and lows, maybe that would be okay. But an accumulation of forecasts isn’t necessarily better just because it’s an accumulation.

    I think over time, because numbers are precise and it’s easier to pin people down on numbers, there would be an enormous amount of pressure to discover who was on either side of the distribution around these projections. It’s conceivable that we could get ourselves into a situation where we release the forecast, it becomes known who has forecast what, and we might get ourselves dug into positions coming into a meeting. What really worries me is that, in all of this communication effort, we could get ourselves into a situation—and I think it’s more probable with numerical forecasts because they are specific and can be tracked—where people come into a Committee meeting with a hardened policy position. People might be unwilling to listen to one another or to change their views because they have staked out a position associated with a number that is well known to the outside world. That could make it hard to come to a consensus within the Committee. For me this proposal raises that possibility more than the other proposals do. I think over time that would tend to wreak havoc on the way we operate.

  • Thank you. I assume that we’ll continue with the MPR forecast, so I would suggest only minor changes much along the lines of those mentioned by Governor Bernanke. I think going to the core PCE measure makes a lot of sense because that’s in fact what we focus on. And I’d probably favor a slight change in terms of the duration of the forecast. I’d take the January forecast out two years so that both forecasts made in a single year cover the same time period. I think that would be useful to the public.

  • Back when Mike Prell was in charge of the staff’s forecast, the way I did mine was to subtract a percentage point from inflation and add it to real growth. [Laughter]

  • My practice now is to get very, very close to the staff forecast. But putting standard errors around my forecast would be, as they say in Texas, like putting lipstick on a hog! [Laughter]

  • Do I have to follow that? Could I ask for a bye and have you come back to me? I’m going to risk a bloody nose. I think the Chairman has already popped my balloon before I tried to blow it up! I’ve actually been laboring under the apparently false impression that we are in fact in the forecasting business. I’ve assumed that we make policy decisions based on both our collective and individual forecasts. We spend a lot of time not only studying the staff’s forecast but looking at outside forecasts and doing some of our own. My staff tells me that there’s a not insignificant body of research that says there is in fact some value in putting together a number of forecasts that are done on a different set of assumptions.

    I guess I was dreaming—it may be the equivalent of the nineteen-person communiqué that the Chairman says just can’t be done—that twice a year we would take a look out twelve to eighteen months and try to inform the public about what we see. I have the sense not so much in the forecast but in the semiannual statements that we have an opportunity as a Committee to let the public know our view of the outlook and how they might expect policy to respond to developments that might unfold. I know we respond to low probability events, but I hate to think that our policy from meeting to meeting is driven without the benefit of a longer-term forecast obviously adjusted for short-term events as they unfold. That troubles me a lot.

    So I had this dream that we could provide a really thoughtful semiannual statement from this Committee—whether it’s done before the Chairman’s testimony or after the testimony—and offer that as our forward-looking view of the broader economy. If we did that and talked about developments that we believed would be important in the period ahead, I thought we might be able to get away from the shorter-term statements that react to the recent data. I’m troubled, for example, by the current Bluebook—that we’re going to struggle tomorrow with how to re- characterize the labor markets because last time we said they were modestly improving and now it appears that they may or may not be. I just wish that we could get ourselves and others thinking a little more about the longer term, obviously tempered as we go along by unfolding developments. That was my balloon that got popped, and I guess my nose is bloodied. But I wanted to take a crack at it.

  • Your head is unbowed! President Pianalto.

  • I concur with the Chairman. I don’t think there is anything to be gained by an enhanced role for FOMC member projections. I, like others, am not in the business of forecasting. My staff does not prepare projections. I rely on the Greenbook projections as a starting point. So I’m not in favor of expanding the role of the FOMC projections.

  • Thank you, Governor Ferguson. I support the Chairman in the sense that I really don’t want to do any more forecasting. In fact, I would rather make all of our twice-a-year forecasts rolling ones and revise them for four quarters ahead only. I’d prefer not to go past a one-year horizon because I tend not to have much wisdom about the outlook beyond that.

    But another point—and I’m going back to the idea of focusing on risk rather than the forecast—is that the minutes issue is relevant here. I think releasing the minutes earlier is important because it’s the one place that conveys the discussions we have around the table about mitigating the risks of the different forecasts we have. Over the past year, for example, while we didn’t forecast deflation, we certainly had quite a bit of discussion about the vulnerability of the forecast in that regard. At least I personally was struck by the fact that it wasn’t out of the realm of probability that we could be faced with such severe issues. And I think our views about those risks come out more in the minutes than in any forecast we could put together. I feel that we do a better job describing the outlook and our concerns in the minutes than in our forecasts. So I’d emphasize the minutes rather than the projections for that reason.

  • I would make two changes and two changes only. One would be to substitute the core PCE for the total. I emphasize substitute. If we do both, we have an implicit energy price forecast in there, and I don’t think that’s useful. Second, I think we ought to be able to survey the Committee members for any changes in their forecasts a week or two before the testimony, or whatever is practical in terms of the schedule for doing it. And maybe we could put a footnote in the MPR that these are the Committee’s forecasts as of whatever the date is. Those are the only changes I would make.

  • I wouldn’t elevate the forecast either for all the reasons people have noted, and I certainly wouldn’t want to do psychological damage to the Chairman! I’m not quite as negative on them, I think, as Governor Gramlich and Chairman Greenspan. I do think the forecasts give a sense of where the central tendencies of the Committee’s views lie. You’re right, Chairman Greenspan, that most of what we do in the policymaking process has to do with the risks around those central tendencies, but I think it’s helpful for the public to get at least some sense of where the central tendencies are. And along the lines of the issues that Governor Bernanke raised, they do actually contribute a bit of understanding as to how we moved on average over time, though maybe not at particular points in time. But they have all the problems everybody has noted, and I wouldn’t elevate their role.

    I would like to address the issue of the staff forecast, however. Maybe it’s because I used to be sitting on the other side of the table, but I really think that releasing the staff forecast would be a terrible idea. What we get from Dave, Karen, and Vincent is their best judgment about what is going to happen and what the most likely course for the economy is. Any attempt to release that forecast would tend to move them, even if only subconsciously, toward hedging that, given worries about the market reaction or whatever. So I believe that would be a very, very bad way to go. I don’t think it would serve the Committee well.

    In terms of minor tinkering with the forecast and what we release, to me core PCE is worth thinking about. Unlike President Poole, I probably would add it rather than substitute it. I agree that would result in an implicit food and energy price projection being there, but so be it. Total inflation is not irrelevant. What is happening to total inflation could very well shape expectations about future inflation, and it probably does. If we believe those expectations are important, I think we ought to talk about the total as well as the core inflation, though I agree that the latter is more relevant to the underlying pressures on the economy so I would add it. And I would give serious consideration to adding six months or a year, particularly to the January forecast horizon. Maybe we can return to those issues before we come back in July.

  • I agree, Mr. Chairman, with the way you characterized this. I don’t think the forecasts serve a useful purpose here. Also, though people have very good ideas for minor tinkering that will improve them—the core PCE, maybe lengthening the time period, and things of that sort—quite frankly, I think there’s a danger in doing that. If we do that, we draw more attention to these forecasts. And we give the impression that we’re putting more emphasis on them, and to that extent I think we elevate them. That would be counterproductive. I’d leave it the way it is and not make any changes whatsoever. Discussing core inflation is obviously important, and you do that in your testimony, which I think is a very appropriate place to do it. But I would not change the way we present the forecasts one bit.

  • Vice Chairman Geithner.

  • I have only the weakest of convictions on this issue. I think Mike Moskow’s point is a very interesting one: If there are sensible changes that we could all embrace in how we present these forecasts but we’re all against or uncomfortable with elevating their importance, it may be a mistake to contemplate sensible changes. I have a somewhat more open mind to the merits of thinking about some sensible changes even if we’re going to retain the current relatively limited role of the forecasts in our thinking. So I’d say those minor adjustments are worth thinking through a bit more. But I see no great benefit in substantially raising the profile or the contribution of the forecasts—nor the time we invest in them—as a guide to policy going forward. It may not be worth going through this, but I don’t think there’s a case for increasing their frequency, and I don’t know how I come out on the merits of separating them from the testimony itself. So I offer those weak convictions.

  • Just as a reminder, when we discussed the first two issues—risk assessment and the release of the minutes—we were talking about communicating FOMC decisions, and we have a very important responsibility in that regard. But I agree that we are not in the business of making forecasts. Also, I would remind people of the purpose behind the legislation calling for semiannual reports on monetary policy. I feel like an old man because I had left the congressional staff before the Humphrey–Hawkins Act was passed, but I had been there until two years before that, and I remember the mindset. It was a disclosure issue. It was not viewed as a tool of monetary policy or economic policy; it was a disclosure issue. To underscore that fact, let me refer you to the last line on page 13 of Benson Durham’s memo— you don’t need to look at it—where it talks about the House Committee’s response to the second MPR in July 1979. “We feel this step constitutes a definite improvement in monetary policy oversight.” The issue was not monetary policy implementation but monetary policy oversight. To put it in simple terms, the Congress was asking, “What does the FOMC know that we don’t know?” This was put into the law at a time when we did not have anywhere near the level of disclosure or transparency that we do now. As you probably remember, the Humphrey–Hawkins Act did sunset in 2000; at that time I was back on Capitol Hill with the Senate. What happened was that there was no particular sentiment for continuing the specific components of the Humphrey–Hawkins legislation, but there was great interest in making sure that the Chairman came before the House and Senate Finance and Banking Committees at least twice a year to discuss monetary policy. So the wording of the legislation that followed, starting in 2000, was designed to ensure that that would happen. With that in mind, I don’t see any reason to change anything that we do with the reporting because its purpose is so different from what it had been. The Chairman may have a different recollection of what transpired in the successor to the Humphrey–Hawkins Act, but that’s my recollection.

  • Let me give you my perspective on this issue. I am in the camp that says we have a range of skills with respect to forecasting, but my observation over the years that I’ve been here is that we are mainly consumers of a range of forecasts. We are looking at forecasts to see whether we agree or disagree and to assess what the risks are, and so forth. I, like the Chairman, have observed a number of meetings where the forecasts and the commentary seemed not to be closely intertwined. Also, just to pick up on Mark Olson’s point about what we know that others don’t know, I don’t think this Committee has ever forecast a recession. I can’t quite imagine how it would work. If we’re going to be very transparent and forward-looking, in the sense of what do we know that they don’t know, would we say that the FOMC’s central tendency forecast was for a recession? That never happens. It never would happen. We’re not very good at foreseeing a recession, and if we did, we’d conduct policy to try to avoid it. If you think about it, I suspect we’d always forecast something that looked pretty much like trend, which I frankly think we do anyway. It would certainly undercut any sense of credibility around these forecasts.

    On some of these smaller changes: the core PCE, sure; add six months, possibly; survey for revisions, I’m not sure, partially because that gets to Michael Moskow’s point that doing that starts to convey this sense of great real time validity about the Committee forecast. So I’m not really sure where I stand on those.

    Let me now step out and try to summarize what I think I heard. There were no votes, as far as I could tell, for substantially changing the way we think about or use the forecasts. There was a range of views expressed on some of these small fixes—the core PCE, adding a few months, et cetera—and some people did not address those issues at all. I would propose, since we don’t have to decide any of this until July, that I or the staff send around to everyone a list of two or three options for a simple yes or no vote. I’m not sure it requires a lot more discussion. We can then report back to you on how the vote came out on core PCE—do we add it, do we use it as a substitute—adding six months or a year to the forecast horizon and revising our forecasts closer to the time of the Chairman’s testimony. I think those were the three issues that came up. We’ll see if there’s an obvious yes or no, up or down, and then discuss all this when we get closer to the next forecast round, but we have a couple of meetings before then. Governor Gramlich.

  • Let me just mention one issue that we might also put on your list. I think all of us would care very much about the Chairman’s psychological well being. What is the legal requirement in terms of whether these forecasts have to go in the testimony or just in the report itself?

  • In the past it has been in the report and not in the testimony.

  • I think we have already crossed that bridge.

  • Yes, just in the report. There have been times when the Chairman doesn’t refer to them.

  • There have been times when they are not even included in the testimony. In the last ten years the Chairman has almost never referred to them in the reading draft of the testimony, but there have been times when they haven’t even been in the text of the formal testimony submitted. They are always in the report.

  • So do you get asked about them, then?

  • If they are in the report, no. There were occasions in the past when we were clearly in a recession and the forecast was for no recession. And the issue that Governor Ferguson raised is a really important one in the sense that these are not best- estimate forecasts. We can basically come out in, say, the June meeting with a 50 basis cut in the funds rate and in the report on monetary policy show the economy going up. There’s also a question here of whether these are goals or objective forecasts. But the major problem is that they are not anything in particular because we haven’t a clue what the underlying assumptions are. To have a bunch of forecasts and not know the underlying assumptions and then add them altogether is a statistical monstrosity. I don’t what the mathematical characteristics are.

  • I don’t know if anybody has ever thought of this, but could there be in a special appendix to the report some verbiage about some of these caveats?

  • We don’t know what the caveats are! Then the whole question is why we are doing it.

  • As you know, I would prefer not to.

  • In the last report we significantly trimmed back the discussion in the testimony. Basically we just presented the table, did the table reading, and did not offer an interpretation.

  • I don’t think we got a negative response to that as far as I’m aware.

  • I would say that there are basically two things that go wrong with regard to the testimony process. One is that occasionally there will be questions such as: Six months ago you were forecasting this, and it didn’t happen. What went wrong?

  • It’s only that. It’s never “you were right!”

  • The second is that the forecasts are numbers, and it’s easy for reporters to characterize them. So sometimes the newspaper articles that come out after the testimony are not what we would have expected because the reporters latch on only to the numbers.

  • It may be a statistical monstrosity, but it’s much better to leave it there than to have the Congress demand the staff forecast. So we should just leave it alone.

  • Well, that’s why we have it. That’s how we got into it.

    SPEAKER(?). It’s a legal requirement.

  • That’s where it came from—to protect the staff. That’s the reason that Don Kohn was mentioning that.

  • And that’s still very important, so let’s leave it.

  • The sunsetting didn’t affect the legality?

  • It’s not required.

  • No, it wasn’t even required by law before. By law the only thing that was required was monetary aggregate targets. And this was appended to those targets partly because the Committee was supposed to say how the monetary aggregate targets lined up with the Administration’s economic forecast. So this was a way of working around that as well. The only thing in the law right now is that we are supposed to give some sense of likely future developments.

  • I think the wording is a discussion of “prospects.”

  • Right, “prospects.”

  • The memo mentions the question of whether or not an MPR without a forecast would comply with the law. That’s an open question.

  • It was an open question because the Committee had established a precedent and they interpreted “prospects” to mean these forecast numbers. But the issue isn’t whether you will be sued; it’s whether you’ll get a worse outcome when the Congress pushes back.

  • Let me close this because we want to get on to something else. It strikes me that the sense of the group is retaining the status quo in terms of this last question. We have a long history of doing forecasts. I’m not sure that we’d be better served by not doing them. There may be some room to do some tinkering on the edges, and the staff will do a survey on the three or four or five ideas that have come up here. I think that’s it. I thank you all for a productive discussion. I got through a number of semi-brilliant conclusions! [Laughter]

  • Somewhat brilliant.

  • Thanks to the chairman of our working group who obviously came out exactly where he wanted! [Laughter]

  • We have time to hear Dino Kos. Dino.

  • Thank you, Mr. Chairman. In the interest of getting everybody out of here quickly, I’ll read even faster than usual today. If the marketplace is designed to frustrate the majority by moving against conventional wisdom and—more importantly—the positions of most market participants, the fixed-income market during this period can be labeled as exhibit A. Although most dealers and investors waited and were positioned for interest rates to rise, their expectations were frustrated. Foreign exchange traders, on the other hand, experienced the opposite sensation. They expected the dollar to depreciate further, and their hopes were fulfilled. At times it seemed that the frustration of one group and the gratification of the other were linked by the intervention of foreign central banks and their subsequent investment of dollar accumulations, but I’ll say more on that later.

    The top panel on page 1 graphs the three-month cash rate in the solid red line and the three-month deposit rate three, six, and nine months forward in the dashed red lines. Forward rates fluctuated in a band pushed up by mostly strong data, positive corporate earnings, and expectations that GDP growth would moderate to a healthy 4 to 5 percent rate in Q4 and continue into 2004. However, forward rates were pushed down by two factors. First, two consecutive weak employment reports offset other positive data. Second, comments by a number of Committee members that rates would not rise anytime soon led to short-covering rallies and brought forward rates back down. The same set of factors affected government bond yields. In their hearts, market participants wanted yields to go up. Forecasts for GDP suggested growth above 4 percent and maybe even above 5 percent, and the market increasingly talked about the timing of the first policy tightening. And corporate results in many cases surprised to the upside, suggesting a turn in the profit cycle. Also, there was the rise in commodity prices and the fall of the dollar, both of which might have inflationary implications.

    So why didn’t yields rise? Among the reasons offered were the following: First, the comments by Committee members emphasizing that short rates would stay low. Second, January’s weak employment report, which came as a surprise to many. Third, the already rather steep yield curve; the 3 percent differential between the funds rate and the yield on the ten-year bond is historically wide, and further steepening probably would bring in new investors to take advantage of the carry. Fourth, real yields as measured by a simple difference between, say, the nominal ten- year note and current inflation measures are within historical norms and don’t necessarily suggest that bonds are overvalued. Finally, and this is a subject that has received substantial airplay recently, Asian central banks are recycling the proceeds of interventions aimed at keeping their currencies from appreciating and are buying in large volume in the U.S. markets. While none of these explanations by themselves is convincing, taken together they may begin to help explain the price action.

    With Treasury yields trapped in a range and corporate credit quality improving, spreads continued to narrow across most credit categories. The two bottom panels on page 1 show the narrowing of investment-grade spreads on the left and of high-yield and emerging-market spreads on the right. The latter have narrowed despite ongoing warnings from emerging-market strategists that spreads have overshot to the downside. I should mention that volatilities for most asset markets are also on the low side. The VIX equity volatility index is below 15 percent for the first time since 1996.

    As shown on the top of page 2, the dollar continued to depreciate against most floating currencies, as concerns about the cost of financing the current account deficit continued to occupy the market. Early in January, Governor Bernanke’s comments about both the dollar and the outlook for interest rates emboldened dollar shorts. The euro hit a lifetime high of $1.29 early on January 12 before President Trichet of the ECB—in his press conference after the G-10 governors’ meeting at the BIS— protested against what he called the “brutal” moves of the exchange market. The dollar recovered after those comments, but this morning the euro was rising again to above $1.26. One of the reasons given for the dollar’s strength during the late 1990s was that asset returns in the United States were higher than those available elsewhere. That is no longer the case when taking into account moves of both asset prices and foreign exchange rates. The middle panel depicts equity market returns—expressed in local currency terms in the gray bars—for the Nasdaq, the S&P 500, the DJ Euro Stoxx, and the Nikkei since January 1, 2003. All did well on that basis. However, the returns of a euro- or yen-based investor were trimmed substantially, when exchange rate fluctuations are taken into account. So while the S&P has appreciated about 30 percent in dollar terms over that span, the appreciation for a euro-based investor is about one-third of that. Similarly a U.S. dollar-based investor would have done better investing overseas, given the currency kicker. The Nasdaq was something of an exception in that its returns were high regardless of the currency base, though that was after three difficult preceding years. The other factor that has worked against the dollar in most cases—with the exception of Japan—is interest rate differentials. Short-term differentials shown in the bottom left panel and long-term differentials shown on the right both favor other currencies, which have had the advantage of offering higher yields and appreciating currencies. And those foreign inflows that have moved into U.S. fixed-income paper are more likely to be hedged by selling dollars. That may be another factor that helps explain the seeming paradox between strong asset markets and a depreciating currency.

    The focus on central bank activity has been most acute with respect to the yen and renminbi exchange rates, though we have less information about the latter. The top panel of page 3 graphs the dollar–yen exchange rate since August. As the yen has appreciated, the pace of Japanese intervention has accelerated, with the notable exception of the pause in operations at the time of the Dubai G-7 meeting in September. During the intermeeting period the Japanese purchased another $80 billion. The middle panel updates a graph I showed a few meetings ago. During calendar 2003, Japan acquired a bit more than $180 billion—triple its previous high in 1999. In just the first four weeks of the year they are on pace to far exceed last year’s Herculean effort. The bottom left panel graphs cumulative purchases of Treasury notes and bills for 2003 through November (the last available data point) from the Treasury’s TIC data. In general, this confirms anecdotal commentary that official capital flows are making up an increasing portion of the financing of our deficits. The bottom right panel graphs increases in the New York Fed’s custodial holdings of Treasuries in green on the left scale and of agencies in blue on the right scale—both of which continue to grow. The scale of these purchases must have some impact on the yield curve, though the magnitude is difficult to estimate, especially given other factors that are at play.

    Although the focus of global markets was mostly on the dollar and U.S. markets, the European and Japanese markets had their own excitement at times. The top panel on page 4 depicts the three-month euro deposit rate in the solid green line, and the three-month deposit rate three, six, and nine months forward in the dashed green lines. The sine curve pattern observed in the forward rates mirrors to some degree the pattern of U.S. rates. The downward trend over the past six weeks is also due in part to the strength of the euro. As the euro appreciated, the market first priced out a possible tightening in the middle of next year, and now market participants are increasingly talking about a possible ease to counteract the currency’s strength. As can be seen in the middle panel, the Japanese yield curve actually has not changed much since the last meeting. But it is up substantially since last year at this time and is much higher than it was last June when the ten-year JGB yield bottomed out at about 42 basis points. While some credit goes to technical factors, most ascribe the rise in yields to an improving economy and a more activist approach by the authorities. Equity markets have risen in line with global shares. The bottom panel graphs the broad Topix index along with the bank and electronics sub-indexes. The electronics sector is one of the main exporting groups, and the interesting point here is how close its sub-index tracks the overall index despite the strength of the yen. Whatever the restraining effect of the appreciating yen, it is being offset—in the market’s eyes at least—by other factors such as increased activity both in Japan and elsewhere. Japanese banks had a terrible spring, as investors worried about the FSA’s approach to the financial sector and prices of bank shares slumped. But with the bailout of Resona Bank, the improving economic outlook, and the write-offs taken by most of the major banks since then, bank equity shares have risen sharply. They have handily outperformed the index, although yesterday they did sell off after it became known that one major bank was being inspected for possibly dressing up its loan ratings.

    Mr. Chairman, in the fed funds market the year-end came and went calmly with no unusual pressures to report. There were no foreign operations. I will need a vote to approve domestic operations.

  • Does the failure of banks to window-dress have anything to do with the Freddie Mac fiasco or any of the other related manipulations by banks?

  • I don’t know the details, but there was apparently some discrepancy between the way the loans were classified and the way they were actually performing. But that’s something I understand the FSA will be looking into. More details to come, I’m sure.

  • Questions for Dino? If not, Governor Ferguson.

  • I move approval of the domestic operations.

  • Thank you. Without objection, they are approved. We are adjourned until 9:00 a.m. tomorrow.

  • [Meeting recessed]