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

  • Good morning, everyone. The GDP figures came out this morning. David, would you like to comment?

  • Thank you, Mr. Chairman. The BEA published this morning their so-called final estimate of GDP for the first quarter. Top line came in slightly lower than we had been expecting in the Greenbook—0.7 percent compared with the 1 percent that we had been expecting. There were small misses in a smattering of categories, including equipment and software investment, net exports, and inventories. Our snap reading, though, is that this release will have little, if any, implication for our outlook. What we lost in the first quarter in inventories, for example, we might be inclined to regain in the second quarter in our projection. So we think that our projection for real activity will not change as a consequence of this release. We did get the upward revision to core PCE prices that we had been expecting on the basis of the revision to the PPI for medical services. Core PPI was revised up from 2.2 to 2.4 percent.

  • Excuse me. The core PCE price index for the first quarter was revised up, exactly as we had been expecting on the basis of the PPI revision. Thank you.

  • Are there any questions?

  • May I ask, Bill, whether there has been any reaction in financial markets to this?

  • I think that people are taking this in stride. The first quarter is old news.

  • So, on your estimate, what we will be seeing tomorrow when we get the details on prices will be in line with what you have been expecting? There was nothing here to make you change your view of that?

  • We don’t know the details of what we will get tomorrow, but there is nothing here to condition our expectation any differently from what we had before.

  • Okay. We are well advanced in our deliberations here. We heard from Vincent yesterday on the action in the statement, and so we are prepared for the go-round. Governor Kohn.

  • Thank you, Mr. Chairman. I think what I heard yesterday was consistent with what I was thinking myself. We are in a pretty good spot, macroeconomically and policywise. We have moderate growth; low core inflation, which is not rising and could possibly be falling, suggesting an underlying balance of demand and potential supply that is in pretty good shape. Total inflation is high, but unless the futures markets are wrong again, total inflation should come down to core, and core is telling us that the balance is about right. I didn’t hear anything yesterday in the forecast or in the anecdotes—some were strong and some were weak—to contradict this picture or to suggest that we have any need to adjust policy. So I strongly support alternative B.

    Markets now roughly agree with our outlook, at least in terms of their expectations for the federal funds rate and judging from our submissions on the forecast process. I don’t think we should be trying to change those expectations. I share everyone’s concerns around the table about the risks on inflation. Even if I don’t always share everyone’s goal for where we might be going in the next few years, I think the risks are clearly pointed to the upside given the tightness of domestic and foreign markets and the increase in headline inflation, which could feed through to inflation expectations.

    I like the alternative B language as it was handed out by Vincent yesterday. It is consistent with yesterday’s discussion that focuses on the forecast of inflation in sections 3 and 4. It reflects our unease about whether recent improvements will be sustained. I think it should leave expectations approximately where they were, although I don’t have any confidence whatsoever in that judgment—I have been wrong too often for too many years on these things. I do think it has the virtue of reflecting our discussion yesterday. I have one suggestion for sentence 3 in section 3, which I think makes it a little closer to last time in terms of wording. In the second sentence—“however, a sustained moderation in inflation”—well, is that core or total? What is that about? I think we should go back to “inflation pressures”: “However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated.” That is what we talked about last time—inflation pressures. Then, “moreover, the high level of resource utilization has the potential to sustain those pressures.” I don’t think we need the word “inflation” twice. So with that small amendment, I think alternative B language should do the trick. Thank you, Mr. Chairman.

  • Thank you. President Fisher.

  • Mr. Chairman, I agree with Governor Kohn. I am in favor of alternative B, of holding the rate where it is. The point that he just made may cover a suggestion I had because I was thinking about what I heard yesterday at the table. I heard two things. One, in our discussion of inflation, I heard some concern about core inflation qua core inflation. I was going to suggest that the first sentence be modified slightly to say that “readings on core inflation have improved modestly in recent months, but measures of overall inflation have remained stubbornly high.” Then, I would strike “however” and just say “a sustained moderation in inflation pressures has yet to be convincingly demonstrated.” I believe that is what I heard yesterday. The other music to my ears, but I think it also reflects reality—and I hear it more at the table—would be amending slightly the last sentence in that section 3 to read, “Moreover, the high level of global and domestic resource utilization has the potential to sustain inflation pressures.” [Laughter] That is what we said. That is what we discussed. We acknowledge that. I think it would show that we’re tuned in to what’s going on, and that would be my recommendation. Otherwise, I would leave the rest of alternative B unchanged. Thank you, Mr. Chairman.

  • Thank you. President Lacker.

  • Thank you, Mr. Chairman. Before I talk about policy, let me just note that it has been a tremendous pleasure being a colleague of President Minehan over the years and being an immediate neighbor of hers—[laughter]—at Federal Open Market Committee meetings. For one thing, she has done a great job as buffer between me and the President of the New York Bank. [Laughter]

  • Not always easy, I might add. [Laughter]

  • For another, I have gotten an up-close view of some really dazzling jewelry. [Laughter]

  • Please take that out of the transcript. [Laughter]

  • Core inflation has come down recently. But as I mentioned earlier, my sense is that it could well rise again. In any event, it doesn’t seem likely to fall much further. So I think we have to position ourselves to do something about inflation when we are more certain that the soft patch is behind us. I support the actions in alternative B. I support Vince Reinhart’s language from yesterday. I am sure there will be more amendments put on the table. I don’t want to start now by commenting on everything that has been put on the table. I will just say that, as we recognized at our last meeting, if inflation fell, we would have a problem characterizing inflation, and core PCE inflation has indeed fallen and could well go below that number on Friday, according to the staff. So it seems appropriate to recognize that improvement.

    The difficulty, of course, is how to do so in a way that respects the fact that we haven’t yet decided whether our objective for inflation is 1½ or 2 percent. This is what motivated my letter to the Committee last week. I didn’t think the first draft of alternative B was sufficiently agnostic on the question. My advisers and I put our heads together, and we couldn’t figure out a way to rewrite the statement to acknowledge the decline but not tip our hand toward preferring one objective or another. So that is why in my letter I proposed that we go ahead and make a decision by choosing between language consistent with 1½ and language consistent with 2. After all, we are widely seen to want an inflation rate between 1 and 2, and we communicated that via language in our statement expressing displeasure with inflation below 1 and, more recently, expressing displeasure with inflation above 2.

    Sure enough, however, some people with far more expertise in the mysterious art of drafting FOMC statements seem to have found a way around this, and the revised statement seems to finesse this pretty well—the language “moderation in inflation has yet to be convincingly demonstrated.” In other words, we don’t have to say how we feel about 2 percent inflation because we are not really sure that inflation is 2 percent yet. Now, I think this will finesse the problem for the time being. Assuming that it does finesse the issue—and that is sort of a big “if”—I don’t think we are likely to be able to finesse this issue forever. If core inflation does spend some time near 2 percent, as the Greenbook forecasts, then eventually it will become convincingly demonstrated that inflation is indeed 2 percent. More broadly, the lack of a decision about our objective will continue to pose difficulties both for our statement and our deliberations, and I think it is going to be increasingly unsatisfactory to say we are still thinking about it. So I hope we can make progress on that soon. Thank you.

  • Thank you. President Hoenig.

  • Mr. Chairman, I am very comfortable with our current stance at 5¼ percent. I think that it is, as I have said before, modestly restrictive and that it will take us over time to a lower inflation rate.

    On the statement itself, I have a couple of comments. I am a little uncomfortable with the language used in the output rationale because we use the term “moderate” to describe growth for the first half of this year and coming quarters and this suggests that there will not be much change in growth going forward as we use “moderate” in both places. So I would like, if we could, to have something in there that will describe the pickup in activity from the second quarter on that we have talked about. This would improve the characterization. That is just a suggestion. I know how hard it is to craft these things, but it is something to think about.

    On the inflation rationale, I’ll make two points. One, I think the statement carries pretty well—that is, inflation has come down recently, but we are not yet confident that progress will be maintained. Two, on a twelve-month basis, core inflation is higher than I find acceptable over the longer term, and would like to see further progress toward price stability. Perhaps President Fisher’s suggestions would take us closer to my preference in terms of something more explicit that promotes further progress in reducing inflation. That would improve the statement. But, as I said, crafting these things is pretty difficult. I can live with the language as it is, and those are just suggestions to think about as we go forward from here. Thank you.

  • Thank you. President Stern.

  • Thank you, Mr. Chairman. Well, like others, I think the case for alternative B is convincing. I don’t think we have any reason to contemplate changing the fed funds rate target at this point or trying to change market expectations about what we are up to. As far as the language is concerned, something that came up at the last meeting was not to make any more changes than are necessary. Some changes clearly are appropriate here because of the incoming data and the way they have influenced the outlook. With that as a guiding principle, I think alternative B as drafted is fine. I might have a mild preference for the suggestion that Governor Kohn made. I think that on the margin it is an improvement, but I can live with B as drafted. I think we are into nuances here that probably matter more to us than to anyone else. [Laughter]

  • I am not so sure about that. [Laughter] Thank you. President Poole.

  • Thank you, Mr. Chairman. I support alternative B, and I also support the slight revision in the wording that Governor Kohn recommended. One thing that I worry about and that I hope we can make clear in the minutes—clearly, we couldn’t do it in the statement—is that we have been in an unusual period. If you look at Greenbook Part 1, the evolution of the staff forecast, the staff forecast for both ’07 and ’08 has changed remarkably little since last September. There has been a 0.1, 0.2, or 0.3 here, but very, very little change. Ordinarily over this span of time you get some information that changes your outlook in some significant way. I would hate to see us encourage the market to think that our projected path of 5¼ percent for the fed funds rate is carved in stone. We need the market to respond to incoming data, as we will have to do when we have some data that really move us off dead center. So I hope that we would emphasize—and it has sort of drifted into insignificance here—that “future policy adjustments will depend on the evolution of the outlook.” I think it is very important that the market understands that. It gets into the broader discussion of communications, but I hope the minutes will emphasize the importance of that part of our statement. Thank you.

  • Thank you. We have seen some change in policy expectations, obviously, in the intermeeting period. President Moskow.

  • Thank you, Mr. Chairman. I am very comfortable with the policy stance—keeping the rate at 5¼ percent. I think policy is in the right place. It is moderately restrictive but not restrictive enough to cause us any problems, particularly in the housing area.

    In terms of the statement itself, I am comfortable with alternative B, as written or as modified by Don Kohn. We could talk a bit more about where that word “pressure” should be when you compare it with the last statement that we had, but that is a very minor point. The key in this statement is dealing with the fact that core inflation, according to our forecast, is going to be 1.4 percent in the second quarter. It was 2.4 in the first quarter, 1.4 in the second, and then it goes back up to 2.2 and 2.2. That is really the key because, when you see inflation improving and then going back up again and juxtapose that against the longer-term forecast that we have come up with, which shows some improvement in inflation over time in ’08 and ’09, it is a delicate balance as to how we present this in the statement. I think the way alternative B has been formulated captures that. I had suggested a slightly different approach. I don’t feel strongly about this, but you could also take that first sentence in section 3, which says “readings on core inflation have improved modestly in recent months” and just add the phrase “but part of the improvement may be transitory.” But as I said, I am comfortable with either formulation here. I think it accomplishes the same objective.

  • The minutes should certainly make that point because the staff has emphasized that this may be transitory.

  • Thank you. President Plosser.

  • Thank you, Mr. Chairman. As people said before, I, too, am in favor of keeping the fed funds rate at 5¼ percent. The economy does seem to be rebounding in the second quarter. The lingering uncertainty over housing suggests that now is not the right time to take more-aggressive action. I am in agreement with that. However, the most current readings on core inflation, while they have been good—just to reiterate the point—I, too, believe there is a lot of evidence that it may be transitory, and we have to be very careful about the fact that headline inflation has not been very cooperative recently. Inflation expectations remain somewhat high from my perspective, and based on our previous discussions, that is a worry for me. I do tend to favor our announcing an inflation target. I am not yet convinced that we will see inflation expectations where they need to be to achieve my goal by the end of 2009.

    If we look at the projection narratives prepared by the Committee members, we see that a majority believe that the flat fed funds rate will get us to a PCE core inflation of 2 percent or slightly less by 2009. If my own goal were 2 percent, I might be more comfortable with a flat fed funds rate going forward. In fact, even the Greenbook suggests that there is a model where that could happen. The bottom line is that I think we can’t avoid the elephant in the room. How can we sensibly talk about the forecast and appropriate policy choices, either in real time, as we do today, or prospectively, when we can’t articulate or agree upon what our objective is? In the absence of agreeing on a numerical long-run inflation objective, we, as individual members, face increasingly difficult choices in arriving at an appropriate policy stance in any given meeting and even greater difficulty conveying our Committee’s decision to the public in an informative and transparent manner.

    Individuals could be advocating different policy paths either because they have different models of the economy or different inflation goals or both. At a minimum, I believe it would help our internal deliberations—and it would certainly help mine—if the causes of these differences in our projections were more transparent. If we are thinking about our forecast as a communication device, this would seem to even be more imperative. That brings me to language. I think the language in the revised alternative B is incredibly well crafted and it tries to get around the problem that we are facing in dealing with what we meant by “elevated” and how we think about this going forward. Citing growth over the past two quarters as having been moderate is a step in the right direction because it encourages the public and the markets to look through shorter-run, transitory movements. Similarly, we need to be looking through transitory movements in inflation as well. As several of you have pointed out in your comments on the proposed statement language before the meeting and as Vince pointed out in our last FOMC meeting, how we characterize the inflation outlook in our statements going forward is becoming increasingly an issue since we have not agreed on what our objective is.

    I have two related concerns. The first is that, in eliminating “elevated,” we run the risk of signaling to the market that we are satisfied with the current rate of inflation, even though we haven’t communicated what that means. Are we looking forward twelve months? Two years? Three years? Are we looking backward at the past three months or the past twelve months? Are we basing our judgment on forecasts of the next twelve months? Are we concerned only about the core PCE, or are we concerned about headline PCE or some version of the CPI that is relevant to our concept of inflation? As I said yesterday, my concern is that there is considerable confusion in the marketplace about why we focus on core and what it means to us and how we communicate that. Internally, we are not clear on these issues, so how do we expect the public to divine our meaning when we are not willing to do it internally? In essence, I think there will be a great deal of speculation, even with this language, about what we mean. Will the market conclude what we think it should, or will we just accept whatever the market divines our intentions to be?

    My second concern about changing the language dramatically is that it might convey to the market the notion that we are satisfied with inflation at current levels. We may reveal through our projections next month that we actually are forecasting inflation to be lower than it is today on a twelve-month basis. This was the point that President Yellen made in her memo. It creates somewhat of a contradiction in how we describe our current views. If the market infers that we are satisfied with a year-over-year core at 2 percent and then our forecasts come in at 1.8 or whatever, I think that will send some confusing messages. On the other hand, releasing the forecast later may clarify for the market what we are expecting and that may be the interpretation. But there is no way for us to know what the outcome of that is without being more specific about what our objectives are. Why do we want to create that much confusion and speculation in the marketplace about what we mean? I understand the desire to extricate ourselves from the language about core inflation, but I think we are being unnecessarily confusing and cryptic in our choice of language, and it will be difficult for us to control those expectations given the way we are trying to manage the language.

    I am not going to get engaged in all the details of the wording. There must be people who are better at that than I am. But I would just like to conclude by noting that, even if we are successful—and, indeed, we may be with the current language in alternative B—in wordsmithing ourselves around this delicate problem, it is not going to go away. We will continue to grapple with it in this environment—and we are going to continue to be pushed by the markets, by commentators, to clarify what in fact we mean. So the problem isn’t going to go away even if we sort of finesse our way around it in the short run. Thank you, Mr. Chairman.

  • Thank you. President Pianalto.

  • Thank you, Mr. Chairman. I also support the policy action in alternative B. I have some of the same concerns that President Lacker and President Plosser, and also President Yellen in her letter, raised about the increasing difficulty in characterizing inflation without having a clear sense of the Committee’s longer-term objective on inflation. I also mentioned yesterday that I have some concerns about claiming that inflation has moderated at the same time that we see the headline measure rising. I find this to be a real problem, and I therefore like the suggestion that President Fisher made. However, I am concerned about introducing yet another concept or another measure of inflation in our statement. I hope that through the minutes we will be able to raise our concern about the headline measure staying stubbornly high. But without further communication, introducing yet another concept, or another measure of inflation, in our statement is going to confuse markets. So I support making as little change as we can to the statement, and I am comfortable with the way the most recent alternative B is presented—although I can also support Governor Kohn’s suggestion about the word “pressure.” So I support alternative B, with some of the minor changes that Governor Kohn has made. Thank you.

  • Thank you. President Minehan.

  • Thank you, Mr. Chairman. I, too, am in favor of keeping policy where it is. As I stated yesterday, I see the risks around growth as better balanced than they were, even given the potential for the housing problems to be deeper and longer-lasting than we might have expected earlier in the year. I remain concerned about the risks that inflation will not continue to moderate, but I am not wed, as I have said many times, to a particular low number. I would be as happy at 2 as at 1½ and perhaps even happier given that levels that start with 1 seem to have downside risks—or at least they did the last time we were there.

    I am concerned, however, about the pressures on the economy, whether you think of them in terms of headline inflation or in terms of the components of headline, particularly energy costs, tight labor markets, and a growing world. I think, although we may not want to put it in the statement, that Richard is right—our economy is subject to pressures from the rest of the world at this point and, related to that, the falling dollar. A lot of things could take inflation from its current moderate level and push it back up, and that I would be very concerned about. It is true that financial conditions have tightened slightly, so markets are starting to do a little work for us. But I believe that we need to continue with policy in a slightly restrictive stance to provide some insurance that the inflation pressures in the economy stay moderate. Staying with current policy is a good balance between the prospects we see for moderate growth and the prospects we also have recognized around the table for the potential for inflation pressures to get worse.

    I support alternative B’s language. I want to say two things. First, the more substantive concern—I think that Governor Kohn’s thoughts about inflation pressures are slightly better than the current language. I was attracted to the “transitory” language that I think President Moskow raised first, and we fiddled around with it a bit in Boston, but I have been convinced that “convincingly demonstrated” and “transitory” are equivalent. [Laughter] So I don’t want to battle about that at this table. The statement in section 3 is headed in the right direction, and I would be in favor of its current form or the form that Governor Kohn suggested. Second, I may be the only one sensitive to this, but in section 2 we have two sentences that start with exactly the same words. I never wrote that way when I was in school. [Laughter] There is an easy way to make that sentence a little better from an English composition point of view. But, again, that is tricky to argue about at the table, so I guess I am fine.

  • How about something like “Economic growth proceeded at a moderate pace”?

  • There are many ways to do it. I know that there are some objections to this, but you could say, “Despite the ongoing adjustment in the housing sector, the economy appears to have grown at a moderate pace over the first half of this year and seems likely to continue growing moderately over the coming quarters.” You could make it one sentence—it is simple, it is shorter, and it reads better.

  • We are talking about the economy, so mentioning it twice seems to be reasonable. [Laughter]

  • We have two sentences starting exactly the same way, though. In any event, this is a nit in the overall scheme of things.

  • Thank you. President Lockhart.

  • Thank you, Mr. Chairman. I, too, favor alternative B and the current policy stance. My interpretation of the discussion around the table yesterday is that we see encouraging signs that the current policy appears to be producing the desired directional effects at least, or intermediate effects, so it seems to be working. There is still a fair degree of uncertainty, and based upon my long experience, I think it is a normal amount of uncertainty. So the current policy deserves being held.

    Regarding the policy statement, I favor the wording in revised alternative B that was distributed by Vince yesterday afternoon because I think it captures the key points— the ones that are important to me at least—and they are moderate growth prospects, mention of the housing sector, better inflation readings and prospects of continued moderation (though it is still too early to draw definitive conclusions), continued inflation pressures, and a continued weighting to inflation risks with no suggestion that the current levels around 2 percent are acceptable for the long term. So for that set of reasons, I favor the wording as presented.

  • Thank you. President Yellen.

  • Thank you, Mr. Chairman. I certainly agree that policy is well positioned, and we should leave it exactly where it is. Markets have come around to our view, and I think our objective in the statement should be to keep market expectations aligned with our view and not to change them.

    In terms of the statement, I think that the current draft is very much improved relative to the Bluebook, and I have no problem in supporting the current language. I like Governor Kohn’s proposal; I think that it is a worthwhile change. I do, however, share many of President Plosser’s concerns and think that we will have a lot of difficulty going forward. Markets are wondering what our long-run inflation objective is. They will certainly note the omission of the term “somewhat elevated.” It will raise a question about whether, if core inflation were to stabilize at 2 percent, we would be satisfied with that or we would want to see it move lower. This statement is very cleverly crafted, and I think it succeeds in finessing that issue for today. I don’t have a problem, really, with finessing it for today.

    My own proposal was designed to say to markets something that I thought we could say without actually coming to full agreement, even within the Committee, about whether we have a single long-run inflation objective. Even if we don’t go announce a numerical inflation objective, our statements need to be consistent with the projections that we will be issuing publicly. President Plosser pointed out that we will be issuing a two-year projection that does show inflation coming down. It seemed to me that we could therefore remove the term “elevated” and still say, as our projections in a couple weeks will confirm, that the Committee expects underlying inflation to come down further without saying exactly how far. But I don’t feel strongly about such language, and I think alternative B does a good job of resolving the problem for today. We will wait until another day, when we will have to face this again.

  • Thank you. Governor Warsh.

  • Thank you, Mr. Chairman. Like many of you, I see no reason to materially change market expectations about our policy action. It is important that we not appear more comfortable with either the level or the trend of inflation than we actually are. Any nods in that direction in the statement are ripe to be misinterpreted, and the process of fixing any such nod would be tricky. Yesterday Vice Chairman Geithner said that financial markets are in a delicate place, and I would say that is particularly relevant in the context of this statement. So I would try not to mess with market expectations, given what we know about the state of our financial markets. All that having been said, I support alternative B. I like Governor Kohn’s amendment, and I still think we are running a bit of a risk in suggesting to the markets that we are more comfortable. But I don’t think there is really much we can do at this point to mitigate that risk more than the Kohn amendment suggests. Thank you.

  • Thank you. Governor Kroszner.

  • Thank you very much. As I mentioned yesterday, I think we have seen some very welcome signs of moderation, but it is certainly too early to declare a victory. That is certainly very clear in the Greenbook, as many of you emphasized. I also agree with Governor Kohn that we are in a reasonably good spot with moderate growth likely going forward and inflation and inflation expectations reasonably contained. It is reasonable to think that they may be going down, but there’s a lot of uncertainty, and most of the uncertainty is to the upside. It is sensible to acknowledge reality, and we should take out the word “elevated” so that we are not seen as inflation nutters. We should acknowledge that some of the numbers have come down but be careful about saying that we are done, we are happy, or we are satisfied.

    As I mentioned yesterday, an upturn in owners’ equivalent rent could be coming. There could be some uncertainty about pass-through to core of the higher energy prices that we have been seeing. There is continued strong world demand, and there could be some lagged pass-through effects of the previous declines in the dollar. I see all those as risks to the upside, and so I think it’s important to convey that we are still concerned about those things. That said, I am very supportive of where we are with alternative B, in terms of both the policy and the message that is coming from it.

    The type of amendment that Governor Kohn mentioned is one that I very much support for a number of reasons. One, as he mentioned, it is more forward looking. I think it is much better to talk about a sustained moderation in inflation pressures rather than inflation, because that gets us out of explaining specifically what we mean by “inflation.” It’s a little bit more general. If we had a clear goal, it would be beneficial. Given that we don’t have a clear goal, I think talking about pressures is good. It also has the value of being forward looking. Two, the amendment fits with President Stern’s notion that we should try to keep as much in parallel with the previous statement. So mentioning moderation in inflation pressures—I’m not sure I wrote down properly whether Governor Kohn suggested in the final sentence of section 3 “the potential to sustain those pressures,” taking it back parallel to what we had before, or whether he said “sustain inflation.” So I would certainly agree with “those pressures.” Three, putting in “pressures” gets us out of the potential for getting stuck. Here we are saying “sustained moderation in inflation has yet to be convincingly demonstrated.” Well, if we take that out at some point, then we will be admitting that it has been convincingly demonstrated, or at least markets might interpret us as saying that. I think that gets us into a bit more of a box than I would like, and so talking about inflation pressures avoids the market’s taking an implication that if we remove that at some point we have said, “Okay. It is convincingly demonstrated when for six months it is below X or below Y.” I think since we haven’t articulated a goal yet, we don’t want to get into that box, but I do think that would be one of the values of articulating a goal. Thank you.

  • Thank you. Governor Mishkin.

  • Thank you. I support alternative B with the amendment that Governor Kohn suggested, so I am very comfortable with that. The real issue for me here is one that I think has been expressed by several others, what President Plosser called the “elephant in the room,” which is that writing the statement is getting harder and harder. I think that we have a brilliant fudge this time around, but it is not going to work forever.

    There are two senses in which I have a problem with this statement. One is the issue of the appropriate level of inflation that we should be shooting for. This is really two separate questions. One is what we do about communication outside, but there is also an issue about consensus inside the Committee. I would find it much easier to agree to statements of certain types if, in fact, there were a consensus. As many of you know, I am actually comfortable with an inflation number of 2 percent. On the other hand, if the Committee comes to consensus for a lower number, I would be more than happy to be comfortable with that. In fact, I would be willing to have a statement that would reflect a lower number. I sense that this is true for other members of the Committee—some who might be caught on the dovish side with 2 percent while some members are on the hawkish side at 1½. But the difference between the hawks and the doves here is extremely slight. In fact, from more than five feet away, you couldn’t tell the difference between a hawk and a dove. [Laughter] That’s one issue that is very important. I think it is going to become more and more difficult as we go forward, as long as inflation evolves in the way that we expect. I mean, we could have bad news—inflation could actually start rising—and we’d have a different kind of a problem. But let’s hope we don’t get into that problem. We want dealing with the good news to be the problem.

    The second issue relates to core versus total. I am quite concerned about the emphasis on core, not because I don’t think it is very important to communicate about core, particularly when you get a big shift in something like energy prices and you don’t want to unhinge inflation expectations. In that context, we need to talk about core so that people understand that the currently high inflation rates, in terms of things they care about—going to the gas station or going to the supermarket—are not actually something that should change their long-run inflation expectations. That’s why the use of the core measure makes a lot of sense. The problem is, as I read the research, that no one measure of core will always be good. In fact, the core measure that we have evolved to has a lot of history behind it, but it is not clear that it will be the best measure in all cases. There are certain alternatives that I think will work in some cases—a trimmed mean may sometimes be appropriate, but at other times it will not. So I think there will be a key problem, as has been discussed today, which is that at times one core measure may make more sense than another core measure. Our whole discussion is very much in terms of a particular core measure that excludes food and energy. That measure will sometimes be problematic for telling us about long-run trends, particularly if we think that energy changes are more permanent or crazy policies about ethanol may be having a more permanent effect in terms of food prices. In this context, we are going to have to deal with exactly this issue going forward. Also, a problem is that people do consume a lot of food and energy, and it is very peculiar to act as though we don’t care about that.

    So I think that we have to grapple with these issues. They are part of our communication issues. The bottom line is that we are fooling ourselves if we think that we are going to get away forever with not dealing with them. We will have to figure out some way of doing this. I think that we can do it because, in my reading of what people on the Committee have been saying, the differences here are actually fairly minor. It is the outside world that wants to make them into a big deal because doing so sells newspapers. But we do need to get to some consensus on these issues so that the outside world sees that the Committee actually has unity rather than differences. Thank you very much.

  • Thank you. Governor Mishkin and others have referred to communication issues. I’d just point out that we will be addressing some of those later this morning. Vice Chairman Geithner.

  • I actually agree with—and am happy associating myself with—much of what has been said. I am totally comfortable with alternative B as amended by Don or with the Kohn-Kroszner amendment because you don’t need to repeat “inflation” twice in the end, [laughter] and I think we should keep the rate as it is.

  • Tim, I’m sorry, I heard my name but I didn’t hear what you said about me. [Laughter]

  • Change the word “inflation” to “those.”

  • Several of you put on the table a bunch of broader questions about communication going forward, which I would like to talk about now, but I think we should defer that until we come to the later conversation. So I am fine with alternative B as amended.

    I do think that a lot of you made many interesting suggestions about the language. But there is much virtue in making minimal changes at the meeting because, even if they sound small, I think it is hard in the few minutes we have before we vote to really step back, take stock, and ask whether we altered the balance in ways that we fully intended to be understood. Thus I would be for minimalism in changes at the table generally unless we have something really consequential that we are trying to shift in the statement. In that spirit, I would keep the changes small and stay with a modest amendment to alternative B.

  • Thank you. Well, we appear to be in considerable agreement about the policy action. [Laughter] It is a good thing, I guess. Not only are we in agreement, but also the bond market is in agreement. [Laughter] I would just note that, in fact, the bond market is acting as an automatic stabilizer, responding to news, as we have discussed before. I think we are in a very good place, and our forecasting process has served us very well. In that respect, I think this might be an appropriate time to congratulate the staff, including Dave Stockton, Karen Johnson, Vincent Reinhart, and the research directors at the Reserve Banks who are here, for their tremendous contributions to this process, which has really been instrumental in helping us find the right level of policy and in building a lot of credibility in the market. So thank you very much for your outstanding work.

    With respect to the statement also, I didn’t hear a lot of dissent. First of all, let me say that I think Governor Kohn’s amendments in section 3 are very much to the point— so that would be “a sustained moderation in inflation pressures.” First, the word “pressures” dilutes to some extent the attention to the monthly numbers. Second, as a number of people have said, it is a broader concept, and it can be construed as including some of the headline issues and the oil, commodities, and so on prices that we are concerned about. So I think it is definitely an improvement, and so I would like to recommend it.

    On section 2, just a couple things. One is that I would hesitate to try to indicate growing strength in the second half, for a couple of reasons. First, at least in terms of the Greenbook, that acceleration is relatively modest—certainly not at all a definite uptick. By continuing to use the language of “moderate pace,” I think we signal that we are not going to take the second quarter as necessarily indicating a new reacceleration of growth. We think that the second quarter represents, at least partly, a transitory increase in the growth rate. Second, Professor Minehan [laughter] was correct about the quality of writing in the section. The last statement began with the term “economic growth.” I am kind of ambivalent about whether or not to do this, but we could say, “Economic growth appears to have been moderate during the first half of this year, despite the ongoing adjustment in the housing sector.”

  • A little more variation—is that acceptable?

  • Could you read that again?

  • The proposal is, “Economic growth appears to have been moderate,” and then it goes on, as it says here, “during the first half of this year, despite the ongoing adjustment in the housing sector.” I see nodding, so I think that is accepted. I’m sorry. No?

  • There is a tense question. The first half of the year isn’t over.

  • Yes, it is—almost. [Laughter] Well, I mean, that is no different from what we already have.

  • It’s the word “appears,” which is fine.

  • The content is no different.

  • Is everyone okay with the language?

  • Yes. Well, at least that solves the instant problem.

  • You do know that English professors get paid very little money. [Laughter]

  • That is what I’m going to—very little money. [Laughter]

  • I think President Minehan is entitled to her change, given that she is valedictory in this. [Laughter] So with that change—“Economic growth appears to have been moderate during the first half” et cetera—that would be my recommendation. Are there any further comments?

  • Just a clarification. On section 3, can somebody just read that complete section as now amended?

  • The entire statement: “The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5¼ percent. Economic growth appears to have been moderate during the first half of this year, despite the ongoing adjustment in the housing sector. The economy seems likely to continue to expand at a moderate pace over coming quarters. Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures.” The last section is the same.

  • This is just one observation. The second sentence of section 3, where we talk about capacity utilization, seems to be redundant once you put “inflation pressures” in the first sentence.

  • Well, look at the May statement. We have been doing that for a while now. [Laughter] Are there any other questions or comments? If not, I’d like to call for a vote.

  • I will be reading the directive from page 29 of the Bluebook. “The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee in the immediate future seeks conditions in reserve markets consistent with maintaining the federal funds rate at an average of around 5¼ percent.”

    And the risk assessment: “In these circumstances, the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.”

    Chairman Bernanke Yes
    Vice Chairman Geithner Yes
    President Hoenig Yes
    Governor Kohn Yes
    Governor Kroszner Yes
    President Minehan Yes
    Governor Mishkin Yes
    President Moskow Yes
    President Poole Yes
    Governor Warsh Yes

  • Thank you. The coffee is not yet brewed. [Laughter] So why don’t we go on to the next phase of the meeting. We turn to Vincent to discuss communication issues.

  • Thank you, Mr. Chairman, for giving me the normal role as speed bump. In that effort we are now handing out material to which we will be referring. If someone will let me know when the doughnut truck comes, I’ll pick up the pace. [Laughter] The Subcommittee on Communications began its work only fifteen months ago, [laughter] which seems like yesterday (at least in geological time). Given the considerable discussion the Committee has had since then on its communication policies, it seemed appropriate to take stock. In particular, I sent around a list of questions designed to elicit your views on the potential roles of the survey of economic projections, the minutes, and the statement in refining your dialogue with the public. The material with the cover, “FOMC Communications,” is designed to help to organize this discussion.

    With regard to the enhanced economic projections process, the survey results circulated on June 15 reported general support for the key features of the process, with three notable exceptions, given at the top of exhibit 1. The subcommittee tried to address those concerns in the modified projections process used for this meeting. So the first question listed at the top of your first exhibit boils down to, how did they do? Did the changes address the concerns you expressed in answer to the May survey? In particular, some of you preferred not to share your forecast submissions, mostly on the grounds that it might make the discussion of the economic outlook at the meeting more inflexible. But some of you held that sharing was important, both to help inform your internal deliberations and as a source of material for the forecast write-up. As a compromise, the submissions were circulated on an anonymous basis, with an opt-out clause that one of you took this time. Some of you were concerned about specificity—particularly in writing down an explicit path for the federal funds rate and in quantifying uncertainty. Those questions were turned into qualitative ones that asked for comparisons with the staff policy assumption and historical uncertainty.

    Another process question is item 2. In what form should the projections be released? Debbie Danker’s memo identified the three options listed in the exhibit, which basically differ by the extent to which the narrative description is tailored to suit different purposes. Option 1 is one-size-fits-all: The staff would produce a single document describing your economic projections, which would be dropped into the Committee-approved minutes and repeated verbatim in the Board-approved Monetary Policy Report. The chief advantages of this option are that the vetting process is tried and true and that there will be consistency across Federal Reserve documents. The disadvantage is familiar to anyone who has bought clothes off the rack in a big box retailer—the fit will not be perfect across documents. Option 2 opens the door to some variety. The Committee-approved minutes would include a brief description of the forecasts, as is the practice now. A separate document would give a fuller account of the projections. In that case, there would be more flexibility as to who approves the document and when it is released. This poses a tradeoff that has come up in previous discussions in that the earlier the narrative is released, the more useful it will be in explaining the policy decision but the more complicated the governance process will be. Option 3 is the bespoke alternative in which separate, complete discussions would be prepared for the minutes and the Monetary Policy Report. The fit will be better, but carrying it out will be more expensive, and even subtle differences may draw attention.

    The third question asks when the projections should be finalized. The choices essentially are the day of the meeting, the end of the week of the meeting, or as late as practicable to be close to the official release of the document. But you have a more fundamental question to answer first. What is the purpose of the economic projections? If they are supposed to help explain your most recent policy choice, they should be conditioned on the same information set that the policy decision is. That is, they should be finalized as soon as possible after the meeting so that they are not contaminated by post-decision information. That is the rule we now use for the minutes. If, in contrast, the Committee’s objective is to release an up-to-date assessment that sheds light on future policy actions, then the individual projections should be nailed down only close to publication day. The middle ground of closing the books on the projections a few days after the meeting seems unsustainable to me, particularly if the narrative description is to be included in the minutes. The first time an important piece of news hits within the window between policy decision and update deadline, the explanation of the policy action will become muddled. Some immediate feedback on that score will be helpful because the schedule for this round allows for your projections to be updated through close of the week. If so, you would seem to have to incorporate Friday’s chockfull data calendar. Do you really want to do that, particularly as it may lead to confusion in the minutes about what you knew and when you knew it?

    The next exhibit focuses on the minutes. You have 2½ years of experience under your belt in publishing the minutes three weeks after the day of the policy decision. In that time, the document has received more attention from you in the editing process and from market participants and the press on its release compared with the previous regime of delaying publication until after the next meeting. How do you assess the benefits and costs of further expediting the minutes? The benefits, listed at the left, are the same as discussed in 2004. A document made public closer to the day of the decision will be more of an aid to the private sector in understanding the current outlook and the prospects for policy. In that regard, you will be able to use that material from the minutes for public statements more promptly. A speedier release may facilitate making the post-meeting statement shorter or less substantive. I point out, though, that my sense in 2004 was that a few of you supported expediting the minutes in the hope that the statement would subsequently be shortened, but that did not pan out. To appreciate the costs listed at the right, you should understand that we use the three weeks after the meeting partly to accommodate your busy schedules and partly to provide a cushion so that the drafting iterations can converge without a dissenting vote. The costs, then, would include your increased effort to ensure that your schedules align with that of the drafting and approval process for the minutes. You should also recognize that less drafting time might lead to more compromises that make the minutes less informative so as to avoid dissent, and more staff resources will be needed to prevent errors. Simply put, with fewer hours, we need more eyes looking at the document.

    Of course, the decision on expediting the minutes further may interact with other potential decisions on communication policies, especially those regarding the enhanced projections process. In particular, if you decide to include a narrative description of your forecasts in the minutes, you may want to delay any speeding-up of the minutes until you are comfortable with the new process. You may also want to consider ways to make drafting and commenting easier. That is the subtext underlying question 5. How do you assess the current content of the minutes, including the staff’s description of recent data? Some time ago, it was suggested that the first eight to ten pages, which provide a backward-looking review of recent economic data, be relegated to an annex. In a similar vein, it could be described explicitly as a staff summary—with its production perhaps even linked up mechanically to a modified Part 2 of the Greenbook. That way, you would be responsible for commenting only on the forward-looking and policy portions of the document, and some of the pressures on staff time could be relieved. If you have any other views on the content of the minutes, today probably would be an appropriate time to raise them.

    The last exhibit raises issues that have not been addressed for some time, namely the role of the post-meeting statement. Some of you might consider the statement as a vehicle designed only to convey coarse signals about policy, with more-nuanced information provided in subsequent communications. Others might see it as important that the statement be able to stand on its own as a reasonably complete explanation of the Committee’s monetary policy decisions and intentions. What is the appropriate role of the statement in light of the changes to the Committee’s other communication devices (question 6)? The statement’s role, which can be described in terms of a monetary policy rule, has varied over the years. At times the statement has provided hints about the odds on future action by characterizing the left-hand side of the policy rule—that is, by directly addressing the path of the federal funds rate. At times the statement has described the right-hand side of the policy rule—that is, the risks to the dual macroeconomic objectives. That is another way of stating question 7: If you believe that the statement should provide guidance about the outlook, should that guidance be couched in terms of the policy interest rate or the dual objectives? If you decide to describe the economic outlook, you will have to settle on the policy assumption underlying that projection, as in question 8. The conditioning possibilities include the appropriate path of monetary policy, some reading on market expectations, or an unchanged policy rate. This choice may interact with the role you envisage for your economic projections in explaining policy decisions.

    As for question 9, your ambition regarding the complexity of the statement will determine how much time needs to be devoted to drafting. Because of constraints as to how long you can meet as a group, a complicated statement necessitates pre- meeting consultation. That may get the nuance right, but it may also force you to settle on a policy view before you have had the benefit of consulting with your colleagues on the Committee. Moreover, it shifts some of the policy discussion out of this room, for which a transcript is kept and minutes are produced, and into informal back channels. A statement that could be agreed upon mostly within the confines of these four walls is probably one that is short and relays a routinized risk assessment, given your long-held view that “nineteen people cannot edit the statement on the fly.”

    Question 10 raises one last governance issue: Who owns the statement? At the inaugural of the age of statements in 1994, the Committee formally directed the Chairman to explain its policy action. Over the years, the statement has come to be viewed as a Committee product, with the words sometimes viewed to be at least as important as the immediate policy action. But you still vote only on the policy action and the risk assessment. Should that continue, or should you be asked to vote on the statement in its entirety?

    These three sets of questions are interrelated, and there is no obvious place to wade into this thicket. One possibility would be to conduct two go-rounds on these issues, with the first covering your views on the enhanced forecast and the minutes and the second addressing the statement. The first two issues are closely related and perhaps closer to closure. I suspect that you are closer to the beginning of your discussion of the statement than to the end. That concludes my prepared remarks.

  • Thank you. Are there any questions? Vice Chairman.

  • Vince, it’s a little unclear from what you’ve circulated what the subcommittee is recommending or presuming about the pieces of material that would go into the Monetary Policy Report. Do you want to say just a little about options there? I assume you want people to comment on that question, too, and that goes to the core of this next stage of evolution in the transparency.

  • That’s a complicated governance issue because it relates to both what the Committee approves potentially and what the Board approves because the Monetary Policy Report is by law a report of the Board of Governors explaining the monetary policy actions of the Committee. The short answer is that it depends on what you want. One possibility—that’s option one—is to write a narrative included in the minutes, have it approved by the Committee, and then essentially lift that out and make that a significant chunk of Part 1 of the semiannual Monetary Policy Report. Then the words would be the same in both places.

  • Those choices I think I understand, but I was really thinking about the pictures. You circulated a whole different set of new things, innovative pictures that showed dispersion, uncertainty, balance of risk, histograms, and so forth. I guess you don’t need to answer this question, but do you want people to react, in the first round at least, with a view on which pictures we think should be part of the narrative?

  • If you don’t express a view here, you’ll have a chance in commenting on what the staff proposes. Our intention was to take a small subset of those charts and tables that were essential for explaining the central tendency projections themselves and the dispersion of views and to put them into the narrative. The draft that we would circulate to you would have that information, and from there, we could take your comments.

  • About the same size as the last draft we circulated, which was, in fact, circulated as an appendix in Debbie Danker’s memo.

  • I didn’t mean that. I’m sorry. I meant the graph showing the evolution of the central tendency with things plus the histograms? That’s what I meant by subset.

  • Excuse me, but the histograms we’re talking about are the individual differences?

  • Yes. Well, that’s what we circulated last time in the draft write- up of the May discussion.

  • So you would have the central tendency analysis that we have and then further amplification, which would show individual differences of the nineteen members of the Committee.

  • Potentially that’s what we would have.

  • I’m just trying to understand what we’re going to talk about.

  • The staff draft of the June narrative will be similar in structure to the May narrative. That, however, is only the first draft. Given that we intended it to be similar in structure to the May narrative, then we would include a couple of histograms. We also added in this package a revised picture of the central tendency—you know, the red bars and the box and whiskers chart. We intended to include that. So we didn’t view any material upgrade in the pictorial description of the forecast. We tried to come up with as fat a package as we could for your internal discussion so that you could see how the individual forecasts of your colleagues vary and also are related—for instance, between the unemployment rate and the growth rate and between the inflation rate and the unemployment rate.

  • I think Governor Mishkin preceded me.

  • We’re having questions for Vincent now.

  • This is just an intervention.

  • I think I had President Poole first and then Governor Mishkin. President Poole.

  • Vince, in thinking about the possible benefits of accelerating the release of the minutes, can you name a time when that would have produced a benefit? I understand the cost because we all understand the costs, but I don’t know of any case in which releasing the minutes five days earlier would have bought us anything. At any rate, we need to think that through before we bear all those costs.

  • The particular cases that I can imagine would be employment reports. If it takes five fewer business days—and that might be a little speedier than the staff can actually deliver—any cutting of those business days, particularly if it gets past that Friday, produces the chance that there would be another employment report between your policy decision and the release of the minutes. This also interacts with the Chairman’s testimony schedule, which is something we have to think about. Do you want to be in the position of having the minutes more likely to be out before his testimony, or would you prefer to have the minutes out after the testimony? I can imagine both benefits and costs associated with that.

  • It probably would be helpful if we could have more detail with regard to how that might work and how often those cases would arise because the costs would occur continuously. As you emphasized, there are also some risks to accelerating the minutes because doing so reduces the amount of time to think it all through and make sure that nothing has slipped through inadvertently.

  • There were a couple of statistics in Debbie’s memo in particular about how it interacts with the standard semiannual testimony schedule.

  • Another observation somewhat in the same vein—regarding the economic projections, as I commented earlier, we have been thinking about this during a period in which the forecast hasn’t changed much. The situation has been pretty benign from the point of view of anybody who has been doing this for very long. One thing that I think we need to work on is how this would have worked—would it likely have been constructive—at a time like the fall of 1998, the time of September 11, 2001, or the time in early 2001 when the economy was sinking really rapidly? We need to work on those cases and not just think about the projections in the context of the relatively benign period that we’ve had. I realize that that involves more staff work, but it seems to me essential that we think all of that through before we start to do it.

    One other comment: I view the whole communication process that we’ve been going through as incremental, and I’m a little worried that we’re biting off too much at once here. We should think about a really pared down set of releases here if we’re going to expand the process with the idea if all that works well, then we’d take the next step.

  • Let me just say that there’s going to be a go-round. Everyone will have an opportunity.

  • Well, I’m sort of asking him to reflect on that. [Laughter]

  • Governor Mishkin, do you have a question?

  • Yes, I do have a question—just a clarification. One thing that we talked about early on when you gave us information was that there is the information regarding our views about whether risk was greater or less than usual and about the skewness of the risk. You might also want to include in the documents that would go out information to guide people on what is normal so that you would have the things that we actually sent out, which was either a picture or the table showing the forecast errors. Is it your view that part of it would be not only the charts that we actually responded to but also the background information?

  • Right. I believe the table of uncertainty was one thing that the subcommittee viewed as useful to include, not the three big fat bars that showed uncertainty variable by variable. That was useful background for writing the paragraphs in the narrative that talked about the Committee’s perceptions of risks.

  • I’m just trying to remember—did the table have the uncertainty for the variables?

  • The table had historical variability coming from a couple of different sources.

  • The Greenbook and FRB/US.

  • Right. That would be a reference table in the write-up. The narrative would say, “In the Committee’s view, current uncertainty was about at historical experience.” Then in the narrative description of the risks, we’d use the information that you provided about the asymmetries of those risks. I don’t think we envisioned showing a particular chart.

  • Right, but the key idea is that we do have a table with actually some numbers as part of the document. Thank you very much.

  • President Minehan. I’m sorry. You had an intervention.

  • That’s all right. I have one question and a plea. The question is, Have we decided about how many times we’re doing these forecasts and I just missed the decision?

  • Will we be meeting four times a year?

  • That’s what we have to discuss. That’s on the table.

  • Okay. It didn’t seem to fall into this huge list of things. The plea is, Please tell us what you want us to focus on first. There’s so much stuff here that goes into the heart of every communication issue that we’ve talked about over more than the past eighteen months. Do you have in mind a plan of action for which you need us to weigh in on something first and then other things second and third?

  • Our hope was that we could come close to closure on enhanced projections.

  • That led naturally into the minutes because the projection’s write-up would be in the minutes. The statement would be put off for a second round, and I personally wouldn’t be surprised if we never got to the second round. [Laughter] We could try. I think we should focus first on the projections—what’s in them—and then how they might relate to the production of the minutes.

  • So really to home in on what we all want to see out of the projections is job number one.

  • Right. We would like to come out of this with some decisions made about the way forward.

  • Is the subcommittee making a recommendation on any of these?

  • No. All along we’ve viewed our job as bringing things to the table and helping the FOMC to make the decisions and not making recommendations, and we’ve stuck with that. Janet is rolling her eyes. [Laughter]

  • This may get us slightly ahead of ourselves, but I think it’s important to what we’re asked to do now. It makes sense to get people to focus on how comfortable they are with what has been on the table regarding the range of options on projections and to say what they’re comfortable with and what they’re not comfortable with. But as I see this plan, you’re still building in some time for refinement over the next several months to get this to the point where it’s ready for prime time. So I don’t think you’re asking people—you really can’t because you’re not quite there yet—to commit right now to views on all specific attributes of this. It seems to me you’re a step short of that. Broad elements of the package on projections would then provide a basis for the subcommittee and the staff to refine this further over the next several months. That’s what I understood the plan to be. I think you’re right, Cathy—there’s a lot here. You can get a lot from asking people to give that broader orientation and still recognize that this is going to need a little refinement. Is that fair, Don?

  • Yes. As Vincent pointed out, we’ll have another round, a practice round this time and maybe even another one.

  • Are there other questions for Vincent?

  • I had, Mr. Chairman, a timing question. Vincent, you said that including the write-up of the projections with the minutes—either as a separate document or integrated—might argue for not shortening the time. But how could we do that with the Chairman’s testimony? Doesn’t that actually force the shortening of the time?

  • Well, I would make a distinction between when the Committee approves the document and when the Committee releases the document publicly. You might not want, for instance, to release the minutes before the Chairman’s testimony because it does sort of step on that message.

  • I agree with that.

  • But if the write-up is in Committee-approved minutes and a Board-approved Monetary Policy Report, you’re going to have to figure out a mechanism by which the Committee signs off on the write-up so that it will be the same in the report. The possibilities are that if it is an annex or a drop-in portion of the minutes, the Committee may very well need to have two editing schedules—that is, comments on the narrative would have to be finalized by a certain date so that it could go into the report and comments on the complete minutes could take longer. That’s one possibility.

  • President Pianalto, do you have a question?

  • Yes, I have a question on the timing of the Chairman’s testimony. Are those dates set by law?

  • The law says no later than February 20 and July 20. In practice, the Committee sometimes allows for some slippage. The last few times it has tended to be earlier than that. So that does put a T in terms of your planning horizon. You also have some flexibility about when you schedule the meetings.

  • I understand that the doughnut truck has arrived. [Laughter] So give us a twenty-minute break for coffee, and we will continue this discussion.

  • [Coffee break]

  • Why don’t we reconvene? We had some hurried consultation during the break about how best to proceed with this discussion. Breaking with our usual practice, we decided that it might be best for me to begin and to provide you with my sense of a broad schematic of how I see us going forward with our communications, in particular with the projections, which I view as being central to our plan. I note that people can justifiably complain that they haven’t had enough preliminary information for this discussion, which I’m about to give you. But let me also say, first, that there will be, of course, opportunity to react in the round to follow and, second, that we will continue to poll you and to consult with you and that we’re not going to be finalizing this for some time yet. So in the interest of trying to give you something to react to, let me just present an overview of how I see this going.

    The extended projections that we have been experimenting with can be a central critical element of a new and expanded communication strategy that will, in fact, address many of the concerns that were raised today. I’ll be very explicit about that as I go through this. In particular, what are the elements of these expanded projections? First, I recommend that we extend the projection horizon. We have used a third year in our experiment so far. I think that might be the right solution, but let me just leave open for discussion the possibility of either using a fourth year or replacing the third year with a third through fifth year average or something of that sort—sort of a long-term average. Second, I recommend that we release this projection quarterly. That would mean approximately quarterly because the calendar is not conducive to an exact quarterly release schedule. That would mean that two of the projections would appear in the context of the Monetary Policy Report. This is not a central concern, but my thought at this point would be that we should revisit the Monetary Policy Report and try to make it more informative. There is a lot that we could do to make it better—to include more information, include boxes, and essentially make it a more-effective publication. That would be, as now, twice a year. Perhaps on the off quarters we could have a small release of some sort, or we could include the projections in the minutes. That’s one of the issues that we need to discuss as we go forward.

    Third, I think that in our projections we ought to project a total inflation measure. As many people have noted, there is confusion—and even some resentment, I would say— about what appears to be our excessive attention to core inflation. Projecting a total inflation measure throughout the projection would, first of all, clarify that our definition of price stability is in terms of total inflation and would give us opportunities to explain in this document, in speeches, and elsewhere not only why we do look at core inflation, how we use core inflation, and its role as a forecasting mechanism but also—as President Fisher and others have mentioned—that it’s not a necessarily sufficient statistic and that we should look at other things as we try to forecast overall inflation.

    I would go even further here—just, again, to be concrete. I’ve wavered myself on thinking about which particular measure. I’ve had discussions with the staff, and I am not wedded to anything in particular at this point, but currently I am leaning toward suggesting that we use the PCE deflator as our measure of inflation. It’s a technically better measure. It uses chain weighting and has a lower weight on shelter costs, which have their obvious problems. It has disadvantages: There is a significant nonmarket component, for example. An argument can be made for the CPI on the grounds that it is better known although, as has been pointed out to me, if we begin to really focus on the PCE, it may endogenously become better known. Another point to make here is—and I don’t want to get too distracted with this—that since there is a fairly stable wedge between the PCE and the CPI, we might be able to use the CPI in some of our communication as long as we’re clear that we are not picking and choosing as far as our objective and our definition of price stability are concerned.

    Another component of the projections that we have been doing, which I think is very valuable, is adding a considerable amount of both qualitative and quantitative information to our projection. That includes, in particular, our explanation of the qualitative material that we have been submitting—describing the forecast, the risk to the forecast, the sense of uncertainty that we have, and so on—and I think that will be very valuable. As I said, we can combine this with other supporting information. There are various ways to do this. There could be a separate document four times a year. It could be in the minutes. I suggested one possibility, which is to include it in the Monetary Policy Report twice a year and keep it in the minutes or as a separate document on the off quarters.

    Let me talk a bit about what this would accomplish for us, and then I will summarize that at the end. First of all, the public is very hungry for information about the Federal Reserve’s outlook and our sense of the risks to the economy. We have, as I have noted before, the best forecasting group in the world. We have useful information to add to the debate. By providing that information, I think we can help people make better decisions and understand policy and the economy better. In particular, the more we are forced to explain our predictions and our forecasts, the more credible we’ll be and we’ll be inviting discussion, reaction, and debate that will, I think, make our projections better. One of the advantages of transparency is that we begin to interact more with the outside world.

    Second, I think we should assume optimal monetary policy. I had some other ideas before, but in the end, I think that’s the right thing to do. An important implication of assuming optimal monetary policy is that the projections therefore become essentially, as everyone understands, a plan for how we propose to steer the economy, if you will— subject, of course, to all the qualifications of uncertainty, forecast problems, and so on. It gives an explicit road map with reference to both sides of our mandate about how we expect our policies to move the economy toward our objectives over the next three years. I think that’s very important for a number of reasons, such as accountability and transparency. But let me give you an example of where I think it’s particularly useful.

    One issue we have been discussing is the appropriate period for achieving price stability, and two suggestions are out there. One is sort of the standard Bank of England approach, which says that we have a two-year horizon. We have certain concerns about that. In particular, it doesn’t necessarily take into account, at least not explicitly, the state of the real economy, the initial conditions, how far we are from price stability, and so on. Another possibility is to say, well, it’s just an aspirational number. It’s a long-term number. We don’t have any particular schedule for getting there. People have raised the obvious objection: Where’s the discipline? Where’s the credibility associated with that? So, as we understand this, we can explain to the public that the projections go a long way toward solving this problem because they show how far out we think we have to go to get to what we and the public view as being reasonable levels of price stability. So it does in a very important way solve the problem of the appropriate horizon.

    Now, I should add a point that will come up, which is that one could object that the projections are not the same as a Committee forecast. We are not going to come together and make a single forecast that the entire Committee buys into, except to the extent that we do have consensus building, which we will have over time in our meetings. That aspect of it could be viewed as a lack of clarity. However, the aggregation process does reflect unique features of the Federal Reserve, including its institutional structure, the large size of Committee, the geographical dispersion of its membership, and our longstanding willingness to accept and encourage diverse views within the Committee. So we won’t be forcing some kind of artificial consensus. There will be opportunity for disparity. In particular, I would recommend that we provide information to the public about the cross- sectional distribution, as we already do. But my inclination—and people can react—would be to provide the entire cross-sectional distribution to convey the sense of uncertainty or the sense of dispersion of views, and that will be informative in the same way that the votes in the BOE’s Monetary Policy Committee are informative. However, as in the case of the Bank of England and other banks, even though we won’t be having a common forecast, nevertheless—as I think we have already seen— the preparation of our individual forecasts does create a certain amount of discipline and has been useful for us in thinking about our forecast.

    A very important question is what is conveyed by the third-year projections, and I think that they are at the heart of the innovation created by this step. Assuming that we’re not too far from the steady state initially, which I think characterizes our current situation, it is evident that the third-year projections—or, alternatively, the third through fifth or however we decide to do it—reveal a lot of information about our views on sustainable long-run growth; our views on sustainable unemployment; and, of course, our views of what price stability is. I simply take note of the fact that the latest projections show the central tendency of the Committee’s inflation objectives to be 1.5 to 2 percent on the core PCE deflator. I actually—and I’m speaking entirely for myself—would be not at all displeased if that became known as the Federal Reserve’s comfort zone or informal definition of price stability. First, it’s a compromise among different views. Second, I realize that I’m complicit in the 1 to 2 percent comfort zone, but I do note that the lowest twelve-month core PCE, in 2003, was 1.27. I don’t think we’d be comfortable with inflation rates below 1 percent even though we’re obviously willing to tolerate inflation rates slightly above 2. It’s not symmetrical, and I think that the comfort zone revealed by our third-year forecast would be reasonable and would provide useful information.

    Some would be concerned that we’re also providing information about the Committee’s views on sustainable growth and sustainable unemployment. I am not that concerned about it. I think that a transparent Committee should do that. However, for those who are concerned about possible risks, I’ll point out that Committee projections will have a lot of dispersion that probably will essentially encompass most reasonable estimates of these variables. Moreover, there will be forecast errors around those projections, and as we get information about productivity and other factors, we will be able to update those estimates. I don’t think that they will be a major constraint. I think that they will, in fact, just provide some information to the public.

    I note that some participants have talked about an opportunistic approach to disinflation, which still seems to have some adherents around the table—that is, people who may say, “Well, I’m sort of for 2 percent now, but I can see over time, if the opportunity arises, very gradually moving down to 1½ and so forth.” Obviously, the revealed preference shown by the third-year projection doesn’t distinguish between those things. One thing that might happen—and I don’t think it’s necessarily a bad thing—is that, if opportunistic disinflation happens and those individuals therefore lower their projections, the Committee’s projection might drift down a bit. I don’t think it would drift up. I think there would be a strong resistance to that. But it would be responding appropriately to changing conditions, and I don’t think it would change very much; so the fact that it would not be literally rigid is not necessarily a problem to me.

    Some thought will have to be given to vocabulary, how we describe these things. I think that I will myself want to talk about the Committee’s projections. It’s not quite right to call them a target because we will not have agreed universally and chosen a number once and for all. That being said, I think that the normative implications of the number will not be missed by the public, and that it will do a lot to clarify people’s views on what the Committee is trying to do and will also be useful for internal discussions. In particular, in testimony, speeches, and the like, I would use the projections as my reference point as I talk about what the Committee is trying to do, where we are heading, and what we think is the best way to get there.

    So let me summarize what I think this component of our communication strategy could do for us, noting that some other things could come in the package—perhaps faster minutes, changes in the statements, and so on. But let me just talk about what I think is best for us. First, it is going to allow us to provide considerably more information to the public and in a more timely way because it will be quarterly. Second, it will give us an opportunity to clarify how quickly we intend to move toward our objectives. It will give us a way to deal with the problem of the horizon. Those of you who were at the St. Louis Fed’s conference on inflation targeting in 2003 might remember a paper by Board staff members Jon Faust and Dale Henderson in which they talked about inflation targeting as being focused on the mean of the objective but needing also to focus on the variance. What they mean by that is the speed with which misses are fixed and that some regimes are not adequately constructed to deal with that. Again, this would allow us to be very explicit and very accountable about how we return to our objectives.

    Third, it would allow us, again, to move to total inflation as our objective and to clarify how we use core inflation as an input into forecasting total inflation. Fourth, it would clear up the current confusion about comfort zones and individual views. We’re not going to take a vote on the particular number, but I think a reasonable way to proceed is to consider the range of third-year projections as being a kind of consensus view of what most of us think is an appropriate measure of price stability. Again, I think the normative implications will be clear. Fifth, it will improve our internal discussion and decisionmaking. We’re already seeing that. In fact, it has highlighted some problems that we have in our communications and in our coherence. This will help, I think. Sixth, it respects the Fed’s unique institutional structure, the nature of its Committee, its governance procedures, and its attention to diversity of views. Moreover, it builds explicitly on a communication device that we’ve been using for thirty years. In that respect, it will look in some sense as incremental even though I think it’s very substantive. But I think with its incremental nature, the transition risks—be they market risks, political risks, and so on—will be more moderate than they would otherwise possibly be.

    So this is an outline. I know that some of you may think that this is a bridge too far. Some of you will think that I’ve only started on the road to Damascus here. [Laughter] As I said, there will be an opportunity now to go around as you talk to give any reaction you might have to this. Also, I have not been very specific about the questions raised in exhibit 1 that Vince put out. These things bear on the details, but I’m pretty flexible about them. I think I’d like to see the minutes moved up if possible, consistent with doing all of what I’ve described. Otherwise I’m pretty flexible about this.

    Let me just say a few other things about going forward. This, together with the other elements, is part of an ongoing process. We’re not going to lock this down. I will ask the subcommittee to continue in existence. Certainly we’re going to have to move forward, if we all agree that this is the direction that we want to go, to implement the details of the minutes, the Monetary Policy Report, the collection of this information, and so forth.

    I would like to talk about the whole package, whatever we come to, in the fall—that is, in the next three or four months. I will surprise Don by saying this. It would be very nice if I could have something to point to in October, but it’s certainly possible and I think it’s very important for us to move deliberately. If that’s not possible to do in a safe and clean way, then we could wait until January to actually deliver some product. So that is a question. I think that what will happen is that we will see the reaction we get. We will see how the public and the markets respond. We may have to take further steps. When we see how this goes, the markets and the public will tell us what they need to know that we’re not yet telling them, and then we can move it still further if we need to. But my sense is that, with some of the details that we need to work out—and your comments are more than welcome, as they are with the entire vision—as a central part of a package, this would move us in a good direction. So I’m going to stop there, and we’ll have a go-round. Did you have an intervention?

  • I have just a question. In communicating the projections, what are you suggesting there, Mr. Chairman? Is it four times a year that we would put the projections out with commentary?

  • Okay. Fine. Thank you.

  • Let me give Governor Kohn a chance to lead off as the chairman of the subcommittee, and then we’ll have a full go-round. Don.

  • Thank you, Mr. Chairman. I agree with and strongly support the path that you’ve outlined for us for the reasons you’ve articulated so nicely. Let me add a few things and then give a few specifics. I think this would be a very important contribution to enhancing the understanding of the public, the markets, and the legislators about what we’re doing and why. Just to emphasize something that you just mentioned, Mr. Chairman, this systematic approach to thinking about the risks and the symmetries and the asymmetries around the risks will be very useful in our communication with the public, and a systematic and regular approach to talking about the changes in the forecast will be very useful to explaining to the public how our forecast is evolving. From my perspective, these explanations are among the most important things that we can do. The write-up that President Hoenig was asking about is key here. To my mind, the forecast is really a framework for putting all of our explanation, our write-up, in place, and is a disciplining process for explaining our thoughts about how and why the economy is evolving. I think it’s more those explanations than the specific numbers that we use to educate the public about what we’re thinking, how we think things are developing and, looking at the risks and the uncertainties, how we’re likely to react to incoming information. This would put that endeavor on a much more systematic track than it has been in the past when it has relied from time to time on ad hoc speeches by the Chairman or on mentions of it in the announcements, minutes, or whatnot. So I think this will be very good.

    I agree with you that the third-year forecasts are mostly people’s preferences for the long run. I admit to being that opportunistic disinflator to whom you were referring. Maybe there are others around the table. I don’t know. I wrote down 1.9 for year three, and I might prefer something a little lower over time. But given the starting place, I thought the welfare benefits of going down to 1.8 or 1.7 or even 1.6 or 1.5 were less than the welfare costs of the potential unemployment that we would incur doing that. I’m also somewhat skeptical about the credibility bonuses from making announcements. But obviously, I wouldn’t have written down a number that wasn’t very heavily influenced by my objective over time. So the public will be correct in interpreting those third-year numbers as pretty much where the individual members of our Committee want to go even if it’s not exactly the right number. I note that the 1.5 to 2 that’s in our forecast is not that wide a range. It’s narrower than the inflation targets of some countries, like New Zealand and Australia. So it won’t contribute that much to uncertainty. I also note that in Mike Leahy’s charts yesterday the inflation compensation changes in the United States over the past couple of months were about the same as in the inflation-targeting countries. I don’t think there’s a huge amount of uncertainty about what we’re doing. Now, some people might think that the inflation expectations are tied at too high a level—I think that President Plosser pointed that out. But I don’t think that the public is afflicted with a whole lot of uncertainty about what our objectives are relative to some other, inflation-targeting countries.

    I see this as sort of a risk-management approach to talking about our long-run inflation objective. We get this out there, see what the reactions are, see what kinds of questions there are, and then proceed. If it looks as though the right thing to do is to actually vote in the Committee about what our long-run objective is, we can do that then. But we haven’t gone that extra step, which we will never be able to take back again if there’s some sort of reaction that we haven’t anticipated. The Federal Reserve is in a very different place relative to our democratically elected representatives than a lot of other central banks. We report to the Congress. We don’t have a Minister of Finance or a Chancellor of the Exchequer that intercedes between us and the Congress. The Congress has given us goals in words and not in numbers, fortunately. I wouldn’t want them to give us goals in numbers. There were some numbers in the Humphrey-Hawkins Act, which on the unemployment rate were potentially quite damaging if we had gone for them. They haven’t asked us to put numbers on these goals. They haven’t looked at this for ten years, but in the mid-’90s when the Senate looked at this, they didn’t go anywhere with it. They rejected it. So I think we are out in front by doing this. If there were to be a backlash against even this limited step, then at least we wouldn’t have committed to something that might provoke a bigger backlash. So I see this as a step toward possibly specifying price stability numerically, a step that helps to manage the risk that it might provoke some reactions that we would have trouble living with. So I’m very strongly in support of the path you outline.

    I think the subcommittee needs from the rest of the Committee some answers even before we get to the specifics here. So, do you agree that we ought to proceed with an enhanced projections process like the one we’ve been going through the past two times? We might have some specifics. Should we do it four times a year? I think we should, but not everybody might. Are we doing approximately the right variables, noting that we’ll have to adjust our price variables? I agree with you, Mr. Chairman, that adding total inflation to the core is a very good idea, and we ought to use the same index for both of those, whatever it might happen to be. So we’ll do some adjusting.

    Do you agree that there ought to be a write-up of these projections more or less like the one that the staff has produced, approved by the FOMC so that it is an FOMC document, and released to the public? Now, we might discuss exactly what’s in that document. Like you, Mr. Chairman, I kind of like the histograms of how many people were lined up at the particular answers to give a sense of the dispersion of views on the Committee; they are much easier for me to look at than the central tendencies and the broad range things, but not everybody might agree. So I think there are some questions even before we get to “Are you satisfied with the general thrust of where we’re going?” I think that’s what we really, really need to know more than other things.

    Let me address some of the things in exhibit 1. I like the sharing of forecast submissions anonymously. I guess I’m concerned that if it was by name, it would potentially be harder to change your mind at the meeting. It would put pressure on those submitting to have more-elaborate submissions. My sense was that I got the information that was important to me about where people generally were. I thought the way we provided information on the federal funds rate path was useful as well. We need to recognize that as we go forward with this—I hope we go forward with this—there will be public pressure on us to release the underlying federal funds rate path. I think we need to go into this with our eyes open. That pressure will be there, but we need to resist that pressure. The process that we used last time worked pretty well. But let’s be aware that there are risks associated with releasing what we think is the path of the federal funds rate going forward. Some central banks are doing that now, small central banks or small countries in the north and the south, in the Antipodes and up in Scandinavia. Let them experiment with this for a while and see how the market reacts and how that interfaces with their own decisionmaking processes before we go down that path.

    I also like the change in characterizing uncertainty in the risks around the forecast. That is, here’s a table. Include that table. How do you feel relative to that table? I think the table will help the public understand how little we know about the macroeconomy. [Laughter] One thing that concerns me about the projections process and delivering these things is the decimal point—to the right of the decimal point. There’s a bit of a risk that we would be perceived as knowing that there’s some difference between 1.7 and 1.8 percent inflation—that we can really determine it—and I think that including the table will tell people that’s not really the case. So I think it is important that the table be in there.

    Regarding in what form the projections should be released, your thought for two times in an enhanced Monetary Policy Report—in February and July—and two other times—either in the minutes or in a separate document released around or just before the minutes, but really just being that enhanced write-up—strikes me as right. So two updates that are very compressed and not much more than what we agree on and then the two Monetary Policy Reports in which they would be embedded strike me as the right way to go.

    In terms of finalizing the projections, as I think Vincent noted, I’m of the view that we shouldn’t be updating our projections except from what we hear at this meeting. The projections we release are how we explain what we did; why we did it; and when we sat around this table, how we saw the path forward that influenced our decision. As for information that comes in after we leave this table, we will not have had an opportunity to digest it or to discuss it and its implications among ourselves. So, yes, if we want to update our projections after the meeting, I would have a very narrow window, and the update would be based on the information you heard at the meeting.

    In terms of the minutes, as indicated by my question to Vince, as a general principle I’d like to shorten the time before they come out. President Poole, I can’t speak to a specific advantage of dodging one piece of data or another, but the minutes are a very good, nuanced view of what we discussed and why we made the decision. I found it always very helpful to have them out there when I give a speech or answer questions, particularly when I answer questions from the audience and I can’t control what I’m saying. [Laughter] Right. Freudian slip. Let’s see. We’ll clean that one up in the transcript. [Laughter] I think the sooner we get the minutes out there the more helpful they will be for the public and for all of us who are out in the public, but we can’t put so much pressure on this process that we don’t have an appropriate review. The words will be even more important, particularly four times a year. I’m not quite sure how all of this fits together with your testimony and all that, but if we can, I think we ought to shorten the time. I think the minutes have approximately the right level of detail in them now. Some central banks give much more detail about what one view was and another view was and what one person said and another person said; but with nineteen people sitting around the table, that would be impossible. So I think we’re there. Also I like the idea that President Poole suggested a couple of years ago and I think Vincent did as well, of taking that stuff about the past, the first eight pages or so through the staff forecast and making that a staff document. So we could say, “As background for the meeting, the staff prepared or supplied the Committee with the following information.” However they want to do it—if they want to make it part Greenbook or whatever, it is their thing. At the least, that takes it out of our hands. It helps us with the editing process. It helps them with the editing process. So I think that would be a helpful innovation. Thank you. I am sorry to have gone on so long.

  • That’s okay. Thank you. President Lacker.

  • Thank you, Mr. Chairman. We were asked to comment on a long list of questions concerning economic projections, the minutes, and the statement. In addition, Governor Kohn has put out the broader question of the general thrust of the direction we’re going in, and I’d like to focus my remarks on the latter. Frankly, right now I think the most important question regarding the release of our projections concerns the relationship of these communication devices to our inflation objective. Everything else is more or less small potatoes right now. I believe it would be a mistake to release our projections without agreeing on it and communicating a Committee inflation objective. It’s inevitable; in fact, it’s intended the way you described it, Mr. Chairman, that participants’ third-year inflation projections will be interpreted as the equivalent of an objective. I think this would be problematic without an explicit statement of an objective for a number of reasons.

    First, our projections display a nontrivial dispersion, admittedly a narrow range, but market participants are going to have a keen interest in whether we believe a 1.9 percent inflation rate, say, is too high or just about right. Financial market participants already believe that there’s a dispersion of the Committee members’ preferred inflation rate and that it lies between 1½ and 2 percent. I note that showing that every individual preferred inflation rate spans a range of 1½ to 2 percent is not equivalent to the Committee’s deciding that its collective preferred inflation rate is for anything within a band of 1½ to 2 percent. So I don’t think this is going to enhance the clarity of the public’s understanding of our intentions much at all.

    Second, communicating our inflation objective via three-year-out projections would accomplish little by way of enhancing any commitment since we’d release the projections anew three or four times a year with the implication that our implied objective could change over time. I’ll remind you again about my brother-in-law doing retirement benefit projections, just to make the important point that a significant part of the value of an announced objective is to reduce long-run uncertainty about inflation.

    Third, our inflation projections would be displayed alongside exactly analogous projections for unemployment and GDP growth in an exactly analogous way. This would confuse people about the economics of monetary policy. In that context, how do we convey that we do not have numerical targets for unemployment or growth? How do we convey that inflation is a variable that we control in the medium and long run, but we cannot peg growth or unemployment at any one number in a sustained way? In other words, how do we remind people that the long-run Phillips curve is virtually vertical? A related consideration is that, if we present our projections this way and do not clearly state our inflation objectives, it’s not hard to imagine someone in the Congress trying to hold us as accountable for our unemployment projection as for our inflation projections. This would be a dramatic step backward for us, I think.

    Fourth, and probably the most pressing and immediate problem in my view, publishing our projections this way will do nothing to improve the clarity of our internal deliberations or to alleviate the problems we have and will continue to have in writing statements in the absence of an agreed-upon objective.

    For these reasons, I believe that the release of economic projections containing participants’ forecasts for inflation three years out would be a poor and ineffective substitute for an explicitly articulated objective and would be problematic without such an objective. Now, let me be clear. I do think we should move ahead in this direction, and I applaud your leadership, Mr. Chairman, for putting something on the table today at the outset of the discussion. I just think we should do this in conjunction with the inevitable other step of agreeing on what we’re about here in the Committee. I can appreciate the sensitivity to the likelihood that various politicians may react to our communication of an explicit numerical objective; but over the past thirty years, politicians have reacted to many of our actions that were integral to our successes over that period. We should decide honestly what we believe is best for the country and communicate it clearly and with confidence. Thank you, Mr. Chairman.

  • Thank you. President Hoenig.

  • I’m sorry. Vice Chairman.

  • So, President Lacker, is it your view that if we’re not at this point prepared to announce a quantitative definition of the Committee’s long-term objective, that we should not do a third-year projection?

  • Thank you, Mr. Chairman. I very much support the proposal that you’ve outlined here. I think it does not tie our hands as individuals, which was one of my concerns originally. It allows us to do our work as members of this Committee and to put our information out there for our colleagues and for the public to judge, and I think that’s very important as individuals on the Committee. I think that the third-year projections are helpful. They do take on the tone of a goal. There’s no question about that, but I don’t think that it’s necessarily bad at all for us as individuals; and I don’t necessarily think the fact that we have differences is bad for us as a Committee so long as we’re clear about our analysis for that. So I’m very supportive of that.

    I would move the minutes up if at all possible. I think they have served us well. We still work very hard on the statement, but the minutes have de-emphasized the importance of the statement because they clarify, and the sooner you can clarify through the minutes, the better the public is served. So, yes, we should proceed. I like four times a year. Now, how do we do it in terms of the description and so forth? That’s something I think we’ll experiment with over time. I really do like the histograms. I think they give a very clear piece of information to the public and to each of us. So I’m very supportive of them as well. The variables you have are just about right. I prefer the CPI, as I have in the past, but I certainly wouldn’t fall on my sword about it. I think getting this out is more important than whether we do the CPI or the PCE. I do think total inflation is very important—it helps clarify things for the public and allows us to explain the difference between it and core. If I had my choice, I’d stay away from the fed funds rate path. Appropriate policy or the way you have described it is fine. Using uncertainty in explaining it is extremely important because it is an uncertain business over time.

    I would not have revisions; they distort what we had coming in. The minutes should describe parts of the discussion and clarify things for us as we go through it. So redoing the projections afterward serves no real useful purpose to my mind. I think we should move forward on this as you’ve described it here. I like your summary of what doing it accomplishes. Thank you.

  • Thank you. President Moskow.

  • Thank you, Mr. Chairman. I, too, want to thank you for putting this proposal on the table. I think it will help this discussion, and I find myself agreeing with everything you recommended actually. I’m a little frustrated. I can’t find anything to disagree with. [Laughter] But let me mention a few nuances. On the question of whether it is helpful to do this in the absence of a quantitative inflation objective, I think that on balance it is. It does move the ball forward. In line with Bill Poole’s question earlier, it’s an incremental step, but a very significant incremental step forward and one that on balance will help provide more information. If at some point in the future the Committee decides to have a quantitative objective, it would be an important part of that process. In any case, you’d have to do it as well.

    On the questions that Don Kohn asked us to comment on specifically, I think that, yes, we should proceed with the enhanced projections and four times a year is a good way to do it. I like the total inflation approach, looking at it on a long-term basis, because it clarifies the confusion between core and total, and over time they should clearly be the same. Regarding the write-up, my recommendation is to put it as an appendix to the minutes to keep it as simple as possible. I think that putting it as an appendix simplifies it because then you can just lift it out and use it those two times a year for the Monetary Policy Report, and it just eliminates any possibility of confusion between the two. If the timing of your testimony before the Congress is such that you need an expedited process for that appendix, it’s easier to do it that way. It just simplifies it for everyone, and there’s just less risk of confusion. I think it would be easier for the staff as well.

    I like the idea of the three to five years, by the way, for the longer term. That is helpful in terms of explaining this to the public. I know some people are concerned that it raises questions about what potential output is and so on, but you’re giving a range, and I think it helps just to explain the complexity of this. Having the longer-term period would be helpful as well.

    Getting back to Vince’s specific questions here—should we share them? Yes. I like the way you’ve used the fed funds rate path, and I like the uncertainty and risk. About finalizing projections, I agree completely with what Don said. The information should be what we have in hand at the time of the meeting because we all should have the same cutoff point for the projection, and that’s the logical cutoff point, and then maybe give people a day or two to update them or modify them based on what they heard at the meeting. But it should be a very clear cutoff—the day of the meeting.

    About expediting the minutes, I guess I would have one disagreement here. I disagree with Don on this. The benefits of expediting them would be very minor compared with the potential costs in terms of additional staff resources that would be needed. I think we have it just about right now. Again, if you shorten the schedule, you can’t lengthen it again. So I would just keep it where it is now.

    I just mention one other little aspect, and that relates to the histograms. I agree we should use them—they will show the outliers in the projection, which is fine. Again, using them shows the diversity of views. There is a risk here that some of the outliers may over time want to move more to the center, but so be it. I don’t think that is a great risk, but I think it is something we should recognize might occur here. So on balance, I think the proposal you have put forth is very, very good, and I agree completely with it.

  • Thank you. President Pianalto.

  • Thank you, Mr. Chairman. I, like President Moskow, find it very difficult to find any disagreement with what you propose. I’m very supportive of the approach you’ve laid out for the reasons that you articulated so clearly. I support extending the forecast period. You mentioned going to a third year; you also suggested maybe a three- to-five-year average. I’m leaning toward the three-to-five-year average because I had proposed a five-year extension of the forecast period—the two years that we currently use and then adding the fifth year. But your three-to-five-year average makes perfect sense to me.

    I’m very supportive of using a total inflation number. President Hoenig mentioned that he had a preference for the total CPI and so do I for the reasons that you mentioned: It’s a measure that the public currently understands, and it gets a lot of publicity. But as you point out, if we start using the PCE deflator, the public will start to focus on that measure. I like the approach of having quarterly releases of our projections. That seems appropriate. Last year we saw that when we release our forecasts only twice a year, they can become outdated rather quickly. So giving more information on a quarterly basis would allow us to keep our forecasts more current. I would like us to spend more time talking about whether we assume an optimal policy because, as Governor Kohn pointed out, we’re going to get pressure to release our fed funds rate path because people are going to want more clarification of what we mean by “appropriate” monetary policy or “optimal” monetary policy. Finally, I like the fact that your approach retains the current structure of the Federal Reserve System and allows us to give our own forecasts, letting the public see the diversity of opinion around that forecast. We are going to have to discuss when it will be appropriate for us to talk about our individual forecasts because, once we start to give the public more information about the Committee’s views on certain things, the public will want to find out where the differences are. Then we will have to have some agreement about whether it’s appropriate to talk individually about how we see our differences from the Committee. But these are details that we can talk about with more time. In general, I’m very supportive of the approach that you’ve laid out today.

    I know we’ve been asked to answer some of Vincent’s questions and respond to some proposals that Governor Kohn put out, and I’ll just make a few comments. I do want to proceed with the projection. I mentioned that quarterly would be fine. Regarding when the projections should be finalized, I support doing it at the end of the week and using the same rules that we use for the minutes currently—not to bring in new data that we receive. In terms of the benefits and costs of further expediting the minutes, I think, like President Moskow, that the benefits are minor compared with some of the costs. The current process is giving more time for members to give thoughtful input into those minutes, and I wouldn’t want to change that. Those items complete my comments. Thank you, Mr. Chairman.

  • Thank you. President Plosser.

  • Thank you, Mr. Chairman. As some others have said, I want to applaud your leadership in laying out a proposal for how we think about this. It’s important to have a framework on the table for thinking about where we want to be. I would add that generally I agree with almost everything you said. I think it’s a good way forward. I view this as a step, not the end game. It’s part of a process in which we evaluate what we’re doing and how we do it. While I share in principle President Lacker’s concern about the potential risks associated with doing this without agreeing on explicit objectives, I’m willing to bear those risks because, since most people around this table know where I’d like to be in terms of that, I think the risks are acceptable in the short run as a means of getting us to that ultimate objective. I think that this will help us as a Committee become more comfortable with being more transparent and more communicative and that the process in itself will help us get to where I think we ought to be. So from that standpoint I’m very supportive of this direction. I support going through with it under the guidelines and broad outline that you described.

    As to some of the specific things that Governor Kohn mentioned and we talked about, as I said, I want to proceed. I think four times a year is right. The details of the Monetary Policy Report to the Congress are just a detail. We can work them out. Somebody is better at figuring that out than I am. I think that shouldn’t be considered a stumbling block. I support moving to total inflation. As I said both yesterday and earlier today, I think that’s important. I’m marginally indifferent between total PCE and total CPI. Earlier I had advocated the CPI. I’m still perhaps at the margin, but to me that’s not a big issue one way or the other. I agree on the timing—the forecast and the projections ought to be based on information available at the meeting, not subsequent information. In fact, that’s very important in what we’re trying to communicate about our decisionmaking process. I’m fairly happy with the way the staff has crafted the language. I think they have done a pretty good job of capturing the sense. I’m rather indifferent about whether we incorporate it into the minutes directly or we make it an addendum. Again, I think the markets and this group can live with it either way, and people who read the minutes will come to understand and accept it one way or another.

    The two points with which I have some trouble or perhaps a little disagreement with Governor Kohn’s comments concern the optimal policy and whether we reveal what’s implicit in the fed funds rate forecast going forward. I think that revealing a dispersion or the varying underlying policy assumptions that people are using going forward helps on the issue of uncertainty—that the world is uncertain and that our understanding of the way the macroeconomy works is uncertain. By revealing that some underlying sets of assumptions that we on the Committee are making to get to this set of objectives are different could actually be very helpful in reinforcing the view that the future is uncertain. Therefore, rather than locking us into some path, it may end up, in fact, opening up options to us in a way that we might not have had before. So I think there’s actually potential information there that we’re providing to the marketplace that may be valuable. Giving this area a bit more thought might be worthwhile.

    The second point is one that President Pianalto just mentioned, and it just occurred to me after she mentioned it. I realized that, if we submit these forecasts anonymously and if they’re reported anonymously, even though the dispersions and so forth are reported in the minutes, we as presidents and as Board members are out giving speeches all the time about our outlook for the economy. At the end of the day, we are unlikely to stop giving out information about what our views are. It’s a little like hiding it over here, but everybody is out talking about what their view is anyway. So I’m not sure we are buying anything real by being anonymous about our forecasts. I guess I’m in favor of revealing more rather than less—revealing more about our uncertainties or our assumptions underlying the future path of the fed funds rate and having that information convey some uncertainty—and being more transparent, because we are anyway, about what our individual forecasts may have been in talking about that outlook. Thank you.

  • Thank you. Vice Chairman Geithner.

  • May I ask a clarifying question before I speak?

  • This really goes to the remarks of President Moskow and to the relationship between a narrative to accompany the projections and the description in the minutes. If you did that model, which as I understood it, President Moskow, is to incorporate a narrative as an appendix to the minutes, how then would the description of the outlook that is in the minutes now—the narrative description of the central tendency of the Committee that now goes in the minutes—relate to the narrative description about the projections? What would be the relationship be between those two things, if you did them as separate but linked documents?

  • Obviously, the two would have to be drafted very carefully to make sure that they are in concert and that there are no inconsistencies in them. But I think doing so is clearly manageable because one is a set of longer-term projections and the other is a discussion of the shorter-term outlook.

  • So that is the distinction. You would say the minutes are the description of the near-term outlook that underpins our judgment about the decision at the meeting, and the annex would be more of a focus on the description of the medium term?

  • Yes, whatever the timeframe is for the projections.

  • Isn’t there a third alternative? The minutes are what we actually discussed, and the other thing is a story. I think President Moskow’s question really relates to whether or not we are going to try to weave what we actually discussed into some coherent story or try to make the minutes really be what I suspect they were originally intended to be, which is what the color and commentary of our discussion were?

  • I think I would just note, Vice Chairman Geithner, that Jim Clouse wrote a version of the minutes that did a pretty good job of integrating them. It gave the projections with the long-term overview and the underlying forces, et cetera, and then the rest of the minutes, as is our wont, in sort of a sector-by-sector discussion of mostly developments in the near term. But you raise a good question. I think we should keep that in mind.

  • Mr. Chairman, may I ask—was that the draft that Ms. Danker sent around?

  • Yes, the appendix to Debbie Danker’s memo is the draft that Jim Clouse prepared. I think the Vice Chairman is correct in that, of course, there would be some repetition in the discussion of the minutes just because the sector-by-sector discussion of the near-term conjuncture is going to be somewhat similar to the longer- term structure of the three-year or the three-to-five-year forecast. But they would serve different purposes, and that repetition might not be unhelpful.

  • Okay. So, Mr. Chairman, I am very supportive of the path you laid out. I think it basically is the optimal balance today between what the consensus of the Committee will bear now on the merits and what our unique institutional structure as a central bank permits. Now, your view and the Committee’s view of that balance may change over time, but I think what you described has to be pretty close to the optimal balance of those needs today. What is the objective of this exercise? I think I am completely comfortable with what you and Don said in terms of the broad objectives of what we are trying to achieve through these enhanced projections. But I think fundamentally that it is important to recognize that we are not principally trying to give a lot of detail about dispersion and variance within the Committee. What we should try to do mostly is to give more texture around the central tendency view of the Committee about the likely evolution, the desirable evolution, of the economy over a two-to-three-year, maybe longer, period so that people have a better sense of what informs our basic judgments about the appropriate stance of monetary policy. We should make sure that we keep to that objective as we think about what to put into a proposal regarding enhanced projections.

    On the specifics, I am fine with a third year. I would like to discuss a little further the merits of three years versus three to five years. I think the tradeoffs between the two are very interesting, and I want to say something about that in a bit. I am fine with quarterly. I agree that we should have projections on both headline and core and that they should be based on the same index, not different indexes. Before we decide to go to PCE and core PCE, again, we should discuss how to think about what it will be like to live in a world where we still have TIPS paying the CPI. We still have a whole bunch of survey-based measures reporting the CPI. If we’re going to give a lot more emphasis to the medium-term implicit objectives of the Committee in some quantitative sense like this, we should think through whether it will work or be comfortable over time. I agree that this should be done on a view of optimal policy that is undisclosed for the reasons that have been put in favor of that, although I think President Plosser did a nice job of explaining the alternative view.

    I would also be in favor of expediting the minutes on the grounds that I think there is a lot of virtue in saying that you want to have a short period between what we say about what we did and why we did it and the greater narrative texture that has to come in the minutes. The longer the gap between those two things is, the greater the risk that you have two events with signaling impact on monetary policy rather than one. This is complicated to do and must have some cost, but I’d say that a bias toward collapsing the two as close as possible is the right bias.

    On the third-year question, Mr. Chairman, you talked about how you would describe what people should infer from the third-year projection about the objectives and preferences of the members of the Committee individually. My own bias would be to still try to qualify heavily whatever we say about the meaning of that third year. If we believe, as you’ve said many times I think, that one wants to think about the period for bringing inflation back down to objective as something that will probably have to vary based on the circumstances, it is really important not to set up a dynamic in which people view that third-year projection as our fixed objective for that horizon. We want to have a fair amount of flexibility for a view of the appropriate path of inflation over time to change meeting to meeting and not be too locked into a judgment about that. So I would say that I am inclined to keep that softer for all the reasons the proponents of a flexible horizon have laid out.

    There is virtue in laying out the central tendency of the Committee’s view about what the appropriate path is likely to be today, but there may be circumstances in which we want to be above target or objective for a longer time than three years. Again, our view about that path might actually vary meeting to meeting. So I would want to soften that up a little. But as we elaborate the package and the drafts of how this gets presented, people will have a chance to look at whether the balance is right.

    On dispersion and what we say about dispersion across the Committee, I think the histograms have a lot of appeal, and I have been in favor of them and of disclosing them in the past. But I am a little worried about the following: There is some risk that they are demystifying. Either the dispersion is going to look too wide, or it is going to get kind of narrow. If we had to decide today, I would be inclined to say for this next step that we should use the narrative description rather than the histogram to characterize dispersion. One reason is that we don’t have nineteen people doing independent, fully fledged, internally consistent forecasts with a fully elaborated view that is independent of the Greenbook’s view of the structure of the economy and its evolution. We are not like the respondents to the Survey of Professional Forecasters in some sense, and so to have a histogram presented of nineteen different views with this degree of diversity and what goes into that gives probably a bit too much emphasis to the quantitative number of the individual views with which people come to the table. But they are very appealing as a device for conveying uncertainty, so that’s the virtue. I would say maybe start with trying to put more texture into a narrative description rather than in a histogram.

    The issue about the relationship between the narrative description that would accompany the projections and the minutes is something we need to think through more carefully. I’m still uncomfortable in that I think what we want to do is to try to give people a little more sense of the story that defines the central tendency of the Committee about the likely desired evolution of the economy—of output and inflation. The part of the minutes that talks about the outlook shouldn’t be too narrow and shouldn’t be too short in its horizon. In many ways, we are making a broad judgment about the forecast horizon at every meeting. I don’t know what the solution to this is, but I would think through the relationship a bit more carefully, and my inclination is to go for integration. Four times a year we do minutes like today, and four times a year we do something that has more texture, more detail, and a little bit more on the medium term and has some tables accompanying it. Again, what we should try to do is give people more of a sense of the view of the central tendency of the Committee that informs that judgment about the appropriate stance of monetary policy over time. To view them as separate, distinguished things leaves me slightly uncomfortable, so I think the topic deserves some more thought.

    On timing, Mr. Chairman, in terms of it launching in October versus January, I think we should defer to your basic judgment about what makes sense. My view is that you should set a dynamic in motion now that gives you the option of doing it in October if people are comfortable enough by that time and if it looks as though the state of the world at that point would be conducive to this kind of announcement. But I think that you want to make sure before we go forward that you have a good sense of how we’re going to describe this, what it’s really going to mean, and how we handle all the obvious complicated questions that we’re going to get.

    Is this enough? Will it leave us with an unmanageable set of problems internally in how we think about decisions on monetary policy or externally in terms of the ambiguity it still leaves in the market about what our objective is? Let me just say a few things about that. I don’t think it is right to say that the market is fixated particularly on the question about whether our implicit view about what we’d like to see inflation do over time is 1.5, 1.75, or 2. I think what the market wants, really, more than anything is to know what we are going to do with the fed funds rate [laughter] at the next meeting, the meeting after that, and the meeting after that. They would like to know more about what we think about the economy, but really what they want to know is what we are going to do with monetary policy tomorrow. It is very important—as you read that people complain about the ambiguity we live with today, have lived with for several decades, and are likely to live with in the future about what we are going to do to inflation over time—to remember that what they want to know is what we are going to do with the fed funds rate tomorrow. My own sense is we can manage, as we have managed in the past, with a framework that leaves the present degree of ambiguity about our objective unresolved. There is a lot of value and flexibility in that ambiguity. I don’t view it as a particular vice. I don’t think that there is any compelling evidence to support the view that the burden that ambiguity presents today is unmanageable—certainly not relative to the past two decades. Of course, we can evolve further. As the Chairman said, we should view this as an evolutionary process. We should be prepared to revisit over time each judgment we make and to continue to explore whether there are things we can do beyond this to improve the way monetary policy works in the United States. So I think it’s not right to think about this as the beginning with a clear evolution for something beyond this. It is also not right to view this as the end. I think you should view it as this is what is next, and we’ll continue to think through things that might help us do monetary policy better over time. That’s all I’ve got.

  • Thank you. President Minehan.

  • Thank you very much, Mr. Chairman. I, too, would like to thank you very much for presenting your thoughts at the beginning of this discussion. It was extremely helpful to my thinking through what comments I wanted to make at this meeting. I have also found Governor Kohn, Vice Chairman Geithner, and everybody else who has talked very helpful in thinking through some of these issues.

    I am very much in favor of the forecast process that we are working on. I don’t think we have it totally right yet, but I think we’re headed in the right direction. It’s a great balance because, as opposed to establishing right now an inflation objective that would sit out there for all time—maybe that’s the direction in which you want to head in the future—it characterizes over a longish term—and I am attracted more to three years than to three to five years—how we see the balance of things working out in the economy and what we think it is possible to do with our inflation objective over that period, given the other factors that we need to think about in the economy and that are important, both to us and to everybody within our economy. So using these forecasts and putting a third year out there that describes what the balance of things would be given an appropriate policy path is something with which I could be very comfortable.

    I like the way that Vice Chairman Geithner talked about beginnings and ends. One thing that I’ve been struck by in this whole communication process is how hard it is to move backward once one starts to do something. It is nearly impossible to take it away. So as we think about beginnings and ends, we need to be very careful about taking a step at a time. Even though it might seem reasonable to take five steps, we should try one, see how it works, and then move on from there. Giving a forecast four times a year; going to three years, not three to five; and showing the balance of things and the range in which the Committee would see those things turning out would be, I would say in harmony with Vice Chairman Geithner, “a good step.”

    I agree with four times a year—that’s a good frequency. I was kind of drawn to some of Vice Chairman Geithner’s thoughts about whether or not to integrate this with the minutes. I came into the meeting thinking that it would be better as a separate document appended to the minutes that, if the timing worked out well, could be put into the Monetary Policy Report or could stand on its own. I tend to think of the minutes as a discussion of what happens at the meeting, focused on what we used to think of as the foreseeable future, which never was three years. It was always two or three meetings ahead, shaping the stance of policy over the near term. So I was on the same wavelength as President Moskow. The minutes describe a set of circumstances around which one is shaping current policy. Of course, they are related to the longer run, but that is a story that can be told somewhat independently and might be told better independently than woven into the minutes. But I think there is a need to think more about that—Vice Chairman Geithner had some interesting thoughts.

    I think anonymity is useful at this time—again, I am thinking that, once one takes a step forward, it’s hard to go back. I like the histograms myself. They are personally informative. However, I think if we accompany at least the first round of these forecasts with histograms, it will be somewhat like throwing red meat at a tiger. We have had those boring tables in the Monetary Policy Report for thirty years. [Laughter] You know, the variance in the range, the outliers—they have been there the whole time. The market could have made a lot out of that, but it never did, not too much anyway. I think that we might be better off with a more boring approach as a first step into this four times a year—say we did it, write what it was about, give the table, but don’t give all these red histograms that seem to beg everybody to worry about the outliers. I don’t think that is going to be helpful to us in terms of discussing things.

    I know we are probably running short of time, and I can’t go through all these questions in the same amount of detail. Let’s see, on that basis, I think that we should go forward four times a year and forecast a three-year time horizon. I like the idea of total inflation. Every time we have talked about this I thought that, if we are going to set a target, it should be in terms of a longish term in total inflation. I would be more inclined to the CPI. I should mention that I heard your comment that, if we focus on PCE, sooner or later everybody else will. That’s what we thought about ten years ago when we started talking about PCE, and over time people haven’t. PCE is there, but the CPI still is very, very common in terms of how people talk about inflation and the economy, and things are still linked to the CPI. I do think that we need to give a little more thought to either the CPI or PCE, and looking at the total as well as the core is very valuable. I don’t think that we should update our forecasts on anything other than what we heard at the meeting. There haven’t been many updates in the past. I wouldn’t expect there to be that many in the future, so I would think either the same day of the meeting, the next day, or the following Friday, depending on when the day of the meeting is. Fine, give people time to update their forecasts based on what they heard at the meeting but not on new data that are out there.

    Okay. Let me see if there’s anything else. In terms of the benefits and costs of further expediting the minutes, I agree that there would definitely be costs to doing so. There may, however, be a benefit in that we might be able to get to the objective that we initially had of trying to make the statement after the meeting more streamlined. To me, that would be a significant benefit of expediting the minutes. We could focus the statement on what we did and why we did it and not try to make that a vehicle for some longer-term reference, but rather leave that to the minutes and then four times a year to the forecast. So I think there is a benefit to expediting the minutes. From a process point of view, people have to be able to get encrypted information on their Blackberrys and not be forced to carry their laptops with them every single place they go. If we expedite the minutes, that will become even more of a burden, I think. In a memo, Vince talked about delegating approval. I would not do that. The principals have to be the ones to approve the minutes. If we decide to expedite them, we have to facilitate that process so that the principals can weigh in in a timely way on the minutes. Did I miss something that somebody wants to hear about?

  • The Yankees. [Laughter]

  • Probably not. Okay. That’s it.

  • We’ll ring you up in retirement. [Laughter]

  • How about the Red Sox?

  • My prediction is that they will stay in first place through the All-Star break. [Laughter] I think that’s safe enough.

  • Thanks. I also want to say that I am very supportive of what the Chairman and the Vice Chairman said. I really think this threads the needle for getting, as Vice Chairman Geithner said, the right balance. We get to provide more information with greater clarity and greater accountability, and I think it will also lead to greater credibility without being perceived as inflexible or challenging the dual mandate. Some of the questions and concerns that I raised in my interventions earlier indicated that I was supportive of an inflation goal, but I said it was a close call. For me, this is not a close call. It really addresses a lot of the potential concerns that I had. I also think it’s extremely good in putting us on the proper evolutionary path. As you well know, everything at the Fed moves at a pace that is likely to be measured [laughter], and so this should operate on that same pace. It allows us to understand how the new numbers will be perceived. As a number of people said, it is very hard to move back, but this gives us some experimentation and a clear movement forward. It allows us to think about appropriate risk management, as the Vice Chairman said, at least at this stage, particularly given that not everyone is on board with a particular number. Even if everyone were on board with a particular number, I think a more difficult thing would be that, if you are away from that number, what the right path is to get to it. I actually think that is the most difficult thing to get consensus on. This gives us a little more flexibility on that without making any particular commitments. It provides some credibility without raising something that could potentially be more problematic. Also, it allows us to harden this if we so choose. If we’re finding that we’re not getting the credibility benefits that we might hope from this, we can go forward.

    On the specifics, I think there is consensus on many of the things that have been said, so I won’t go through the individual pieces. Just let me mention a couple of things. Actually, along the lines of what the Chairman said about focusing on PCE and the endogenous response that there will be more focus on it. I think that is, to some extent, correct. I also think that there may be some issues on existing contracts, and so it is an important point to think about.

    The point that President Lacker raised is also an important one to think about: How are these different numbers going to be perceived? Obviously, we are focusing a lot on the particular number for inflation, but we are putting these other numbers out in the same format in the same way. This raises questions about growth goals, employment goals, the NAIRU, and Phillips curve tradeoffs, about which we certainly—or at least I certainly—wouldn’t feel comfortable in making commitments. That actually leads me to desire to put out just a third-year forecast rather than a three-to-five-year forecast, at least at this point because I think it reduces the chance of misperception and allows for greater flexibility of how we want to characterize it. It allows us to go forward and characterize it more as a goal, if we so choose and there isn’t confusion. But if we say three to five years, it is hard to step away from that being a particular goal. I am not saying that we don’t want to do that down the line. But at this stage I think I’d feel a bit more comfortable in sticking with the pace that is likely to be measured and just adding a year on that.

    Again, on this endogenous response, if we do this quarterly, we are likely to generate a request for quarterly testimony from the Chairman, and that response becomes more and more likely the more independent we make this document. I’m not saying that anything is wrong with that, but I think we should just be aware of it. The Chairman should be aware of what he is getting himself into [laughter] and make sure that he feels comfortable with that, although I don’t see any problem with it. I just think that it is important to think about. With respect to the question about whether or not it should be anonymous, I think it is valuable to have the projections out there but to have them be anonymous. The main reason for anonymity is, as you well know, that a reporter will ask, “Don’t you think that President X is completely wrong?” Talk about red meat in front of a tiger. That is exactly what people like to look for. They like to look for dissent. Although there could be some benefits, I see attribution as mostly a downside— trying to generate dissent among people, which I think is not particularly productive.

    I do broadly like the idea of expediting the minutes. Getting information to the market sooner and when it is fresher is more valuable. But I am sensitive to concerns about the downside risks of people being unable to weigh in and of excess burden on the staff. So we have to get that balance right. But all other things being equal, I prefer sooner rather than later. Making sure that we are available to give feedback or can get minutes securely in a more expedited process is a relatively small price for the nineteen of us to pay to provide fresher information to the public. With that, I would also say that we shouldn’t revise our projections beyond the day of the meeting because the minutes should be about the meeting. They shouldn’t step on or confuse things, and expediting them makes that kind of revision even more sensible. So I am very much on board with this type of proposal. Thanks.

  • Thank you. President Fisher.

  • Mr. Chairman, you spoke of the road to Damascus. I was thinking about the movie “What About Bob?”—not because of my own neuroses about this exercise but because I think it is important to proceed with baby steps, step by step. President Minehan’s point is cardinal: It’s very hard to go back once you move forward. As I wrote in my memo of June 4, I believe it was, I think that you have summarized one of the most important things that we can do as a Committee, and that is to get a useful and credible inflation metric. Not only do I applaud the overall outline that you started us off with—and, again, thank you for bringing that outline to the table because it organized the conversation—but also I am a big believer in the need for us to come up with an inflation metric that is credible. Tim’s point on the PCE versus the CPI is very important to consider. As I have said before, I am more in favor of the CPI, but I do think we need to think that decision through in terms of the different instruments that are out there in the market and the precedent that has been set.

    Now, I just want to make a couple of points. On the road to Damascus, we have to think of what the milestones are going to be. I want to be careful that we don’t labor under a conceit of false precision. I worry sometimes that, when we look at these histograms—and I want to come back to the histograms in a second—the reality is that only 20 basis points separate these things. The further we go out in the time horizon— you know the old saying that you only put something three points to the right of the decimal point to show that you have a sense of humor—we have to be very, very careful not to imply that we have ultra precision. We don’t have ultra precision; this is a judgmental business. So that is one point I would like to make.

    I have very mixed feelings about the histograms. After listening to this conversation, I would suggest that we start with the central tendency analysis—the table that was put together. The problem with histograms, besides giving us a sense of false precision, is something that a couple of the Presidents and Governors pointed out or hinted at and Governor Kroszner just pointed to but I thought that he didn’t go far enough. Even if we do it anonymously, if we were to publish these, the press is going to poke and poke and poke—the red meat argument that President Minehan gave—and ask, “Who are the outliers, and why?” Once the press starts doing this, it is just a matter of time before a Congresswoman or a Congressman does the same thing. We row as a crew, as a team, and I want to be very careful that we don’t take any risk to undermine the unique aspect of this body. We sit around this table. We have differences of opinion. I noticed Governor Kroszner pointed to me when he said, “This guy is wrong.” It was just the way you were pointing. [Laughter] I realize that sometimes I am a total outlier here, but that is in the spirit of the comradeship that exists at this table. You put this out for the public, and I think you run certain risks of undermining the authority of this Committee, the authority of the Chairman, and the integrity of the process. The federalist process that we have is of value. Let’s be careful that we preserve it and don’t make this like every other Washington institution, because we are unique in the nature of our integrity.

    Just a couple of other comments. I’m very wary, as I outlined in my letter, of being open about the fed funds rate path we envision. This is our central policymaking instrument. If we were to forecast it, I worry that we are going down a slippery slope. We would be under pressure to validate our forecasts by our actions, and I think we need to preserve some of the mystery that surrounds them. I remind you that FF does stand for “full frontal,” so I want to be careful, again, not to give the markets a full frontal view but to preserve some of our power.

    With regard to the frequency with which we do this exercise—again, if we do it baby step by baby step, I would like the Governors to be mindful of the fact that the Presidents run businesses. We have other things to do. I think Vice Chairman Geithner pointed to that indirectly. This is not the only thing we do. We don’t have our own models. If Governor Kohn and the Bank Affairs Committee are willing to give us a few billion dollars more to build our own models, then we are happy to take the money. [Laughter] But the realism is that we key off the staff and off the FRB/US model. If you really look at all these numbers that were given out, not a whole lot of variation is there. We need to acknowledge the fact that we don’t have the wherewithal and that a lot of this is guesswork. The further we go out, the more it is guesswork.

    One last point: I like your suggestion, Mr. Chairman, of the three to five years. As I have made clear, I have the opposite fear of President Lacker’s. I think that what President Lacker suggests puts us right into an argument with the political authorities about what our employment target is. This is a nice way to skirt the issue of formal inflation targeting and, in my view, inevitably being forced by the Congress into employment targeting. I support your suggestion that we use a three-to-five-year range. It is a nice, elegant way to get us out of a possible box. Yet if we decide to go down that road in the future—again, in this “What About Bob?” baby-step approach—we can do that later. I wouldn’t start out there. I think there are too many risks. Thank you, Mr. Chairman.

  • Thank you. President Poole.

  • Thank you, Mr. Chairman. Clearly, from the discussion so far— and my prediction is that it will continue this way—there is a tremendous amount of support for the outline that you have presented, and I share that. I want to focus on two points that Richard raised and maybe hit them a little harder. First, on the fed funds path, the fed funds rate is the policy instrument. We don’t want to confuse the public about the difference between the policy instrument and the policy goals. If we want to present something, we ought to present the policy rule by which the fed funds rate is determined. We don’t know how to do that beyond the broad outlines of the Taylor rule, and that is the point that we should be emphasizing. So I am very opposed to presenting a fed funds rate path because I think it is really going to confuse our communication.

    Now, on the issue of false precision, I want to use an analogy because I hope that it will help to explain this issue. Let me use a GPS analogy. If I did my calculation correctly, GPS coordinates usually show up on your instrument down to a thousandth of a minute of longitude, let’s say. If I did my calculation correctly, that’s about six feet. For some policy purposes, perhaps locating the piers on a suspension bridge, you would really like another digit. But the GPS instrument can’t produce that other digit. If you were to try to do it with repeated trials, you would just get random garbage. Therefore, if you are locating bridge piers, you have to use a different measuring device. Now, Don said, “What is the difference between 1.9 and 1.8?” Well, that is beyond the measurement accuracy of a lot of the data. It is not just that it doesn’t have very much policy relevance, but it is really beyond the measurement accuracy, and we have multiple measures of inflation. We take the PCE index, and we look at it with and without the nonmarket components. Those relationships change, and therefore we are really making a mistake if we force ourselves to make these judgments to 0.1 percentage point. In the projections, we ought to round these things off to the appropriate number of significant digits. Standard scientific practice is not to present measurements that run beyond the accuracy of the measuring instruments. So what is the appropriate number of significant digits in this business? If you look at the nature of the revisions, the multiple measures, and so forth, I would propose that for GDP and inflation it is probably 0.5 percentage point. For the unemployment rate, it is maybe 0.25 percentage point. But we are really going to tie ourselves in knots over stuff that is like the fourth digit on your GPS instrument. It just doesn’t have any measurement validity to it.

    Part of the problem in presenting the histograms that are organized around these very fine intervals is that they will display differences that are totally insignificant and don’t amount to anything. But if we present it, people will start thinking that we must think it means something. So I think we really will aggravate the communication process, and therefore we ought to look at what the appropriate number of significant digits is. I am not trying to obfuscate the differences. I am trying to make sure that we focus on differences that are genuine. If we have a real difference that is 0.5 percentage point apart, well so be it. There is no reason in my view that we shouldn’t present it and explain it.

  • Thank you. President Yellen.

  • Thank you, Mr. Chairman. I strongly support the proposals that you have laid out. I appreciate your doing so. They have helped focus this discussion. Besides agreeing with the proposals, I also agree with the reasoning that you have set out as to why this is the right step and why it is an important step. It doesn’t go all the way to having a single agreed-upon inflation objective, but I do think it’s a major step in that direction. Given the political realities and sensitivities and the differences of opinion and comfort level with moving wholly in that direction, I think this is a very constructive step. It moves us forward, and it doesn’t preclude other measured steps later on. It would worry me to take this step if there were a huge difference among us about the quantitative definition of an appropriate price stability objective. But it is clear that the range of difference is not very broad; 1½ to 2 in the grand scheme of things seems to me to be very minor. Certainly, at this point going out to a third year, it seems to me, will be very informative to the public.

    I really like the idea that, having talked about our individual comfort zones, we will be able to get out of the current phase of being very reluctant to talk about this topic at all. It would be good to express in our own speeches something that reflects a Committee objective. I think that 1½ to 2 as a range of what we think of as price stability is adequate and will be useful. It will let us clearly explain our objectives and our strategy for using monetary policy to achieve them, which is something we really haven’t done much of, and I think that’s a good thing to do.

    I am really torn about your proposal about whether or not we should go beyond three years. We are lucky at this point that we are awfully close to the range that we think we would like to be in. But if at some future date we were a lot further from the objective, I could easily imagine—given my own view of the tradeoffs between the employment and inflation goals—that three years would be an insufficient period for you to look at my projection and see what my view of price stability was. So at some future date, having a range as short as that could be problematic. However, going from three to five years has a disadvantage in that we will, in effect, be laying out something that the Congress is likely to view as an employment goal or an unemployment goal, and I am worried about taking that step. So I am really torn about it.

    Just a bit on a few specifics—I think that four times a year is appropriate. I like our sharing our projections among the Committee members; it has been helpful in understanding what other people think and in facilitating our own discussion. I think the staff has done a wonderful job of producing the narrative. A major thing that we can provide to the public is to lay out our reasoning about the economy. It is being nicely done, and I think we really have that in good shape. I like the idea of a total inflation number. I like the CPI because of its familiarity but could certainly live with the PCE as well. I like “appropriate policy.” There have been a lot of concerns in the Committee about projecting the fed funds rate. In the past I have been where President Plosser is now in terms of wanting to reveal that to the public, but many good reasons have been advanced in our discussions about why we shouldn’t do that, at least for now. With respect to the concern that, if we are very specific in our own submissions, it will eventually become public, my own feeling is that, in this round, just asking people “Do you agree with Greenbook?” or “Are there any significant differences?” has been quite informative and is sufficient.

    I like the treatment of uncertainty in this round. Asking people to put down their own numbers was false precision—I really didn’t like that. Providing some table of model-based or forecast-based historical averages is very helpful if combined with some qualitative discussion. I am a little worried about the histograms. They are nice graphical devices. But are they really informative about something we want to inform the public about? I share some of the concerns that have been expressed about outliers and whether or not we want to focus attention on them. With respect to timing of the forecasts, I really think we should not be adding information in those projections that goes beyond what we had at the meeting. It will be very confusing if we try to do so. I feel that we should have the projections finalized either on the day of the FOMC meeting or shortly thereafter but not based on any additional information.

    With respect to publication, I agree with President Moskow’s thoughts that putting the projections out as an appendix to the minutes is desirable, though we will have to be careful about what we say in the discussion. We can then also include them in the Monetary Policy Report. I do like the idea of expediting the minutes, especially if we figure out a way to be able to read them on our Blackberrys. We ought to be able to do that—most of the compression in time to cut it down to two and a half weeks comes in terms of our own response time. I think that we can respond quickly, especially if we can get them while we’re traveling. I like the idea of being able to use the minutes in our speeches. We have not yet talked about the statement, but I think getting the minutes out more quickly will also take a little pressure off the statement. If the staff can find a way to write the first part of the minutes and we can present it as the staff’s information that they brought into the meeting, that will also take a burden off the minutes, and I hope it will take some burden off the staff.

  • Thank you. Governor Warsh.

  • Thank you, Mr. Chairman. I also think that your straw-man proposal really does strike the right balance, and I strongly support it. We probably owe it to you between now and the fall, or whenever you feel appropriate to be able to go forward with an announcement, to keep our discussion in this room. Our confidentiality around this discussion for the past year has been incredibly helpful, and it does strike me that your ability to frame something that fairly represents your views and our views without having any of it previewed by us, wittingly or unwittingly, is awfully important.

    In terms of additional reasons that I think we have the right balance in your proposal, there has been a discernible difference in the markets in putting data- dependence into practice. In seeing how the financial markets have reacted to data sets and how they have struggled with what those data have meant, I think that they seem to have come a long way from a year or two years ago in understanding how we process data, rather than looking at the width and depth of our briefcases or the winks and nods of our statements. I can’t help but think that we have really made some progress down that path. By putting the projections first and foremost on our list of deliverables to come, we are going to continue to ask them to do their own homework as opposed to relying on us. If we were to go a step or two beyond that at this point, we might undermine some of those good market practices that are starting to bear some fruit.

    The markets judge us by our actions and not by our words, and that is why I must say that I don’t think any of these iterations or any of these proposals that we have discussed is a panacea in and of itself. These proposals and iterations constitute an appropriate framework for us to continue our dialogue with the markets. By taking this next step we are going to put some of our words into action by generating these projections quarterly and seeing what responses we get. I tend to think that we are going to learn quite a bit through that process. As others have said, while the economic environment is apparently benign, I think that the political environment and the financial markets are probably somewhat less so. Maybe that suggests to me another reason for taking appropriate steps and not going beyond them at this point. Finally, I don’t think the financial markets are asking for more than your proposal suggests. I think Tim has it right in some ways—they are still just asking for the answer key. What we are doing here is finally telling them that we are not going to give them the answer key but that we will tell them more about what we’re thinking. That will be more than sufficient to that constituency, and over time we can revisit what we are doing.

    In terms of details, I will refer to only three items. First, on whether we should be making our projections under appropriate policy or sharing a fed funds rate path, I am incredibly concerned that policy forecasts would be misunderstood to be policy commitments. Again, I think that would undermine much of the good work that we’ve done. Second, regarding the anonymity of projections and the points that President Fisher made, I am a little uncomfortable with even these numbers of 1 through 19 with each of our projections because I think that the veil that we have around us could well be pierced. Another way for us to get the benefit of that might be for us to individually submit our projections to the staff. Then when the staff circulates them for us to review, they would have the projections aggregated to the extent that we can see granularity but not be listed as numbers 1 through 19. Obviously, that can be done a lot of ways. But I am very concerned that, if we were to go with individual projections, we would have calls and speculation that would make us all hunker down and somehow explain why we are where we are and be somewhat less interested in hearing where our colleagues are or in modifying our projections over time. So I would favor even a step back on anonymity—but only enough, obviously, to give us a view of where our colleagues are.

    Third, the question that requires probably the most time among the issues that have been raised is the third year versus some three-to-five-year average. I could change my views on this, but my instinct is that, if we were to adopt a three-to-five-year window for that set of data, it might look just a little too cute. I would prefer that we all do our best to say, “This is about projections.” As we get into a third year, our crystal balls are cloudier than they are over shorter periods. Over time, if we were to do that with a third year, in our own ways and our own speeches, we could be elaborating on what that third year means to us. To some of us it might be aspirational. To some of us it might be opportunistic. But I would hesitate to go further than that at this point. But, again, I think this is the right path forward, and obviously discussion will continue. Thank you.

  • President Plosser had an intervention.

  • Yes. I just want to make one comment about the issue of the fed funds path. Both Vice Chairman Geithner and Governor Warsh made a comment about the markets. When I hear you talk about the markets, I am struck that it is a very narrow definition of what the markets care about. You are looking at it in the context of what the financial markets care about is only what the funds rate is—what our path is going to be. I think that is much too narrow a way to think about what we are trying to do here. To say that they don’t care about inflation and that they care only about the funds rate is a slippery slope. Whether it is just a financial adviser who is worried about inflation planning for his clients or people who are investing long term and trying to make decisions about housing or other things, I think it does go back to inflation. It is not just about what the markets think the fed funds rate is going to be. In that regard—I am going to go out on a limb a bit here—to the extent that longer-term decisions or the prices of longer-term assets, such as longer-term bonds, move frequently with short-run funds rate decisions—sometimes more, sometimes less—that really tells us something about what they are expecting the path to be in the future. They are trying to infer something about our future path from one decision. To the extent that we can provide some more certainty or shape to that path as it relates to our inflation objectives or our inflation ranges that we want to talk about, we are going to change that dynamic between short and long rates in a way that will remove some of that uncertainty and some of that speculation about what the path is going to be, even though we can at the same time convey some uncertainty about our individual perspectives about that. So I think we want to be careful not to become too focused on what tomorrow’s market response will be and what they care about because I think it goes beyond just that. I just wanted to share that with the group. Thank you.

  • Thank you. President Lacker.

  • If I could just add to that. I had a similar reaction to Vice Chairman Geithner. When we targeted money supply growth, markets reacted to money supply growth figures because they thought we were going to react to money supply growth. If Red Sox victories influence a fed funds rate setting, the market would react to the Red Sox. Obviously, we are going to manipulate the fed funds rate in response to inflation. I don’t think that is going to drop off the table anytime soon. So it sort of sounds great to say that they don’t care about inflation, that they care about the fed funds rate. Well, they are going to care about inflation if they care about the fed funds rate.

  • Perhaps I could say my piece again, just so he didn’t misinterpret it. Of course they care about inflation, and of course they care about whether we are going to competently deliver acceptable inflation outcomes over time. My only point was to say that even if you gave them clarity on an objective at a certain horizon, in quantitative terms, fundamentally they would still want to know how you are going to achieve that, and you are still going to leave unmet their principal demand. Of course they care about inflation, and we care about inflation. But I believe that the differences they are concerned about today—a central tendency that has a 50 basis point spread on it—are small compared with the uncertainty that they would like us to resolve about how we are going to react to stuff. What they really want is something that I don’t think we can fundamentally give them. They really want more certainty than we have at any given time about how we are going to react to a changing world, and they would like us to resolve the mystery in what the future will hold about the evolution of the economy. It is important to recognize that. But you are right, of course they care about inflation and how we’re going to react to inflation.

  • I would just like to add a comment in favor of uncertainty for the markets. Uncertainty is important in how markets work. Uncertainty is critical to market participants forming their own views about the future and managing the risks as they see them in the future. Everybody talks about the famous Greenspan put. We know Greenspan is going to be there to save us if the market overdoes it, so let’s just play into the rising market because the Fed will save us if everything tanks. That is an overdone argument, but I have heard it made. If we give people a policy path, no matter how we characterize it, they are going to take that as far more a given than we could ever really commit to, and they are going to make bets on that basis. When those bets don’t work out, it is going to be another version of the Fed leading them down the garden path. I really think we should not go there. We should encourage some uncertainty in markets about what our actual policy path is going to be, given that over a three-year period or a three-to-five-year period the range of the Committee’s preferences around inflation is within some narrow band. Let the markets figure out what they think incoming data prescribe in terms of policy and make their bets on that basis. I think a certain degree of uncertainty is absolutely healthy for markets.

  • I thank Vice Chairman Geithner for clarifying his views. I couldn’t agree more that there is a vast range of uncertainty out there about which we can’t help markets and they can’t help us. We would all like to know more about the future. That is why it is imperative, to me at least, that we focus on resolving the uncertainty we can resolve. Foremost on that list would be our coming to terms with decisions that we eventually will have to make about our intentions. Just leave it at that.

  • Well, I, too, strongly am in favor of the direction you have proposed, Mr. Chairman, and the reasons that you laid out for moving in this direction. I would urge us to move as promptly as is practical down this path. I am fairly flexible about many of the specifics that would accompany this path because I think there is more than one way to skin the cat and I think it is important that we get there.

    Before I get to some of the specifics, let me just say that I went back and looked at a fairly recent chronology of our changes to communication going back to 1994. I don’t know whether I got everything; all actions were not equally significant; and of course, we don’t have the counterfactuals, so we don’t know what would have happened had we not taken these steps. But I think it is fair to say that all our increases in communication, beginning with the press releases back in 1994 up through the expediting of the minutes and so forth, with the benefit of hindsight have worked out well. They have worked out well in part because we give these things pretty careful consideration and long deliberation before we move ahead. I think we have done that in this case as well, and so we are well positioned now to move ahead with this.

    As far as some of the specifics go, yes, I would be in favor of the quarterly frequency. For now I would favor sticking with the three-year horizon. I am not particularly opposed to a longer one, but at least to date I think the three-year horizon would be a significant advance. It seems to have worked out reasonably well as far as the trial runs are concerned, and I would do that. In terms of the general shape of the latest trial run, the level of anonymity, and so forth, that was all fine with me, so I wouldn’t see any need to make any particular changes with regard to that. With regard to the form in which the projections should be released, I think I would come down in favor of President Moskow’s suggestion as some sort of appendix to the minutes. I think that will give us more flexibility over time and it will not be a big problem to make sure that whatever we say in the minutes is consistent with those projections. I think that is a manageable issue, so I would favor that. I would also favor cutting off the projections as soon as possible after the meeting for a couple of reasons. One is that not doing it raises the potential for confusion of what we know and when we know it, which we can and should avoid.

    I also think that we don’t really want to put much emphasis on high-frequency data. Just because you get one or two more observations, most of the time they don’t make much difference; but even when they seem to indicate a significant departure from what we had expected, they are subject to revision or the next observation we get a day or two later may work in the opposite direction. It just doesn’t seem to me that there is a lot of advantage to emphasizing them.

    I would be in favor of expediting the minutes, but I think I would defer that for now, just because we are talking about some major steps. We ought to get those in place first, and we can come back and think about expediting the minutes shortly thereafter, assuming that this all works out well, if that’s what we want to do. There are probably good reasons to do it at the end of the day, but I don’t view that as quite as important as some of the other things we’re talking about at this point. With that, that’s all I want to say. I think we are in the process of making some significant progress here, and I am encouraged by that.

  • Thank you. President Lockhart.

  • Thank you, Mr. Chairman. I, too, applaud your putting a concrete proposal on the table. With a Committee of nineteen, and as many moving parts as this could have, we could end up with a camel when we wanted a horse, and therefore having something concrete to react to is very helpful.

    Having said that, I have looked at this question both at the strategic level and at the tactical level. Let me just comment on the strategic level first. The way I process the question is that it is based on principles in some respect, and some of the principle-based objectives are (1) transparency in governance is a best principle in general, and this moves in that direction; (2) it should enhance accountability; (3) it should enhance public confidence in our credibility; and (4) it should enhance the influence on outcomes—that is to say, it should have a grounding in results and the optimal outcome should involve somewhat less risk. I am trying to process the thrust of my decisions through that strategic prism. So I asked myself under what circumstances this could backfire, and I think the answer is perhaps that in periods of very rapid change, volatility, turbulence, severe shocks, and the aftermath of severe shocks, we could find this degree of explicitness and degree of openness problematic. But I don’t think we can manage to those kinds of contingencies. I think we have to manage more with a view of normal times.

    I see here in the Committee some tension, as we address this question, between a mystique model of effectiveness, which perhaps optimizes flexibility and gives us an opportunistic posture and, therefore, is built around closed deliberation and a transparent, explicit, exposed, “out there” model. They both have some benefits in terms of our ultimate effectiveness. So I view it as a bit of a balancing act between those two. But, as I said, I support the thrust because I think the principle of transparency and accountability trumps that of maximum flexibility, if those two things under certain circumstances are opposed. I am influenced, Mr. Chairman, by your and Don Kohn’s sense that this is incremental. It is a step and, therefore, is adjustable. It may not be reversible, but it is at least adjustable, and that means that we can tweak the overall tactical aspects of it to get it to work as efficiently and as effectively as possible.

    As to some of the specifics, yes, we should proceed. Four times a year seems right, and I think we have to line it up with the Monetary Policy Reports. I like the idea of total inflation because I think that is where people live for the most part. I see the narrative best done as an addendum. Regarding anonymity, I would say that not being anonymous might be too much disclosure, so I support anonymity. On the third year, I think of the third year as a statement of intentions. It is our intended steady state, if we can get there. I do see a tradeoff there: Having a single third year is more consistent with accountability, but it puts credibility a bit more at risk. So as I listen to the debate on that, I am somewhat influenced by Vice Chairman Geithner’s approach of allowing for more flexibility in the outyears. This is not a moon landing. We can’t be precise in where it comes out in the thirty-sixth month. We are in a world of shocks and uncertainty, so I, on balance, favor the idea of buying us some flexibility in the three-to- five-year timeframe. I like the qualitative characterizations, particularly of uncertainty, for the same reasons. I am not terribly in favor of accelerating the minutes for now. We could do that at a later date, after we have refined and nailed down some of the other moving parts here. I don’t think it buys us enough at this time, so I would view that as a refinement that might be made at a later date. Let me leave it at that.

  • Thank you. Governor Mishkin.

  • Thank you, Mr. Chairman. I share many of President Lacker’s concerns, but I come to a different conclusion because I strongly support this proposal. It is a major step, but it is incremental. But I’d like to go through some of the issues that President Lacker discussed because I think that they relate to where we may be heading in the future and how we may have to handle things now. The concerns that he raised are very, very important ones.

    The first is that a third-year or a three-to-five-year projection does not reflect a commitment. We know that there are some very strong benefits to having a commitment. A particular thing that’s important here is that being opportunistic in terms of changing what our view is of where we will head in the future creates very bad expectations dynamics. In fact, it creates an anti-stabilizing influence rather than a pro-stabilizing influence because, when you overshoot, you might tend to have higher projections. Similarly, when you might undershoot, you might lower projections. This has become an issue, by the way, in other countries. In countries that have inflation targets, when they were undershooting for a long time, people actually pushed them to lower the inflation goal. Doing that turns out to have very negative effects on the economy because, when you get a negative shock to the economy, people lower their expected inflation. That raises the real interest rates and means that you have a contractionary impulse. That’s very problematic and a serious concern that we have to worry about. I’ll talk about how I think we can deal with some of these issues.

    Second, I also very much worry about the issue of the projections. Although they have the benefit of giving information about what people’s views of our inflation goals are, they could be interpreted in relation to output and unemployment as also being speed limits, goals, or whatever. In the end, that is a very dangerous thing to happen.

    The third thing that I think is an important concern is that, without a consensus of this Committee, it is much harder to deliberate. It will be much harder to write our statements. I have been struggling with this. I am willing to go along on this for a period of time because we are still not there yet, and a question is whether we can get to a consensus. So I am willing to hold off. But there will be a point at which some of us may say, “Gee, I can’t sign on to that statement unless a consensus is built.” I think that problem could become serious in the future.

    So how do we deal with these issues? The reason that I’m comfortable with this step at this point is that through speeches we can clarify some of these issues. So, for example, if we go with this approach, I would give a speech and say that, although some information is here about inflation objectives, we should not think about it as having information about unemployment or output objectives because we have much uncertainty about what potential GDP or the NAIRU is and, furthermore, we can’t control either. So I think that we can clarify some issues in speeches. I’m sure that the Chairman will do it.

    The point that I think is relevant, and the reason I am discussing these issues, is that people have to realize that, even though this step is exactly the right way to proceed, it will still leave us with problems, and the reality is that we will have to deal with them. The advantage of proceeding this way is that it gives flexibility, particularly to the Chairman for dealing with the political considerations.

    Eventually we will have to go to a numerical inflation goal. Not doing so will get more and more untenable over time. A question is, What is the right time to do it? What is the right time in terms of the political environment? What is the right time in terms of where the economy is? So people have to be aware that this is really a first step. To be honest, I will not be satisfied with this as the end game. At the same time, the question is, When would be the appropriate time to move forward from here? We will have to use our best judgment on this question, and the Chairman will have to use his judgment as well. So I am very supportive of this proposal, but I want to make clear that I think that we’re not settling the issues. I’m sure we will have to deal with them in the future, and I think we will deal with them in the future. So those are the general issues.

    Let me go to some of the specifics. The issue about the horizon is really very tricky. I am very comfortable right now with a three-year horizon because things are working out pretty well. Thank goodness the economy has been coming out pretty much in line with our forecasts—that we actually have inflation coming down and that it is very close to what the goal of anybody on this Committee would be because we are all between 1½ and 2 percent. Given a goal of 1½ or 2 percent and a three-year horizon, we should get approximately there. So I do not think there’s a problem now with a three- year horizon. However, I don’t see this as stable because, God forbid, there could be cases when we get shocks and where we are substantially away from where we want to be, and then a three-year horizon will not be adequate. President Yellen and Vice Chairman Geithner made this point. The issue here is that doing three years now is fine, but we will have to rethink this in the future. At some point, we may have to go to a longer horizon, or the alternative will be that we will have objectives—so it is one or the other. I think people know where I stand on that issue—I have a preference. Right now, I’m actually very comfortable with three years because three years plus a long-run inflation goal will provide the information that people need. If we don’t have a long-run inflation goal, then at some point, if things don’t go right, we may need a five-year horizon as well.

    I get concerned about providing a federal funds rate path. I am known as a person who is very pro-transparency, but I wrote a paper called “Can Central Bank Transparency Go Too Far?” The problem here is exactly the one that Governor Warsh and others have mentioned. Even though we know that, when you put out a path, it is completely contingent on events and a lot of uncertainty is around it, making that clear to the public is very hard, particularly to politicians who want to use things in their own way. It’s amazing, when you testify in the Congress, you’ll say something, and then they will try to use whatever you say in a way exactly opposite to what you said. Everybody knows it is exactly opposite, but they will do it anyway. So you have to be very careful with what you put out there. This has been a problem with other central banks. The Swedes actually had problems when they first announced their path because they didn’t clarify the uncertainty and some problems arose in the marketplace. We shouldn’t rule it out in the future, but it is a tough thing to think about. For the time being, I would certainly not advocate it, and I have serious concerns about it.

    On the issue of the CPI versus the PCE, a lot of details are here, and my view is to let the subcommittee decide. I’ll go with whatever they want here. I do have a preference for the CPI, but it is very slight—I don’t even think it’s a second order issue, maybe third order; it’s not really critical. An advantage is that CPI is better known. Vice Chairman Geithner mentioned it is actually involved in a lot of contracts. One reason that the CPI is used is that it is not revised. That turns out to be the reason that I lean to the CPI rather than the PCE. I think the PCE is a slightly better measure, but the CPI is not revised, which will make our lives simpler because we know that we’re making decisions ex-ante with the information we have now. However, when the PCE gets revised, people can second-guess you. We’ve had this in the past, when our PCE was getting very close to 1 percent. It turned out to be revised quite a bit upward, and then people said, “Gee, why weren’t you tougher on inflation?” So I think that using the CPI has a political-economy advantage, even if there is a slight disadvantage from a technical viewpoint.

    I share some people’s concerns about the histograms. But I love to see the histograms. They were very useful to me. I like them because they provide information and actually show that there is less diversity. What was remarkable about them—and I don’t think that this will be a problem in the future—is how close we generally are. I think that actually will help dissipate some of the issues in the press. But, again, I don’t feel particularly strongly about this issue.

    A very important issue that comes up here is where we put the enhanced projections into our documents and their relationship to how quickly we do the minutes. I lean toward having the projections as a separate document in some form, either as an addendum or whatever, because I think it gives us a lot of flexibility. I am going to say something that may get me an IED (improvised explosive device) in my office later on, but we’ll talk about that in a second. [Laughter] There is also an issue about the times of the testimonies, which are happening two times a year. I suspect that we will end up with testimonies four times a year, and in that context it may be difficult to have the full minutes done within three weeks. We will definitely need to expedite the enhanced projections. In fact, if we have the flexibility of having a separate document, we may be able to do one and then do the other; that way we can basically relieve some of the pressure on people. We’re going to end up having to speed up the process on that part of the picture, so separating them to some extent has the advantage of giving us more flexibility.

    So the last issue, for which I may get the IED in my office and which I think is going to happen even if I didn’t propose it, is that I think there really is an advantage to having these enhanced projections as part of a Monetary Policy Report that is issued four times a year. My suspicion is that we will be in a situation when we do this that the Congress will likely want testimony more often. I am sorry for the Chairman here, but I would welcome the increased testimony because it gives us a bully pulpit from which to provide more information to the markets and to tell them our point of view. I wouldn’t have to do the testimony, but there is a little work because, as a Board, we have to go over the testimony. I’m going on vacation, so we have to do a conference call about the testimony. I will have to do that four times a year, so there is a little cost for me but more for the Chairman. Having a Monetary Policy Report with these enhanced projections will actually be a plus. Again, it gives us an opportunity to express our views, and I suspect that it will actually end up improving the quality of the Monetary Policy Report. It could be an important part of our communication process.

    Now, let me mention an issue so that I don’t get the IED but instead just a water gun shot at me by the staff. We have a really serious problem right now in that our staff at the Board is getting severely overwhelmed by work. That is of great concern to me and, I think, to other members of the Board. The situation is such that, if we don’t fix it, I think the staff will break. This means that we have to think about the products that the staff produces for us. Do we absolutely need them? Even if we like them a bit, if they’re very costly to produce, do we need them? This will be an issue going forward. The process that we are talking about now will increase work for the staff. If we do a Monetary Policy Report four times a year, it will be even worse. We may need to think about what goes on in terms of FOMC documents. Can they be done in a more efficient way? Do we need certain information? What is the most efficient way to run a research operation? The issue here also is that there has become a discrepancy in terms of the workload for the Board staff versus the research staff at the Banks. I think that it is great that the Banks actually have the research that is coming from them, which has greatly improved over time. That is a major positive for the System. But the discrepancy in terms of workload, which is killing our staff—if in fact their work is increasing relative to that of the Banks—is not a healthy situation for the System in the long run. So one of the things that I am proposing is more work in a sense, but the Committee will need to think about the issues of how we can use our staff more efficiently to continue to provide us with all the services we need, so that the quality of work does not decrease. If it’s done right, it can improve the quality of work for us and can actually take some of the pressure off the staff. So I’m doing this so that I don’t end being a victim of Jihadism, but I actually strongly believe it. Thank you very much, Mr. Chairman.

  • Thank you, Governor. Well, first of all, let me thank everyone for extremely thoughtful and helpful remarks. We will be looking at them, the staff will be looking at them, we will proceed with this process, and we will try to converge to the document that ultimately will be the one that will be the format that we will be using. So we will be in touch with you about perhaps further questions, and we will be doing another trial run for the next meeting.

    We do want to have a few thoughts from you on the statement. Let me propose the following. Let’s take a half-hour break for lunch. When we come back—I’ve conferred with Governor Kohn about this—let me just ask you to answer two questions. One, in light of these proposed changes, are you happy with the statement, or is there a change that you would make? Two, are you happy with the approval governance—the process by which we now construct the statement? The answer could be yes-yes, no-no, [laughter]—clearly 3:00 p.m. is the drop-dead deadline—but I hope that we can have a very quick and efficient go-round on those two questions. So let’s take a break for lunch now and come back in half an hour.

  • [Lunch break]

  • Let us reconvene. Again, thank you for the very useful discussion before lunch. Let me just remind you that we need to keep this discussion within this room. It would be destructive to the whole process if we had it leak out in the next few months. So we appreciate your doing that.

    The last item of business is just to do a go-round on the statement. Remember there are two questions. First, given where we seem to be going on using projections and the other elements we discussed, do you think that the statement is okay? What suggestions do you have for changing it? Second, do you have any comments on the consultative governance issues? Who would like to begin? President Hoenig.

  • As far as the statement now goes, the way I would phrase it is that I can live with what we have. If I may anticipate President Minehan just a little bit, I would like to see it simpler and shorter as we go forward, especially if we can move the minutes closer to the meeting date as we discussed here earlier. That would enable us to do that. That’s my first comment. On the governance, I think the way we do it right now is fine. If we are going to have the statement as it is now structured, the process seems to be working, and I don’t see any need, again, to vote on it.

  • Could I add to the governance question the issue of what we vote on as a Committee? Should we vote on the whole statement or just the first and fourth sections as we do now?

  • Well, I guess the way I would answer that is I would not change the way we do it now because I’m not sure if it’s the first or the fourth section. [Laughter]

  • So the practical implication is that it really wouldn’t be legitimate if we agree with that to dissent on the description of the economy or inflation.

  • If we agree on that—but we will hear what people have to say. Thank you. President Stern.

  • Thank you. I’m basically happy with the statement as it is now. It’s not exactly where I thought I would come out, honestly. But if you look at it, it’s really pretty straightforward and does what it needs to do—by which I mean that it provides a concise, but I would say valuable, rationale for the decision. That has to include, and it does, something that’s forward looking a bit because obviously with the lags in policy we’re not just making decisions based on looking in the rearview mirror. I don’t think it’s too long. It’s only, if I counted this up right, seven sentences or something like that. That doesn’t strike me as excessively long. In fact, other things being equal, I would probably be in favor of adding to it rather than reducing it, but I don’t think it’s worth the effort based on my experience around this table in recent years. [Laughter] So I think it does what it should do and does it reasonably effectively. I have no inspirations, I guess, for how to improve it in any significant way. I do think it will continue to evolve just as the economy, the outlook for the economy, and the position of policy do. That’s inevitable.

    As far as governance is concerned, I would prefer voting on the entire statement, but I don’t think that the current system is so badly broken that we absolutely, positively need to do something about it. But it seems as though we spend a fair amount of time on it, so I don’t know why we wouldn’t at the end of the day vote on it.

  • Thank you. President Poole.

  • Thank you. I think the statement is okay. I am a little concerned that we modify it case by case. Today we had this issue about “elevated” or “somewhat elevated” and how would we change that without giving a message that we don’t intend. I don’t know whether we can craft language that would avoid that sort of case-by-case issue. It seems to me that after we go through the projections exercise, we might want to come back to that. On governance, I could go either way. I think it’s okay the way it works because we fully discuss the issue. If there’s sentiment to vote on the full thing, that’s fine, too.

  • Thank you. President Pianalto.

  • Thank you. I’m basically happy with the statement the way it is now. Like President Stern, I was leaning on the side of making it shorter, but when I started to look at where I would cut, it was very hard to come up with places to cut. I don’t think that adopting some of the changes that you outlined earlier will shorten the statement. It could change how we characterize elements of the statement, especially the rationale section. When we talk about economic growth, we can characterize it more as it relates to the central tendency projections that we’ve provided. Then when we characterize inflation, rather than using words like “remains elevated” or “will moderate further,” the public will have the benefit of our projections on a quarterly basis, and it might be easier then to describe how we view the inflation situation. Then also by adopting a total measure for inflation, it will be easier and, again, clearer when we’re saying words like “inflation” or “inflationary pressures.” The public will better understand what measure we’re looking at. So I don’t think that the new approach or the revised approach would change the length, but it might help us in the communication process, and I’m happy with the way that we’re doing the risk assessment in the statement now.

    In terms of governance, I think that the public views the statement as a product of the Committee deliberations, and for that reason I think having the Committee vote on the full statement would be helpful. In that regard, Vice Chairman Geithner made a comment earlier about if we go that approach, let’s make fewer changes at the table and focus on giving our input to the statement before the meeting. If we do some of the editing at the table, we don’t have time to reflect on how those changes will be interpreted. So having fewer changes at the table would be helpful. Thank you.

  • Thank you. President Lacker.

  • I like the statement as is. I was one of those who, when we considered accelerating the release of the minutes, thought that it would take some weight off crafting the statement, which we could shorten. Alas, I was incorrect, and that was sort of hopeless. So I’m giving up. I sort of like the length the statement is now. It does a reasonable job with what it does, with one exception—the last section, the so-called balance-of-risk assessment. I’ve argued this many times when we’ve talked about this. The intention is to convey the likely next direction of interest rate changes. Our general practice has been—there have been some exceptions—to describe the risks to the things we care about, and we invite people to deduce what we think of as the likely next direction of interest rate moves by inverting our policy reaction function somehow. I always thought that was problematic, needlessly obscure, and I liked the times when we crafted that statement fairly directly and explicitly with phrases like “policy firming.”

    About the balance-of-risk assessments, I hesitate to put something else on the table, but we ought to think about the directive, too, because the balance-of-risk assessment came into the statement because it was in the directive and there was a tilt statement in the directive that originated in the ’80s as a way of providing the Committee’s sense of constraint on the Chairman’s discretion to make intermeeting moves. That’s my understanding of how it arose. Then it came to be about the next meeting when we did intermeeting moves, and now it’s just sitting there in the directive, and I don’t know what good it does in the directive really. You know, we don’t make intermeeting moves. I don’t know what our understanding is about discretion about intermeeting moves. I think that we’re supposed to have a conference call with everybody. So I don’t know why we need this little directive in there, and it seems to me you could just take it out of the directive.

    About governance, I’m in favor of voting on the whole thing. I remember talking at one point with I think it was you, Mr. Chairman, and others about how it is backward for us to talk about the statement—to do negotiations about the statement—a week before we even talk to each other or read the Greenbook. But I don’t think that’s so problematic. It doesn’t end up putting our feet in cement really, and I think we’ve been able to have sufficient flexibility during the meeting despite what we said the week before. So I don’t view that as terribly problematic.

  • Regarding the first question, the statement, I think the process is working well at this point, and so I don’t see any need for major changes in it. Given the consensus on moving forward on these projections, I think that fits in quite well with the existing process we have for the statement. My feeling is to minimize forward-looking comments in the statement. We never used to do this, and then we got into it with phrases like “considerable period,” and “patience,” and so forth, and then we evolved to a statement in which we say “future policy adjustments depend on the evolution of the outlook for inflation” and so forth, and the data coming in. So we don’t really have a forward-looking statement currently, but my preference is to use forward-looking statements only when it really is important to serve a specific purpose for the Committee. I tend to agree with Jeff Lacker that you could drop the last part of the statement.

    On the governance issue, it seems artificial not to vote on the entire statement because we spend so much time talking about all parts of it. So on balance I would say, yes, we should vote on the entire statement. One issue was raised in the background material about whether the statement should be the Chairman’s or the Committee’s. I think it should be the Committee’s. It would put the Chairman in an awkward position not to have it as a statement of the Committee. If it wasn’t a statement of the Committee, people would try to pull us apart by asking us questions individually as to whether we agree with “the Chairman’s statement.” So I think the process we have now is just right and that it should be a Committee statement.

  • Just to clarify your comment on forward-looking language, your examples were about policy, like “considerable period” or whatever, but not necessarily. Does your comment apply to statements like “output is going to grow at a moderate pace?”

  • No, I should have clarified that. No, in terms of comments in the statement about the outlook for the economy, yes, I think that’s fine. I was thinking of the outlook for policy.

  • I also had a two-hander on that. So in terms of things like “predominant concern,” which is kind of forward looking for what our concern is in the future, would you have that or would you cut out the whole fourth section?

  • No, when appropriate, I would keep that. But I was thinking primarily of the last sentence that we had happen there. My recollection is that it evolved from “a considerable period” to “patience” and so forth, and then we got into “it will depend on the outlook for inflation and economic growth.”

  • I’m not sure I heard you clearly, Mike, but I want to clarify: I was advocating eliminating the risk assessment from the directive, but I would keep that section in the statement.

  • Well, thank you, Mr. Chairman. I think the statement is just about right. I like the current length and structure. I would not want to see a great deal more detail in it about our assessment of the economy. I think that should wait for the minutes, but I don’t think there’s anything that’s in the statement now that we should cut. The statement has evolved; and we have in practice avoided doing something formulaic in terms of the balance of risks. We do not have the same language all the time. We sometimes use forward-looking policy language and sometimes we don’t. That’s good. I think we should avoid anything formulaic and just do what’s appropriate in the given conditions. When we were on a path of raising the fed funds rate from 1 percent, and we had every expectation that we would be involved in a series of steps over time, it would have been highly artificial to avoid indicating in the statement that this was our expectation. It was important to signal it using forward-looking language. So I wouldn’t want to take forward-looking language off the table. It doesn’t seem too important now when our own expectation is for a flat path. So I think the statement is working well. I’m really amazed at how well the process of drafting the statement is working too.

  • Well, considering the group. [Laughter]

  • Initially when we started getting into circulating ideas about it before the meeting, I thought, “Oh, this is going to be chaotic and spin out of control.” I’ve been amazed at how thoroughly constructive it has been—that by the time we walk in here and have the statement, it has actually evolved a fair amount. I think it has always been an improvement, and we have been able to have drafting sessions, and they have worked out surprisingly well.

    On the governance, I think this thing has accidentally fallen into a governance hole, and it needs to be cleaned up. The Committee should vote on the whole statement. That’s what the outside world thinks now; they just haven’t noticed that we don’t.

  • Thank you very much. I’m relatively happy with the statement. Along the lines that Presidents Yellen and Moskow discussed, I would try to stay away as much as possible from forward-looking language or commitments. There’s a time and a place—2003 going forward: Moving from 1 percent up was a unique occurrence, I think. So I would really focus the statement, as we mostly do now, on what we did and why we did it. Why we did it has a forward-looking component to it. It has to depend on what we expect the economy to look like in the future and where we expect inflation to go. Something referencing both of those things has to be in there. If I had my druthers, I’d be agnostic about whether or not we do an assessment of risk each and every time; rather, consider what that adds to or possibly subtracts from in terms of the statement. So I wouldn’t be committed to doing a section 4 each and every time. It’s really good, to the extent we can do it, to stay away from formulaic language and to focus the statement as much as we can on what the realities are at the time of what we did and why we did it.

    In terms of process, with anything edited by nineteen people, the process is not always optimal. Getting a little sense of where the staff is the week before is helpful. It has allowed people, myself included, from time to time to weigh in, to actually be heard before the meeting and to make some changes to the draft statement that we look at in the meeting. I can understand the desire not to do too much editing around the table. However, I thought that one of the reasons that we went to more two-day meetings was so we could all get a read on what others were saying and thinking on the one day, think about it and any implications it had for what we said and how we said it overnight, and then bring those thoughts to the table the next day. I always thought that there was a lot of logic to the process and that it probably adds to rather than subtracts from the amount of comments around the table, particularly when you find yourselves in a bit of a tenuous or dicey situation with regard to how to characterize how people are feeling about things. So I think I’d be willing to bear a little more noise around the table rather than a little less.

    On the governance issues, I think this started as the Chairman’s statement because nobody had the stomach for nineteen people editing. So it was better to let it be the Chairman’s statement, and therefore we didn’t have the right to edit it. Now, of course, we edit it, so it doesn’t seem reasonable to me not to vote on the entire statement. I think it’s easy enough to make that change. The whole thing is so esoteric anyway that I can’t imagine that anybody aside from us knows that we don’t vote on it or has even focused on it. The idea that people are going to dissent on the statement? We’re not dissenting on policy. I find it difficult to think that dissenting on the statement is going to be a big issue, but it is always possible, I suppose. Were there any other governance issues? I think I probably said this. The current approval process is difficult; but given the ability to look at some form of a draft the week before, to be able to think overnight, and provide some substance to the editing process the next day, I think it works okay.

  • Thank you. President Fisher.

  • Mr. Chairman, I think the statement should be a statement of the Committee. I don’t have any problem with the current governance structure, although I think it does make sense for everybody to vote on it since we hammer it out anyway. I wouldn’t change the language. We do have one sentence that we always repeat, which to me is a given—that our future policy actions will depend on the evolution of the outlook, et cetera, et cetera. I guess we should say that every time, but I’m not sure we have to say that every time. It’s a given. Otherwise, I’d keep it the same, although I promise to continue to lobby for the word “global” from here to infinity. [Laughter] Thank you.

  • Thank you. Governor Kohn.

  • Thank you, Mr. Chairman. Like the others, I think the statement has basically evolved into a very good place. I sometimes worry that the process of putting a statement together by nineteen people will mean that there’s too much inertia in the process. But so far, maybe because the economy hasn’t jerked around very much recently, we’ve been able to keep up. But I do think we need to make sure that the language doesn’t lag the events or, if events start to move, we’ve got to be willing to change the language even though it’s hard here. I like the way the balance-of-risk section has evolved from talking about what’s going to happen to the funds rate—I agree with President Yellen that it was appropriate in the particular circumstances—to talking about the right-hand side of the Taylor rule—that is, what’s going to happen to the output or inflation gaps. So I think that’s positive. It gives a little very vague guidance about what the Committee is most worried about, and I think that’s probably helpful to the markets. That is then elaborated in the minutes, but it fills a three-week gap before the minutes come out. Certainly if we changed our minds about where we saw the risks to the economy, we would probably want to tell people about that before those minutes come out. So basically you’re in a pretty good place here, and it will continue to evolve. We just have to allow it to continue to evolve.

    On the governance side, I think the editing is also going pretty well. When we got into the pre-meeting editing, I was a little concerned that the decisions were going to move outside the room. But the process has evolved in a way that we get close to what the final statement is in these pre-meeting sessions, and then we can fine-tune the language at the meeting. That’s probably where we need to be if we’re going to put out a statement. So I’m comfortable with where we are there. I think that most people outside this room think that the Committee is responsible for the whole statement, and we probably ought to acknowledge that by making the Committee responsible for the whole statement. But if we do that, we ought to understand among ourselves that the hurdle for dissenting on words should be very, very high or else we will get ourselves into a governance mess. Those are my thoughts.

  • Thank you. Governor Warsh.

  • Thank you, Mr. Chairman. I like the statement format and process and, like Governor Kohn, think that the governance, while it is not urgent to change, will catch up with the reality and with the expectation. Thank you.

  • Thanks. Much as Gary Stern has said, as an academic I was never particularly enamored of the statement. But actually having seen how it evolves, how it is built—usually when you see the way the sausage is made, that upsets your stomach, but it has actually been the opposite. [Laughter] Maybe I have been eating the sausage for too long now. I don’t know. [Laughter] I’ve been taken in by it. But I think, as Governor Kohn has said, it has evolved in a way that many of the elements that I was more critical of a few years ago are not there now. I think it operates in a perfectly reasonable way.

    Some people have mentioned how the statement could change if we speed up the minutes. We’re never going to speed up the minutes beyond say a week. Even if we were to get it to a week, which I don’t think is feasible, the statement can’t change all that much. We have to convey the information that’s in the statement. I don’t think we can say, “Well, gee, because next week we’re going to say something, we can just cut it down to two sentences or three sentences.” As long as there’s a week in between, and I can’t imagine there being any less than a week in between, the statement is going to have the kind of information that it has in it, which I think has evolved in a perfectly reasonable way.

    On governance, since the process is working, I don’t really see the need to change it. There’s a possibility that down the line that concurring opinions could be put out so that people agree to whatever the monetary policy movement is but, like the Supreme Court, write their own statement. Since the process seems to be working well without leaving that possibility for coming in, I don’t see that it’s necessary to make the change, although I’m open on that. Thank you, Mr. Chairman.

  • In terms of this issue of forward-looking language, I’m quite comfortable with the statement and with forward-looking language so long as it’s on the right-hand side of the Taylor rule in terms of what’s going on with output and inflation. I’m actually not a fan of forward-looking language in terms of the federal funds rate, and in fact, I differ from some people on this. I really didn’t like it, even during the unusual period when there was some concern about deflation—in that context, it did have elements that people might have interpreted as a commitment. It turned out that nothing bad happened because the economy evolved in a reasonable way, but I can think of scenarios during that period, particularly in 2004 and so forth, when it might have been a real problem. So you do have the statement at the end that we’re always contingent on events. I like that statement; but what I don’t want to see is moving from that to what we did in that period, except in the most unusual circumstances. At the beginning it was justifiable in terms of concerns about deflation, but it actually had real potential problems that did not arise, but I think we got lucky. So I’m very comfortable with where we are right now. I think the editing process is going well in terms of the meeting—there is fine-tuning going on, but it’s done in a very constructive way, and I think it’s working well.

    In terms of governance, I guess I lean toward the idea that we should vote on it, for the following reason. When you think about doing policy, it’s not just what you do today that’s important. What you are signaling about the future is every bit as important. This is the whole issue that the Chairman has worked with Mike Woodford on—the issue of managing expectations is not just what you do with the federal funds rate now; it’s also the path. In fact, the projections that we are talking about doing are very much consistent with that way of thinking. So the reality is that, from a policy viewpoint, what we say in the statement is as important as what we do in voting on the federal funds rate. Indeed, since I’ve been on the Board, that’s been really the only issue because we really haven’t had much debate about the federal funds rate decision. So in that sense, if it is really important and it is a key part of policy, it makes sense for us to vote on it. I’m not worried about the issue of dissents because the point that you made, Governor Kohn, that there should be a very high barrier is exactly the way people have been proceeding. The barrier is fairly high for the federal funds rate decision, but in this case even more so. It’s just a couple of words, and if you dissent, well, to be honest, then you’re a jerk. [Laughter] I don’t see any jerks here. So my feeling is that I don’t think we’re going to have a big problem.

  • Not anymore. [Laughter]

  • So I’m actually quite comfortable with moving in that direction. Thank you very much.

  • We have to put those words in the minutes so that they get out there sooner than five years. [Laughter]

  • I’ll be an outlier in terms of the transcripts five years from now; they’ll say, “Oh, God, Rick is here.”

  • Thank you, Mr. Chairman. It may horrify everyone at the table that before I joined the Committee, I didn’t actually parse this statement every few weeks. [Laughter] I don’t have a lot of historical perspective, but I’m basically okay with the way the process works now. I think that the inclusions in the statement all serve a purpose. I’m not sure I fully understand the right and the left side of the Taylor rule, Rick, but maybe afterward you can explain that to me. I view this statement as having a short term. If there are forward-looking statements, they are short term. They signal the next meeting or two, but not much more than that. Regarding the governance or the voting issues, I think we should vote on the whole thing, and if we ever need to have a tie breaker, I guess I would revert to its being at that time the Chairman’s statement. But in normal circumstances, we all vote and agree, and that’s it.

  • Thank you. President Plosser.

  • Thank you, Mr. Chairman. I, too, am relatively new to this process of watching the sausage being made. I have to confess up front that I’m a bit schizophrenic about this because I’m really of two minds in terms of the direction I think about, and I’m persuadable either way. Part of me, as Jeff said, has argued that maybe the forecasting exercise is going to take some pressure off all the nuances and the time we spend on the statement. As Governor Kroszner mentioned, no matter how soon we get the minutes out, it’s going to be tough to do that. So I’m sympathetic to that argument. My view is that the minutes really provide the nuance of what goes on in the Committee, and I think that’s incredibly important. The only thing I worry about in terms of the statement is that it can’t provide that nuance and it gets so much attention in the marketplace so immediately so that part of me says either we want to enrich the statement and get rid of some of the inertia that’s in it, and make it longer or just make it shorter. So a part of me says that maybe what we really ought to say in the statement is just section 1 and section 4 and let the nuance of how we got there and what our views are be elaborated in the minutes. So a part of me says that it would be a simplification that tells the markets what we did and how we view the assessment of risk as we look at the economy, but it doesn’t try to tell them all of the details of what went on. We let the minutes do that. I can live with the statement with way it is, but I think there might be some advantages in simplifying it so that we don’t spend so much time arguing over the nuances of the rationales and other things. Besides that, we’d get capacity utilization out of there if possible and just go with the overall assessment of the risk, and then let the minutes speak for themselves in terms of the nuances of the discussion.

    On the governance question, I agree with everybody else. I think that it has been implicitly a statement of the Committee. The Committee ought to vote on it. If you took sections 2 and 3 out, there would be a lot less wordsmithing and a lot less worrying about whether the words were exactly right and what each of us might have meant or preferred to say. So it might even make it easier to have a Committee vote on that, and they’d have to worry about fewer things. Those are just some thoughts.

  • Thank you. Vice Chairman.

  • Thank you, Mr. Chairman. I think the statement has been evolving sensibly. The process is basically working. I don’t think we need to lock ourselves into any fixed view of the optimal structure of the statement over time. We should be open to changing it if it suits our purposes in specific circumstances. Obviously, shaping expectations about the stance of monetary policy is a vital part of what we do. I’m pragmatic on all the questions about whether or not to have forward-looking language. There are some circumstances in which it may make sense in the future as it has in the past. Those should be exceptional circumstances, and using it should be done very carefully and thoughtfully. But we do not need to commit not to use it. I also think the basic structure of saying something implicitly about the forecast, the outlook on which our decision is based, is very important. So we should have something in there that refers to the expected path of output and inflation and the risks to that generally as part of the signal. Without that, you’d lose a lot of value. I think I’d still be open to experimenting further as we have been doing with introducing a bit more forward-looking view about the outlook for demand and inflation as part of the statement, even though that will be hard to do well.

    On governance, I have a very different view. I think that we really should stay in this governance limbo that we now have. It’s very important to recognize that we’ve had a huge amount of turnover in this Committee. It’s important to give the Chairman the flexibility to ultimately be the arbiter of the nuance in the statement without having to go through a process in which he will have to figure out whether he’s prepared to have a vote with significant dissent in that context. Right now we have a process in which the Committee has substantial input into the shape of the signal that’s in the statement. The minutes actually say that the Committee agreed that the statement should say X. It’s clear that the Committee is implicated in the statement. The Chairman is obviously very deferential to the views of the Committee in shaping it, but we’re close to 80 percent of the way in having a formal endorsement by the Committee of the statement. I don’t see any virtue in going the next 20 percent and a lot of virtue in preserving the possibility for the Chairman to say, “My sense is that we should do X,” (I know that’s not acceptable to all of you) and not have that come with something that forces a vote in that context. I just don’t think the balance we have now is problematic, but I can envision a circumstance in which the state of the world, the state of the Committee, or a bunch of other things might make a formal vote unnecessary and tilt the balance in a way that may not make sense for the institutional structure we have. You know, we have a group of nineteen, not of seven. Fundamentally the Fed model institutionally is based on a strong Chairman, and I’d preserve that particular remaining piece of that model.

  • Thank you. Are there any other comments? Well, again, we’ll review the transcript and see what steps we need to take. Once again, thank you for your very useful comments. The next meeting is Tuesday, August 7. If there is no other business, then we’re adjourned.