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

  • Good morning, everyone. Mr. Reinhart.

  • Thank you, Mr. Chairman. As can be seen in the top panel of your first exhibit, market participants marked up their expectations of policy action at this and subsequent FOMC meetings, on net, over the intermeeting period. Apparently, the upward impetus of stronger-than-anticipated releases on inflation and statements by Federal Reserve officials more than offset the drag of readings on economic activity that had a soft cast. The expected path for the federal funds rate over the next two years, the middle left panel, had shifted 25 to 35 basis points by the time of the publication of the Bluebook. In the week since, those expectations edged higher still, with investors sure of a ¼ point hike today and expecting more of the same by autumn. As has been true for a while, the funds rate is apparently seen by investors as trailing off subsequently—with your last ¼ point rise rolling off in 2007.

    Three explanations have been offered for this inversion of the money market futures curve, as noted in the middle right panel. The first, which is probably more popular inside this building than outside it, is that it may well be optimal to raise the nominal funds rate in response to a temporary bulge in inflation so as to keep the real interest rate from falling. As inflation recedes, the nominal funds rate can be reduced so as to prevent the real funds rate from rising. Such a path has been a common feature of the Bluebook exercises we’ve shown you when the Committee is assumed to desire an inflation goal below the prevailing rate of inflation.

    The second explanation is based on an assumed nonlinearity in the housing market. Housing demand, some analysts claim, has been importantly buoyed by outsized expectations of capital gains, expectations that for a time have been impervious to the level of the policy rate. In such a circumstance, the FOMC has to tighten to the point that it gets the attention of those investors. But when it does get their attention and housing demand softens suddenly, the Committee will have to change gears quickly.

    The third explanation relates to a hardy perennial in FOMC transcripts. Over the years, many of you or your former colleagues have said that your last action in any phase of a policy cycle is always a mistake. And you can’t look at the current configuration of futures rates without wondering whether it is happening again. The Committee might, however, be willing to accept tilted odds of over-tightening if that were judged to be the least unattractive alternative. That is, a funds rate a little higher than that consistent with full resource utilization for a time may be seen as the necessary cost of countering inflation that has risen above your comfort zone. Note also that the extent to which markets view you as rolling back some portion of your anticipated 50 basis points of additional firming will lessen the consequences of that near-term policy path for the prices of longer-lived assets and, presumably, aggregate demand.

    As can be seen in the second column of the table at the bottom left, the upward revision to near-term policy expectations flattened the yield curve somewhat, with rates on two-year Treasury notes rising 30 basis points compared with the 13 basis point gain in their ten-year counterparts. As the bars at the right show, the rise in nominal rates was more than accounted for by an increase in their real components, especially at short maturities, and inflation compensation edged lower.

    This rise in real rates, along with the decline in equity values shown in the bottom two rows of the table, implies that financial market conditions tightened over the intermeeting period. As shown in the top panel of exhibit 2, such a tightening, against the backdrop of weakish data on spending, might incline you to keep the funds rate unchanged at 5 percent today. Such concerns would be particularly acute if you interpreted the anecdotes and survey measures of participants in the housing market (as in the middle left panel, for instance) as suggesting a more pronounced housing slump than embedded in the staff forecast.

    But you might see some reason to pause now even if you bought into the basic contours of the Greenbook outlook. Estimated policy rules explaining the Committee’s behavior over the past eighteen years that are fed outcomes for inflation and the output gap as in the staff forecast (plotted as the dashed lines in the middle right panel) predict that you will be lowering the policy rate. Similarly, the simulations shown in the Bluebook and repeated in the remaining panel suggest that, with a 2 percent inflation goal and specific assumptions about your preferences, you’d also be satisfied with a funds rate no higher than 5 percent. In that scenario, however, you’d be willing to accept core PCE inflation (the bottom right figure) running at 2⅜ percent for almost one year. Market participants, in part learning from your public comments, evidently view you as unwilling to accept such an outcome. And if your own assessment of the economy has evolved in the same direction as that of the staff, then your near-term policy choices have probably gotten more unpalatable.

    As can be seen in the top panel of exhibit 3, the Greenbook outlook for unemployment (at the left) and for core PCE inflation (at the right) has worsened over the course of this year. We tried in the Bluebook to summarize the net consequence of the changes over the past six months in the forces shaping the economy using the FRB/US model. In those simulations, repeated in the middle panel, the policy that best accomplishes the assumed objectives and the resulting macroeconomic outcomes given by the current outlook (the solid lines) are compared with those implied by the extended outlook at the time of the January Bluebook (the dashed lines). In each of these simulations, policymakers are assumed to have a long-run inflation goal of 1½ percent and to place equal weights on the three stabilization objectives: output, inflation, and policy stability. The current outlook implies a funds rate path that peaks a bit above 5½ percent in mid-2007 and then declines gradually to about 4½ percent by 2010, noticeably above the rate call in January.

    Another aspect of the changed outlook, this time seen from the perspective of financial markets, is the rise in far-ahead inflation compensation, the red-dotted line in the bottom panel, over the past year. True, you may be heartened that inflation compensation has moved lower since the outbreak of jitters in late April and that, as noted in the inset box, changes in policy expectations prompted by official statements appear to have been associated with a decline in far-ahead inflation compensation. But concerns about investors’ confidence in your commitment to price stability, witnessed by the positive correlation of data surprises and inflation compensation over the same period, are probably at the root of a decision to tighten at least 25 basis points today and signal that more may come, the subject of exhibit 4.

    As can be seen in the top panel, a ¼ point move today would position the real funds rate more assuredly above the center of staff estimates of its neutral level. And putting some weight on the simulations presented in the Bluebook, if your inflation goal is 1½ percent, as in the middle panel, you may see the need to move the nominal funds rate up from 5 percent sometime soon. Indeed, if you put a particularly high priority of the attainment of that goal—as in the dashed lines—even more tightening is in store.

    As shown in the bottom panel, the prevailing market sentiment is toward a ¼ point firming today, which has been a compelling, but not conclusive, argument for action in the past. The key question for each of you is, What probability do you place on another ¼ point firming in August? The solid line in the bottom left figure plots the implied probability currently in financial markets of tightening at both the June and the August FOMC meetings. When drafting the statement, we thought an 80 percent market probability of such a dual action was on the high side of what you would prefer. So, in table 1, which is updated as your last exhibit, we put a few markers to rein in expectations of action in August. Note that the rationale paragraph asserts that growth is moderating and repeats reasons that inflation might be held in check. More important, the assessment of risk is also couched in terms of your goals rather than just the policy instrument. My bet is that, with the release of the statement, the odds would go to 50-50 on action in August, but you should probably view that as no more informative than the flip of a coin.

  • Any questions for Vincent? If not, then we’re ready to start the go-round on policy. Governor Kohn.

  • Thank you, Mr. Chairman. I support the alternative B action of 25 basis points and the language in the statement that was passed out last night. Although output has softened, it’s not clear how much and for how long. What is clear is that inflation has been running higher. That’s a given. That has been in the data.

    We’ve had some warning over the past weeks and months that inflation expectations aren’t as firmly anchored as we might have hoped they were. They have come down a bit, but when they’ve edged back down, it has been largely on expectations that we would be firming at this meeting and on the marking up of our path. So I think it’s important to cement that in and to take that action today. It’s important to recognize the inflation risks that we all acknowledged in our discussion yesterday.

    I think 50 basis points would be too much. The economy is slowing. There has been a considerable tightening of financial conditions over this year. Long-term interest rates are up 50 to 75 basis points over the past six months, including 50 basis points in real rates. This increase wasn’t just inflation expectations. Some of the increase has happened over the past couple of months, and I think it’s quite likely that we haven’t seen the full effects of those rate increases on activity. So we already have some slowing of activity, and I think there’s a little more to come, or at least some additional damping from tightening in the pipeline.

    We do need to keep our eye on the forecast here. As I said yesterday, a good deal of the inflation increase that we’ve gotten has been a consequence of energy prices and maybe the price effects in owners’ equivalent rent, which are so difficult to analyze and predict. These price effects should dissipate, so I’m certainly expecting inflation to come down as they come out. We need to be careful about inflation expectations and not overreact to incoming data on inflation, but we shouldn’t ignore them either. I think that would be a mistake. The whole thing is very uncertain, and I think that inflation, even after a move of 25 basis points, will remain the greatest risk to our objectives, at least until we get much more data that growth indeed is slowing to below potential.

    In that regard, I like the elements in the alternative B statement. In paragraph 2, it’s important to acknowledge that we recognize that the economy is moderating. That was a prediction last time, and I think we can be confident enough to say it’s an actuality this time, to recognize that a lot of that slowing is in the housing market, and to recognize the lagged effect of increases in interest rates. It’s important for the rest of the world to know that we have our eye on that.

    In paragraph 3, we need, as I said, to acknowledge that inflation has been too high and that there are some things working in a good direction, such as productivity gains and unit labor costs. There is a risk that inflation could remain higher than we want it to.

    In paragraph 4, it’s important to recognize that the slowing of growth should help to limit inflation pressures, at least keep them from building further, but that our primary focus is on inflation risks. This is a good time to step back a bit from predicting where interest rates are going to go because I think we’re less certain about where they are going to go, and so I was glad to see “some further policy firming may yet be needed” was taken out. We still have a prediction in there by saying “the extent and timing of any additional firming that may be needed.” It should be clear that in the view of the Committee the next move is more likely to be up than down. But it’s a less definitive statement than it was before, and I think it’s appropriate to take that slight step back at this time. Thank you, Mr. Chairman.

  • Thank you. President Lacker.

  • As I said yesterday, although the outlook for real growth is noticeably softer than it was at the last meeting, it doesn’t seem to me clearly inconsistent with growth around trend going forward. I see the risk of slowing the economy overly much in the near term by increasing real rates as relatively low.

    The way I look at the evidence, real short-term interest rates are still somewhat low by historical standards. If you compare the periods of extended growth, such as the late 1990s, it looks as though they come in between 3 and 5 percent and center near 4 percent or so, although I know there are many ways to measure them. Right now it appears that, by the same sort of measurement, the real funds rate is between 2½ and 3 percent. So I still sense that the real rate is low by historical standards for a period of economic expansion like the one we seem to be in now.

    My sense is that we may need to raise rates beyond today because it seems clear to me that we’re not pleased with recent inflation or the inflation outlook. The rate of inflation has been substantially higher over the past few months than we would like, and I think the level of inflation expectations is too high as well, although I recognize some of the subtleties involved in gauging inflation expectations accurately. Moreover, inflation expectations appear to be unnecessarily fluctuating; we’ve been on something of a rollercoaster ride for the past few months. Inflation expectations rose when the public wasn’t sure how we would respond to the oil-price shocks, just as they did after Katrina, and inflation expectations came down as they did last October and November only after we communicated our intentions. These ups and downs really serve no useful purpose in my view.

    Last night at dinner, Rachel Lomax made a relevant remark about the extent to which their regime anchors inflation expectations and causes firms to adjust to oil-price increases, not by passing through but by cutting wages and costs elsewhere. I think that’s a relevant example here. To say that some inflation currently is a consequence of oil-price increases is incomplete, as we all know, because the extent to which oil-price increases pass through to overall inflation is entirely a consequence of the policy reaction function that is either in place or is viewed as being in place by the public.

    Now, I’m not going to claim that this is the end of the world. This isn’t the 1970s. I think the credibility of our commitment to not let inflation rise to 10 percent is very secure. But we ought to be able to improve upon a policy regime and an accompanying equilibrium in which expectations for ten-year-ahead inflation fluctuate as much as they have over the past several months. So I agree with Governor Kohn that we ought to raise rates at this meeting. We ought to leave open the option in our statements that we could raise rates again. I think it’s very important to use today’s statement to clarify our intentions regarding inflation; otherwise we’re likely to be in for more rollercoaster rides in the months and quarters ahead.

    I have two concrete recommendations about the statement. First, note that on June 1 the Chairman characterized recent inflation readings as “unwelcome”—a very important word that harkens back to the word the Committee used in 2003 to communicate a lower bound on the range of inflation rates the Committee considered consistent with price stability. We should use that word again today in our statement to communicate that we do not view current inflation readings as consistent with price stability. I’m afraid that failing to do so would be a glaring omission and would unnecessarily perpetuate ambiguity about our intentions.

    My second recommendation about the statement has to do with the assessment of risk, the first sentence in alternative B, row 4, that reads, “Although the moderation in the growth of aggregate demand should help to limit inflation pressures over time, the Committee judges that some inflation risks remain.” Placing anticipation of an aggregate demand slowdown front and center in our assessment of inflation dynamics seems odd to me in light of all of the talk around this table over the recent years about how flat the relationship is between aggregate demand and inflation. Moreover, even with the sentence that follows it in that paragraph, it seems to imply that we’re willing to simply wait for a moderation of inflation rather than take sufficient action ourselves. Given the Greenbook’s forecast, it asks a relatively modest output gap to do a whole lot of work. It also—but this is a sort of broader doctrinal issue—risks leaving the impression that our methodology for controlling inflation is to manipulate aggregate demand, and I’m not sure that’s entirely accurate.

    The assessment-of-risk sentence in alternative C would be much more appropriate than the first sentence in alternative B. It states clearly what we would like to see happen with inflation: “In order to foster price stability and a sustainable economic growth, the Committee seeks a medium-term decline in core inflation from its recent elevated levels.” My sense is that this is something that everyone around the table wants—a medium-term decline in core inflation; if that’s the case, we ought to state it clearly to the public. These two changes would send a much clearer message about our focus on inflation risks. Thank you, Mr. Chairman.

  • Thank you. President Poole.

  • Thank you, Mr. Chairman. I’ll start by saying that I support 25 basis points today. Many of us, including especially the Chairman, helped to shape market expectations that we’re going to do that today, and I think not to carry through, given that we shaped market expectations, would be very unfortunate.

    Before I get to the statement, I want to try to state as clearly as I can what my position is on the substance of what we ought to do, thinking about the clarity in the formulation of the statement as having to precede the discussion of it with the public. I was struck in our discussion yesterday by the differences around the table in the degree of optimism about the real economy. The Greenbook outlook is perhaps on the low side of the range around the table, and some of those who support that view give some weight to the possibility of a weaker outcome than the Greenbook outcome. Others are more optimistic than the Greenbook, and they put some weight on a stronger outcome than even their point estimate. So that produces a range of views about the real economy, but I believe that the range is well within the normal bounds of professional disagreement and well within the normal forecast errors.

    Now, how would we characterize our policy stance coming out of this meeting, assuming that we raise 25 basis points? I think that the right way to characterize the stance, and this is what I was trying to say in the memo that I distributed earlier, is that a fed funds rate of 5.25 percent would be a stance of mild restraint. Let me give you just a short list of some of the things that lead me to believe that. This list is in no particular order, although I suppose it’s not an accident that I’m going to put money growth at the top of the list. We have slow and, indeed, slowing growth of MZM (Money Zero Maturity) and M2, particularly in recent weeks; I don’t put a lot of weight on the short-run information that we get, but what we see is consistent with the view that policy has mild restraint. We’ve had some persistent increase in real rates of interest this year, particularly, as Jeff Lacker noted, since our last meeting. We’ve had some modest declines in U.S. equity markets—that is consistent with mild restraint. We’ve had some dollar appreciation since the May FOMC meeting. We’ve observed pretty clearly some reduced activity in sectors of the economy that are interest sensitive, particularly housing, and interest sensitivity may have something to do with automobiles as well. There have been some modest declines in commodity prices in recent weeks—again, not very much, just a bit if you look at the chart against the context of what has happened. Perhaps there are some other things that you would want to add to the list, but I don’t see anything out there that would be a clear indication on the other side that would say that it is a glaring exception to the list of things that I’ve given.

    So I think we have a stance of modest restraint. It could well be that we will need additional restraint in the future, but we should not have a clear presumption that we will be raising the funds rate in the future. The decision in August should depend on all the information that we get between now and August, and we should not try to build in a particular assumption on the policy decision. In fact, if I were to be as neutral as I can be on this, I would say something like 50 percent odds that we would hold steady in August and 50 percent odds of another 25 basis point raise. You could take the mean of that and say, “Well, let’s just be done with it today and raise the funds rate an additional 12½ basis points.” [Laughter] But I think that would be pretty silly.

    The message we ought to give to the market is that we have mild restraint in place, and we don’t know whether or not that will be enough to do the job. But if we get some unfortunate additional news about the current inflation readings, which I think we could easily get, I don’t want to be in a position in which I have to prove my manhood, so to speak, by proposing that we have more draconian increases in rates. If we believe that we already have mild restraint in place and over time it is going to be enough to do the job, then we don’t want to position ourselves that in response to market expectations we have to act more. Now, I don’t know that we have enough in place, but I don’t want to have a presumption that what’s in place is inadequate at this point.

    I think that the inflation we have, including the energy situation, is predominantly from worldwide demand; we’re making a mistake if we ascribe very much of it to supply shocks. We’ve had a very strong worldwide expansion. We know that China is soaking up energy like crazy—that’s part of the very strong worldwide demand situation. Of course, some of the Chinese success comes back to produce demand in the United States: They’ve ordered a lot of aircraft from Boeing, for example.

    Now I’m going to get to the statement itself. All the alternatives help to create a presumption about the August meeting. I understand from the paper this morning that the market has now bid into it a probability of a move in August of more like 85 percent rather than 70. That obviously fluctuates from day to day. But we shouldn’t produce a presumption. The way to avoid creating a presumption but at the same time to emphasize our concern about inflation is to say, as I suggested in the memorandum I distributed, that we believe that we have mild restraint in place, assuming that that view is accepted around the table (which it may well not be), and that we will act in August on the basis of the incoming information, which may change the outlook that we get. So that’s where I come out on this. Thank you.

  • Thank you. President Lacker and President Poole have made some specific suggestions. If additional speakers want to comment, that would be very helpful. Thank you. President Yellen.

  • Thank you, Mr. Chairman. Based purely on the economic data, I consider it a close call between raising the funds rate 25 basis points today and pausing. I definitely think that policy should have a firming bias because inflation is too high. However, I do consider policy to be mildly restrictive, and I see a lot of uncertainty right now about the prospects for both real GDP and inflation.

    My preference would be to move up a bit more slowly, if in fact it turns out that we do need to tighten more, in order to allow additional time to assess the economic situation as we go. In other words, the option value of pausing, especially in view of how close the next meeting is, would have ideally, in my view, made it preferable to pause on purely economic grounds today.

    There is a wide range of possibilities for the future. I am deeply concerned about the pace of core inflation in recent months, but as I said yesterday, I take comfort from the continued strength in productivity growth, modest increases in wages, and the high level of markups. But it certainly is a possibility that inflation will remain where it is or pick up even more than we have seen so far, and in that case, further action will surely be required to bring it under control. I’m also quite aware of the possibility that output will slow much more than the Greenbook expects and that the rise in inflation we’ve seen recently will turn out to be a temporary bulge. Financial conditions have tightened considerably, and we may regret not getting off the escalator of raising the funds rate at each and every meeting because, if in fact output does slow down even more than the Greenbook projects, we will probably overshoot the appropriate level of the funds rate, perhaps by a considerable amount.

    In response to President Lacker’s comment about how we affect inflation, it seems to me that we do affect inflation by manipulating aggregate demand. That is the channel through which monetary policy works. To my mind we have two goals, not one, and we are now in a regime with mildly restrictive policy so that we face a tradeoff between the pace at which we’re going to bring inflation back to our target and the path of unemployment along the route.

    So although on purely economic grounds I’d prefer to pause at this meeting, I certainly recognize that it would be difficult to leave the stance of policy unchanged at this time. In general, I believe that we should do the right thing, even if it surprises markets, but in this case our public statements seem to have convinced the public that we will raise the funds rate today. If we didn’t follow through, there would likely be some loss of credibility for policy. Moreover, as I’ve indicated, I see today’s call as an exceptionally close one between firming and pausing. Therefore, I can certainly support another increase in the funds rate of 25 basis points today.

    With respect to the statement, in response to Vince’s point about what our policy choice is today, I believe our objective should be to craft wording that lowers the market’s assessment of the chance that we’re going to move again in August below what it is, which is about 85 percent at this point. The revised statement does an excellent job in accomplishing that, and I endorse the analysis of the statement that Governor Kohn gave as he went through the various parts. I do find, however, that I’m also attracted to the wording suggested by President Poole as an alternative. It’s another way to accomplish the same thing, and it has the added attraction of including the statement that we judge our stance after today’s move as mildly restrictive. It does open up the distinct possibility of our pausing in August, depending on the information we receive.

    To my mind, there is a real policy challenge as we go forward. Policy—I agree with President Poole—is mildly restrictive: The Greenbook forecast has unemployment moving above the NAIRU and inflation gradually coming down. However, assuming that the inflation bulge is not a purely transitory one that will disappear rapidly, the process for inflation to move down is going to take a while. The communication challenge I think we face and will face for quite a while is how we will live through a period in which inflation exceeds our objective. We need to express the idea that that is an unacceptable long-run situation. But I endorse the comments that President Poole made: We have to make sure that every time we receive an adverse inflation reading—and that could occur for quite some time while the medicine of our policy is working—we don’t respond by raising the funds rate again.

  • Thank you. President Fisher.

  • Mr. Chairman, I’d like to build on the comments by President Lacker, President Poole, and President Yellen. I want to address the language first and the move second. Following President Lacker’s lead of referring to last night’s dinner, I want to go back to a statement that Governor King made last week—that the Bank of England’s approach is to keep things as simple as possible. They don’t say where interest rates will go next for the simple reason that they don’t know and it would be quite misleading to pretend otherwise. Listening to my colleagues at the table and addressing President Poole’s point and my own concerns, I don’t know where we’ll go in August. I do think we should keep it simple.

    In terms of the wording—and I’ll get to the move in just a minute—it strikes me that the first sentence in alternative B as to the rationale is correct and in keeping with what we’ve heard at this table. I would then move on—I agree with President Lacker—to say what we set out to do. But “ongoing productivity gains” and “contained inflation expectations should restrain inflation going forward” is the wording from alternative C, the second paragraph of the rationale. I don’t like the word “readings” because—and President Yellen has made a very good point—we don’t want to be viewed as reactive. I’d prefer the word “pressures”: “However, recent pressures on core inflation have been elevated, which the Committee views as unwelcome.” Then I agree with President Lacker—to clarify our intention, I would not use in alternative B the paragraph 4 that we have. I wouldn’t use any of it, and I’ll come to the reason in a second. I would just say that “in order to foster price stability and sustainable economic growth, the Committee seeks a medium-term decline in core inflation from its current elevated levels.”

    By the way, I don’t like the second sentence of paragraph 4 in the current alternative B because, as a former market operator, I take from it that we intend to raise rates again. The slippage in there revolves around the words “any additional firming” and the word “may.” Again, given my background, I read from those words that we’re biased toward raising rates again, and I don’t think that’s where we are. At least that’s not where I am. I would also make a plea, which I think I do at almost every meeting, to eliminate from row 5 the words “in any event” and just say, “The Committee will respond to changes.”

    As to the move itself, the real epiphany I had last night was after dinner driving home. I’m about to go on vacation, and I was thinking about golf—besides the wisdom that I garnered at dinner. In thinking about golf, I was thinking about the U.S. Open. What happened at the U.S. Open was that the fellow who was in the lead, Phil Mickelson, went for broke. The fact is that this is a team sport. (By the way, Mr. Chairman, I want to congratulate you for the way you conduct these meetings, because I really do feel—and I think all of us feel—as part of a team.) But the sequence of events here is that we’re going to release a statement after we announce our move, you’re going to testify on monetary policy, and then the minutes are going to be released, if I understand the time sequence correctly. The markets look to the Chairman. Even though this is a team sport, you can go back in history, and you can think of various analogies. Just to kill my golfing analogy here, we might consider Paul Volcker as Bobby Jones and Alan Greenspan as an octogenarian Tiger Woods, and so on. Your words will be carefully weighed. In arguing for a sparse statement, I think the market will be focused on what you say, and then it will look at the minutes, and that’s where we amplify, if we wish to amplify or respond to incoming data. Just to finish the golf analogy, I think our job in terms of the amount that we move is to put the ball back onto the fairway so you can approach the green. I think 25 basis points is the best alternative, so I support the 25 basis point move, and I would urge you to consider the wording changes that have been put forth by President Lacker and by President Poole. Thank you, Mr. Chairman.

  • Is that two-handed? Vice Chairman Geithner.

  • Richard, let me just clarify for a second. So you think we should move today but then leave expectations flat, not 50-50 on another increase?

  • I don’t know where we’re going to go next. I do believe we should move. I also believe, by the way, that the economy is stronger than the Greenbook says. I made that clear in my statement. I was tempted to suggest adding “somewhat” after the word “moderating,” but moderating is moderating. I’m not sure where we go next, and I’m not sure that we should signal because I think we don’t know. This gets partially at President Yellen’s point and certainly to President Poole’s point. The wording as it is, Tim, is too directive. Like President Lacker, I would prefer to clarify our intention as it appears in column C here in the fourth box. I don’t think we need to say much more and should leave amplification to the testimony and to the minutes. That’s my point. Does that answer your question?

  • Well, I would have a hard time reconciling Jeff’s comments with the ones that followed. In some ways we need to make a choice. It may be true that we’re not sure at this point what’s going to make sense beyond June, but we need to make a conscious choice about what we want to do with the expectations the market now has. Therefore you can’t evade that reality. You have to consciously decide what you want to do with those expectations. You have to decide fundamentally whether you want to leave them neutral, push them down, or push them up. I was trying to read where you would be on that spectrum.

  • First of all, we announce a ¼ point move. Second, we say that we are worried—we use the word “unwelcome.” The inflationary pressures, the core inflation pressures, are unwelcome. We state very clearly what our intention is, and we state that we’re going to respond to changes. I think our action is then addressed in a very straightforward way by the words that we use without indicating that we’re likely to move still further, because I don’t have the confidence that we will move still further. But we’re making it very clear we’re not going to tolerate obviously extreme or harsh inflationary pressures that we’re seeing in the core.

  • It sounds as though your objective with those changes would be to push up expectations.

  • No, I don’t want to indicate that we’re going to move when we’re not sure we’re going to move.

  • I would have read the net effect of your proposed changes as pushing up expectations. Even if we’re uncomfortable with how much confidence we have about where we want expectations to be, we need to make a choice about what we want to do. And I would have read the net effect of those changes as pushing up expectations or leaving them unchanged.

  • Well, Mr. Chairman, I disagree with the reading. We come from different perspectives. However, we do need to bear in mind that we have this statement, we have your testimony, we have the release of the minutes, and all of those are tools that we should use. Let me just leave it at that.

  • Just a factual question. Richard said that the sequence is that you testify first and then the minutes come out. Is that accurate?

  • The minutes are released three weeks from today. Testimony is tentatively scheduled to be the day before and the same day. Is that right, Brian?

  • So the testimony is Wednesday, and the minutes are released Thursday. The first leg of the testimony is on Wednesday; the second leg is on Thursday.

  • I don’t disagree with the importance of trying to assess the effect of our statement on the immediate post-statement probability that the market places on our move in August. But I’d just point out, by the time we get to August, the effect of intermeeting news on that assessment will in some sense swamp this. How the markets react to that news and how they view us as likely reacting to that incoming news are going to be important. I have expressed some dismay at what has happened between the March meeting and now. I wasn’t unhappy with the March-meeting post-statement assessment by the markets. I’m unhappy with the way the markets reacted to the news, how they inferred that we’d react to the news that came in. So I think that, although the focus on what the likelihood is of a move in August is important, I don’t think we should lose sight of how we want markets to interpret incoming news and what that means for our policy going forward.

  • The wording in alternative C—which says that, in order to foster price stability, we seek a medium-term decline in core inflation from its recent elevated levels—puts into context, President Lacker, how we’re likely to deal with intermeeting data. That’s our intention.

  • On Tim Geithner’s point, we come out of this meeting with a clear asymmetry in the sense that what’s on the table for August is either zero or up 25. The question is, what kind of probability of up 25 would we like to encourage the markets to think about coming out of the meeting? I said that I would like it to be sort of 50-50, and let the data between now and August determine the result and not go into the next meeting essentially having created the presumption of up 25. That’s my position.

  • Thank you, Mr. Chairman. I favor the ¼ point increase in the federal funds rate at this meeting. There are lots of considerations that go into it, but a principal one in my mind is that it’s important, and perhaps essential, to take that action to anchor inflation expectations and perhaps even to reduce them a bit. So that’s where I come out on the action.

    As far as the statement is concerned, it seems to me that we want to strike some sort of balance between the possibility, maybe the probability, that we ought to increase the funds rate further, perhaps even more than once at subsequent meetings, with the possibility that we may also find it appropriate to pause, perhaps not too far off, partly because of the lags between our actions and their effects and the fact that we’ve moved quite a bit. I used the language “some sort of balance” because, as I think the discussion has already suggested, it’s going to be very difficult to find something that I would consider fully appropriate and that everybody else around the table would find fully appropriate as well. So I would be happy with any statement that strikes that balance in a reasonable way. I think alternative B largely does that, and I can certainly go along with the language in B. I’m going to resist the temptation to fine-tune it, except to tilt at one windmill and say that I wouldn’t use the word “unwelcome.” If we want to make the point, we should say “too rapid,” “too high,” “inconsistent with price stability,” or something direct. Why we would want to be coy isn’t clear to me.

  • Thank you, Mr. Chairman. Given our recent disappointing inflation experience and, more important, our forecast that suggests that inflation is likely to move at least somewhat higher over the forecast period, I’m solidly in favor of a 25 basis point move today. Like some others, I am less sure about the need for further increases at subsequent meetings.

    As yesterday’s discussion highlighted, our near-term policy decisions look to have become somewhat harder. There is the possibility that output may be slipping to below potential, and inflation has yet to respond in any convincing way to the tighter policy. Like others, even given that possible problem, I am more concerned about the upside inflation risk, given what I consider to be the greater consequences of an unwelcome development on the inflation side. Despite that leaning, I would emphasize the increased uncertainty we now face and the need to maintain some flexibility with regard to our subsequent policy actions.

    I want to go back to the last point I made, or tried to make, in yesterday’s discussion—the possible policy corner into which we may have unwittingly painted ourselves. Let me explain what I mean by that. In an effort to underscore our individual commitments to low inflation, many—and I think perhaps most—of us have over the last couple of years expressed a numerical range of price inflation that we would consider acceptable over the longer term. While those ranges have not all been the same, 1 to 2 percent on the core PCE price measure has been the most often mentioned and the range many outside commentators have picked up as what they believe us to consider as our informal target. The problem that we now face in my view is that our forecast for inflation over at least the near term, and perhaps extending into the intermediate term depending on how one defines that time period, does not have inflation moving down even to the upper end of that range. I was struck by the tabulations of the forecasts we turned in for the upcoming congressional testimony. Those showed a central tendency of 2¼ to 2½ percent core PCE inflation this year and 2 to 2¼ percent next year. The staff forecasts were even higher, at 2.4 percent this year and 2.2 percent next year. Using the confrontational language of one of my grandkids, I will say, “So?” In other words, what are we going to do about it? I think it’s reasonable to expect that people are going to be asking that question of us more and more. More important, we should be asking that question of ourselves.

    I find it interesting to think back as to how we may have individually hit upon 1 to 2 percent core PCE inflation as reasonable and achievable. I think it was substantially influenced by our very favorable experience during the 1996 to 2003 period, when we did have the measure comfortably within that range. But a decomposition of core PCE inflation for that period suggests that such a benign experience may have been an aberration. During that period, we experienced significant declines in goods prices, due largely to sharply lower worldwide demand and the persistent downward pressure on goods prices resulting from the emergence of China and other developing economies as goods producers. That pattern of goods price deflation has now changed, and goods prices in the aggregate are now not making a large negative contribution to overall inflation. In other words, it’s hard to attribute that brief historical period of low core inflation to our domestic monetary policy—it may have simply been good luck—and I think it’s a weak reed upon which to base our longer-run policy response and preference.

    The scenario in the Greenbook that has below-trend growth, unemployment above 5¼ percent, and near-term inflation accelerating underscores the difficult policy choices we may face. And the Bluebook’s modeling of what will be required to get inflation back under 2 percent is sobering. Yet if we continue to espouse a target range of 1 to 2 percent and do not behave in a way that seems to move us decisively in that direction, then I think we run the risk of a substantial loss of policy credibility.

    Finally, alternative C in today’s Bluebook table 1 hints at the kind of action and statement language that would seem to be consistent with a commitment to get back well within a range of 1 to 2 percent. I would not advocate that we go there today, but I think that construct serves to remind us of the need to begin to have such a discussion around this table.

    With regard to today’s statement, I like the way the various drafts have evolved, and I am generally comfortable with the latest alternative B language that we have before us. I was very uncomfortable with earlier language that toyed with the notion of commenting on and forecasting several very specific variables. I would urge us not to use the statement to elaborate on a rationale for our actions or to highlight a particular data series. I believe that’s best left to the minutes. Thank you, Mr. Chairman.

  • President Guynn, I just want to make a comment that, when I give my testimony, I will have the Committee’s forecasts for year and a half ahead, which are conditioned on optimal monetary policy; so I’ll be able to say that this is what we think we can achieve reasonably over the next year and a half. Any issue of where we may want to be in the very long run is, at this point, I think moot. I take your point that we have not, as a committee, decided even to announce a quantitative price stability measure much less choose a specific one, and perhaps we should be more cautious about that. But in the near term, as Vincent’s simulation showed, getting to the 1.5 percent in the simulations takes us five years. We don’t want to create an impression that we are trying to achieve that kind of objective in a year or a year and a half, and I will make that point very clear in my testimony. President Pianalto.

  • Thank you, Mr. Chairman. With our decision in May to set the federal funds rate target at 5 percent, I felt that we had moved the fed funds rate to a level that was slightly above neutral. I thought at that time that the cumulative effects of our previous actions, along with other elements in the outlook, might enable us to consider a pause at this meeting. Others at that meeting weren’t quite as sanguine, and I said at that time that I perceived two distinct positions regarding a rate hike at this meeting—those who were leaning in that direction and looking for the data to talk them out of it and those who were leaning against an increase and looking for the data to talk them into it.

    I was in that latter group, and the data have indeed talked me into another 25 basis point increase in our fed funds rate target today. I’m just as wary now as I was in May of pushing the fed funds rate beyond the level necessary to restrain inflationary pressures, but my concerns about the real side of the economy have been trumped by what I perceive as a significant shift in the risk to our price stability objective.

    For some time now, I’ve been expecting to see headline inflation slow down even as we see a drift up in core inflation. We may yet find that some of the influences of energy and housing prices on the inflation statistics are transitory and that they’ll wane. Nevertheless, I’m less confident of that position today than I was in May, and I can’t comfortably rationalize the recent string of bad inflation reports that we’ve seen. Fortunately, some of the wobbliness in inflation expectations that concerned us in May appears to have stabilized because of the belief that the Committee will respond to the latest inflation reports with a rate increase today. I think it’s important to validate those expectations.

    As others stated previously, I’m also not prepared to say with any conviction today what I will be prepared to do in August. As Vincent pointed out, the markets are currently expecting another rate increase in August. I would prefer to see that probability closer to 50-50, and I hope that Vincent is correct that our language is going to move the markets in that direction.

    In terms of our statement, I was ready to support President Lacker’s two suggestions in the statement, taking “unwelcome” inflation, which appears in both alternatives A and C, and using it in B. But after hearing President Stern’s question about what it means, I’m not so sure that I would use “unwelcome” in alternative B. President Lacker’s second suggestion, of taking the first sentence in paragraph 4 of alternative C and using it as the first sentence in alternative B, addresses those concerns. It conveys that the Committee seeks a decline in core inflation, which is more specific than “unwelcome” inflation. Even though I understand that the transmission mechanism of monetary policy is through the slowing of aggregate demand, I would prefer that our statement be more forthright about what we are trying to achieve as an objective. That’s what I think that sentence in alternative C does—it says that we are seeking to foster our objectives of price stability and sustainable economic growth and are seeking to see a decline in core inflation. So my preference is alternative B with a change in the first sentence in paragraph 4. Thank you, Mr. Chairman.

  • Thank you. President Minehan.

  • Thank you, Mr. Chairman. I’m in favor of increasing rates 25 basis points. I like to think I’m in favor of it not because that’s what the markets expect but because it’s the right thing to do. At some point, I hope we can surprise the markets by doing the right thing but not having it be necessarily what’s fully expected. I’m in favor of the 25 basis points mostly because I think we need to hedge the bet that slower economic growth will rein in the outsized increases in inflation that we’ve seen prompted in part by jumps in energy costs. But I don’t think we need to start engaging in an all-out war on inflation. We’ve increased rates seventeen times or so, there has been some upward movement in the long end of the yield curve, and we face the risk that we will overdo.

    In that regard, I had a really hard time convincing only a bare majority of my Board—and you saw this in action, Ben—to vote for an increase in the primary credit rate on our last telephone call, as most of them see the amount of tightening already in the works as sufficient given what they see as the downside risk to growth. So I am concerned that we could find ourselves overdoing, particularly if we continue on this upward path. Perhaps the greatest challenge we’re going to face is figuring out when to stop.

    That takes me to President Lacker’s proposal and President Pianalto’s comments. I’m not one who would like to start a policy that looks to take inflation down to the levels that we saw in 2002 and 2003. President Guynn made very good points about the fact that our experience with very low levels of inflation, a growing economy, and so forth over the past decade or so may have in fact been part and parcel of unique factors at the time. So when I see longer-run inflation scenarios in which you can choose 1½ percent or 2 percent, I really wonder about the sacrifice ratio of moving from 2 percent to 1½ percent and building in a policy pre- commitment to that. If you take the wording in alternative C and match it with some of the language that has been out there recently, you will build into the market an expectation that we are hell-bent on taking the inflation rate down no matter what. That’s too much emphasis on one of our goals at the sacrifice of the other. So I think we need to have some leeway in the statement to pause, maybe in August, maybe later.

    I’m very attracted to Governor Kohn’s parsing of the statement. When I looked at the statement last night, I wasn’t anywhere near as inclined to agree to it as I am now after his walking through it. I do think that, by our eliminating some of the language that was there last time, it gives us some flexibility in August. So although there are many ways to shorten it and there may be many ways to make it clearer, I think that editing it at this table does not really help a whole lot. I would be in favor of both 25 basis points and the statement as it now stands.

  • Thank you. First Vice President Stone.

  • Thank you, Mr. Chairman. I support raising the funds rate 25 basis points, both on the merits and for our credibility. On the merits, I think that certainly, as we discussed yesterday, the risks to growth are higher than they were at the May meeting but inflation risk and the recent news on inflation are certainly tilted to the upside. So on the merits, I support an increase. On the credibility side, the markets’ expectations are built as much on what we’ve said as on what they read in the economic numbers, and we need to follow through on those expectations. I think it would be a mistake not to.

    Now, as to the wording, I have to admit I’ve been torn. The simulations that the staff ran were relatively sobering. There’s likely a greater probability of needing to raise rates further, but I don’t think we’re ready to use the language in alternative C; it just doesn’t send the right message at this point. I think there is an amount of uncertainty. I could spend a lot of time tinkering with the language in alternative B, but I’m prepared to support the language in alternative B the way it is. Thank you.

  • Thank you. President Hoenig.

  • Thank you, Mr. Chairman. I’m glad that everyone agrees that the strength of a good committee is for someone to disagree, because my preference, based on the assessment of the outlook, is to maintain the funds rate at 5 percent, and I would vote accordingly if I were a voting member. Even though the financial markets clearly expect a move to 5¼ percent at this meeting, my reading of the evidence suggests that such a move is not necessarily required at this time. Based on what I know, a 5 percent rate is moderately restrictive and will, given time, result in an easing of inflationary pressures as the economy slows in the period ahead. Our challenge should be to maintain this rate as the economy begins to slow, until we have inflationary pressures clearly receding, because there will be pressure to ease as soon as the slowing of the economy intensifies. I think that’s where our mistake will be made.

    I have every concern about inflation. But the numbers that we’re seeing are in the past, they’re from policy actions we took in the past, and there’s not a lot we can do about them looking backward. We should be prepared to switch: If the economic data show a reacceleration of the economy, then we will have real cause to make a move up. But so long as the economy is slowing and projections show that it is slowing, then we are restrictive—mildly restrictive, as President Poole said—and we should hold firm until we bring inflation down.

    I think we are implementing restrictive policy, and what we’re choosing today in raising the rates reflects our desire to steepen the projected downward inflationary trend. Our choice today reflects our willingness to increase the risk of overshooting in an effort to decrease the risk of undershooting—that’s the tradeoff we’re making today. So I would hold off, I would be patient, and I would be firm in keeping the rate at 5 percent until we see the inflation numbers come down—that is, if I were choosing.

    In the language, I believe it is important to reemphasize our commitment to price stability. I agree with that. At the same time, I do not think the risks are all one-sided, and I believe we need to state this in the release. For example, I judge that monetary policy is now restrictive or somewhat restrictive, and we should say so. Now, I agree with those who say nineteen people can’t write a statement, but that’s something we should have in the statement going forward. Moreover, in the current circumstances, I believe it is very difficult to devise forward-looking language that will clearly be understood by the financial markets. Obviously, we’re talking about that here and having trouble ourselves. So regardless of the decision at this meeting, I think that it is especially important that we do not, by our choice of language, pre- commit to another increase in August. And I will leave it at that. Thank you.

  • President Hoenig, I think everyone around the table admires you for your consistent position. [Laughter]

  • That’s a generous word, but thank you. [Laughter]

  • I just want to step in and say that I totally agree with Tom Hoenig’s statement. At a time when things are so uncertain, it would be really good if all of us could watch the language that we use and not get ourselves into a situation where we feel, which I know I do, pre-committed to something. I’m in favor of this move. I would have been in favor of it probably in any event. But I do think there are reasons to think carefully about the pause that President Hoenig has put on the table and that has been kind of taken out of our hands. We need to be concerned about that at this time.

  • Thank you. President Moskow.

  • Thank you, Mr. Chairman. I agree with the 25 basis point increase that you proposed. Let me make a couple of comments. First, people have used the words “modest restraint,” and “mildly restrictive.” If we are somewhat restrictive, it’s really not very restrictive. We have increased interest rates 75 basis points since January in nominal terms. If you adjust for inflation, that’s 30 basis points. Also, if you look at chart 8 in the Bluebook and you look at the current funds rate, because of the increase in inflation we appear to be a little below the equilibrium real fed funds rate today. So I take Don’s point that long-term rates have gone up, but on a historical basis they’re still quite low, as we all know.

    The second point is about the long-term targets. I realize that these are simulations and that they can change, but when you look at the results of the simulations, they are disturbing because we don’t reach either target. If you have a 2 percent target or a 1½ percent target, you don’t reach it by 2010. So that certainly was disturbing to me when I looked at the results.

    I agree with the objective that people have stated. Our objective in the statement should be to leave open the option for August as to whether we want to increase rates 25 basis points, whether we want to pause, or whether we want to increase more or have another increase after that. So we certainly should leave all those options open.

    In terms of the specific proposals on the table, I thought that Jeff Lacker’s two points were very interesting. You could do both of them, or you could do one or the other. They both accomplish the same objective. Gary made the point that he didn’t like the phrase “unwelcome.” You could say, “Readings on core inflation have been elevated in recent months, and that’s inconsistent with price stability.” We could do something like that or “unwelcome.” One or the other—Sandy favored the first sentence in number 4—accomplishes the same objective, but I think including one would add to the statement. Finally, I agree with what everyone has said— that the Chairman’s testimony, the minutes, and the data that come out are going to have a great impact on the market’s expectations for what we do in August.

    Just one final little edit: If you go with alternative B, the first phrase in number 4, “although the moderation in the growth of aggregate demand should help to limit inflation pressures,” doesn’t belong there. I don’t disagree with the phrase, but I don’t think it belongs in number 4. It really belongs in number 3, and there is a way to work it into number 3 if we start doing that. I just put a marker down that I’d suggest that edit if we get to that point. I think it’s part of the rationale, not an assessment of risk. Thank you.

  • Thank you, Mr. Chairman. I, too, support a 25 basis point move at this meeting, and I share the objectives that many of the people around the table have. I think we may have a bit of a disagreement on how to achieve this objective through the words in the statement.

    In the first part of the rationale, our talking about the lagged effects of increases in interest rates and energy prices and the cooling of the housing market is an important acknowledgement of what we have been doing and implicitly gets to the point that President Poole made about mild restraint because it is about the effects of our policy on what’s happening now and what’s going to be happening going forward.

    I would prefer not to use the language about mild restraint. First, I agree with the point that it’s hard to know exactly how much restraint we have. I think President Moskow made a very good point by looking at the simulations that Vincent has given us to show that such language, at least in some interpretations, would suggest that we’re not really having very much restraint. Second, and very important from a communications standpoint, if we say this now, then in the future we’re always going to have to characterize how much restraint we are having in the market. So then we have “mild restraint,” then we have “modest,” and then we take off the word in front. I think it gets us into a very bad dynamic. So I would prefer to leave that idea implicit. It is important to have it in there, through the discussion of the lagged effects of our policy. We could even say “lagged effects of current policy,” if we really wanted to emphasize something like that. But I would prefer to go about it that way.

    With respect to some of the suggestions that President Lacker has made, I think it’s very clear that I very much share his objectives and concerns about unanchoring expectations. In each of the meetings at which I have appeared so far, I have talked about the importance of maintaining credibility and know full well the great costs of trying to reestablish credibility once it is lost. That said, we have to put the movements that we’ve seen in expectations over the past six weeks in a broader context, and I don’t think they’ve moved all that much. I would prefer them not to be moving up and down; I would prefer that we maintain very clear credibility; but I don’t think that they’ve moved a lot or moved in a way that I consider sufficiently large to be disturbing. So from that point of view, I would be averse to including the word “unwelcome.” I consider the word “unwelcome” unwelcome in this statement [laughter] because I don’t think we need to say that or convey it in that way here. We can convey it through a variety of other means. But I share the broad objective.

    I’m a bit wary of trying to bring in some of the alternative C language into alternative B because I’m concerned about the market’s focusing too much on specific measures when we start talking about the medium-term decline in core inflation. There may, then, be an overreaction to PCE numbers or CPI numbers that come out, and that would be a bit of my concern. Something that I very much like in alternative B at the end of the assessment of risks is that we talk about the evolution of the outlook for both inflation and economic growth, which is very much forward-looking and a bit more concrete, which I think is very valuable and helps to clarify our objectives.

    Finally, something that Vice Chairman Geithner brought up—I think there’s a tension between what some people want to achieve and the language that we’re going to use to achieve it. I concur broadly with the comment that a number of people have made—that alternative B will probably bring down the market’s odds regarding what we’re going to do in August from its recently elevated levels. We’re going to be getting some important data. We’ll be getting two employment reports, so we’ll get to see whether the lower numbers in employment are temporary or not. After we see four or five months of data, we will be able to start pulling out whether something is temporary or not. We have some other important numbers coming up, and so I support basically keeping alternative B as it is. I think that is the best way to achieve the objective of leaving our options open but not in any way unanchoring expectations.

  • Thank you. Governor Bies.

  • Thank you, Mr. Chairman. First, I support the 25 basis point increase at this meeting, and as several people have said, I think the real issue is what we signal going forward. Let me refer to some comments already made and respond to some of my colleagues. President Poole, I’m sort of right where you are: I’m thinking 50-50 going forward, and so I’m leaning toward the neutral language that leaves our options open.

    However, I’m troubled, too, as Governor Kroszner just said, about talking about our position as restraint at the moment. I see where we are as having removed the excess accommodation. I’m concerned that if we call this restrictive and if we want to backtrack, it might signal that we’re easing up again. I think we’re right in the sweet spot, and I don’t really want to characterize it one way or another because, again, I think we’re where we need to be.

    The other comment I would make is that we’re still seeing banks loosening lending standards. There’s plenty of liquidity out there. As Governor Warsh said yesterday, people are leveraging. Pricing may be restraining, but there is liquidity. Credit spreads are still very, very minimal. From that perspective, the market, given what they’re seeing day to day in deal-making, may react by asking how we can call it restrictive.

    I like President Moskow’s comment about moving up the first sentence of row 4, the first part about the moderation in growth, to the rationale. As we spoke around the table yesterday, we were trying to decide what to do with these signals of inflation—how much of this inflation is transitory and how much will be worked out as housing cools because, again, that is really where the slowdown is coming. The slowdown is coming from housing, but that’s what we really wanted to happen. By having the rates rise, we’ve pulled the hot sector down closer to where we want it to be. If you look at section 3 of alternative B, we really are laying out why we think inflation is headed in the right direction. Productivity gains are still good. Unit labor costs, therefore, have been held down. Inflation expectations are contained. We could add to those points that the moderation in aggregate demand will also help contain inflation. However, we still have other pressures. I think the sentence in row 4 supports that rationale, so I like the suggestion that we move it.

    I also agree with the suggestion that we take out the first word in the sentence, “readings on core inflation” and just say “core inflation.” I am open to saying “unwelcome”—it serves as a signal that we are anchoring expectations. Some numbers as high as 3.8 are very unwelcome to me, so I would be glad to stick the word “unwelcome” in there.

    The only other thing I would say is that in number 4 I would just put a period after “outlook for both inflation and economic growth.” To get everybody focusing on the outlook is what we’re all talking about. When we say “data dependent,” we mean that we need the data to validate our forecast or to modify it. I think the markets look at just the data, and I would just as soon put a period after “growth.”

  • Thank you. Governor Warsh.

  • Thank you, Mr. Chairman. Let me support the move of 25 basis points on the merits. I don’t feel as though I’m constrained by market expectations for this meeting; rather, on the merits, I think that’s the right thing to do.

    Before getting into a discussion of the language, maybe I can give a couple of perspectives, Mr. Chairman, on the markets themselves. My sense of things is that a bit of a herd mentality remains in the markets in that they have been waiting for our every utterance and, in some ways, they have been guided by us for a very, very long time. The discussion we’re having today is really the tough one because we recognize that we need to wean the markets from the degree of certainty that we no longer possess. I think this discussion is really quite healthy in doing so. In light of that perspective, I think that alternative B strikes the right balance. Without trying to wordsmith the statement at this point, I think that, although I share Vince’s view that ultimately the markets will get to a probability for August that is more balanced, it will take some time. That is, I think the markets’ first reaction to alternative B and to the various versions that we’re talking about will have some “stickiness” to the view that they have now. They will believe that we have stopped giving them guidance, that we’ve gotten out of that business, and that we are somehow culpable for that. We have led them to the river, and now we are telling them that what they do is really their decision after all. My own view is that this shift is a very, very good thing; but it is not going to be without some pain, and I think swipes will be made at us. The Chairman’s monetary policy testimony will perhaps represent just a little bit of that.

    But a dispersion of market views as to what we should be doing, what the state of the economy is, and what the prospects are for inflation is a very healthy thing. We will be introducing some volatility into the markets, probably in a more meaningful way than they may have seen, but on balance I think such a shift is all to the good.

    With that backdrop—that these markets are not focused on nuance—and the recognition that the discussion we’re having is about nuance, let me say a few things in support of alternative B. First, in the rationale section, where we say that inflation expectations remain contained, I think the markets will take a couple of shots at us and say, “Boy, you said they were contained previously. You say they’re contained now. What was all that that we heard in between?” The way that I get comfortable with the statement that inflations expectations are contained is that some of the movements in the markets, in the inflation surveys, in the TIPS markets, and in the commodities markets show they have been responsive to our views. I also feel that we can honestly describe them as being contained, but the container may be bigger than we had said it was before. [Laughter] I guess I’m not troubled by that. If we introduced language such as “unwelcome,” the markets would take it as a reprise of the Chairman’s remarks from a few weeks ago and would take the view that we were anticipating that they move up the fed funds futures markets for August. I think that view would be very problematic in light of what I hear is the central tendency of people’s views here—that we want that bet to be fairer, closer to 50-50, and I fear that our historical use of “unwelcome” would go against what we’re collectively trying to accomplish.

    Let me make another comment, about the assessment of risk where we say, “The Committee judges that some inflation risks remain.” I think that people in the markets are going to focus on the word “some.” “Some” in recent meetings has meant some further policy firming—that is, more than one move; “some” was a strong word. In this context, after some time and understanding, which will not be at 2:16 or 2:30 or even today or tomorrow, they’re going to recognize that “some” actually weakens the statement somewhat. Saying “some inflation risks remain” rather than “the Committee judges inflation risks remain” will, on balance, modestly lower the fed funds futures for August and beyond and will more likely bring us back to a point where we will have a fair fight come our August decision. I think that taking out “some” is likely to be a good change. So, on balance, Mr. Chairman, I support alternative B. Some of the suggestions that have been made about how to characterize our views vis-à-vis neutrality and whether or not we’re mildly restrictive strike me as leading to a discussion in the markets that might not be terribly helpful at this time. Our walking away from what the markets perceive to be firm and obvious guidance is a bigger move for them than I think this discussion may be suggesting, and I’d rather not add a new notion of neutrality, and a discussion about whether we are less loose or more tight strikes me as inopportune at this moment.

    I concur with a comment that President Yellen made at the outset about thinking about our August decision with an option model theory approach. This approach is basically that we don’t want to exercise that option until we have to. Alternative B preserves our options, on balance, for a fair fight and a fair discussion come the August meeting. Thank you, Mr. Chairman.

  • Thank you. President Poole.

  • Just very quickly, I think we should remember that the core PCE index comes out tomorrow. If that’s an unfortunate number, it’s going to be right up against what we say, and people might say, “Some inflation risk? We’ve got a bad number. Where are these guys anyway?” So I would vote for taking the “some” out and for saying, “Inflation risks remain.”

  • Vice Chairman Geithner.

  • Thank you, Mr. Chairman. I would read our discussion yesterday as implying a central tendency to our forecast of an economy that’s growing basically at potential over the forecast period with a trajectory for inflation that is higher than we’d like if it were to extend over time and that moderates slowly and modestly over that period, and the risks of that forecast are still slightly to the upside. Even if we were all quite confident about that basic forecast and had the same view of the risks around it, we couldn’t say that we actually know at this point how much more tightening we will need to achieve our target.

    I think it’s obvious that we should move today. I think we need to send a signal that we want the fed funds rate to have a positive slope going forward. Achieving the probability of 50-50 around a move in August would be terrific, but I don’t know if we can do that. We want to have as much flexibility as we can have. We want the market’s expectations about policy to be responsive to the data going forward, not sticky because of anticipation of what we’re going to do; and I think, of course, that we don’t want to pre-commit. I believe that alternative B actually does a very nice job of achieving this objective. But it’s all about the alternatives, and I think that alternative B, like democracy, is better than the alternatives. [Laughter]

    I think we face two types of risk now. One risk, which I think Janet articulated best yesterday, is that we may already be in the midst of what will prove to be a more acute adjustment in housing and a much more dramatic response by households to the change in expectations about future income and wealth and that the saving rate has been unsustainably low and will have to rise more significantly. That is a plausible scenario going forward. A second risk is that, under an expectation that we stop at 5.25, we may be left below the optimal path for policy. I want to say two things emphasizing that risk, even though I don’t think we can judge it as the predominant one. First, to echo what I said yesterday, if you look back at where we thought we would end and where we thought prevailing estimates of the neutral rate were, we have been way under and the market has been way under. The Bluebook estimate of now-prevailing equilibrium illustrates a basic 200 basis point move in estimated equilibrium over this period, and the market’s expectations of the terminal rate have moved a lot. So we may have been too loose for too long, and we may have to do more moves to adjust for the effect that our stance has had on inflationary behavior, inflation acceptance, psychology, and momentum.

    The optimal control exercise—and I thought the memo that you gave us before the meeting was very helpful—left me a little troubled because you can read those exercises as saying that, if our objective for inflation really is 1.5, we’re going to have to be tighter than 5¼ percent; and if you relax the assumption around smoothing, you get a significantly higher near-term path for the fed funds rate that is judged to be optimal.

    But even with that, those exercises imply a view about inflation persistence that says we’re going to be above 1.5 percent for a very, very long time. That situation, as I said, does create some risk that people will read the persistence of inflation as implying that we have higher inflation tolerance than we do or it may make us vulnerable to some further gradual erosion in credibility. So it’s possible that we’re going to need to be higher than the funds rate path assumed in the Greenbook, but we just don’t know, and we don’t need to make that judgment today. We do not want to try to cap expectations at any particular level and hold them down.

    Just a few things on the suggestions made. All the suggestions were very thoughtful, but I would oppose all of them. [Laughter] The rise in core inflation would be unwelcome if it was sustained or if it represented an expected path for inflation that was significantly higher than the central forecast. To say that a bulge like the one we’ve seen today, given what we think is driving it, is unwelcome increases our vulnerability to the perception that we’re going to be a little too backward-looking. We need the flexibility to stop at the point where core inflation is still accelerating, and “unwelcome” would limit our capacity to do that.

    I think Governor Kroszner was exactly right in resisting the suggestion that we characterize our current stance of policy as somewhat restrictive. We don’t know how restrictive policy is; but even if we did, we should not be in the business of calibrating a judgment in our statements about how restrictive we are. Most important, the statement says implicitly what I think, Bill, you’re trying to achieve, which is to convey that we see monetary policy as getting some traction on the economy today. We also don’t need to be quite as vivid in saying our expectation is to bring core inflation down over the medium term to some implicit level. “Medium term” does have a lot of flexibility in it, but as the optimal control exercises suggest, we don’t really know what the costs are of adopting a specific horizon now for bringing inflation down from what is only a very small deviation from our implicit target.

    I think that alternative B strikes a good balance now, and each suggestion would alter that balance in a way that would not be as good at capturing the consensus about the trajectory that was described yesterday. So I support moving 25 today and the language in alternative B.

  • Okay. Thank you all very much. Jeff.

  • Just a couple of comments in response to a few things, if that’s all right, Mr. Chairman.

  • First, the statement language that we’ve been using in row 4 to try to influence the probability that we’d like to see immediately after the statement of the next move has conflated two things. It has combined our assessment of the probability of various data coming in and our intentions about how we’re likely to react to those data. As a result, when data come in, they have a short shelf life, and not too far out into the intermeeting period the markets become uncertain because we haven’t told them separately what our intentions are, what guides how we respond to the data. That’s why I think alternative C, which says something about what we’re about, is going to anchor inflation much better.

    President Stern, I take your comments to mean that you favor something that’s synonymous with “unwelcome” but less coy, and I welcome that suggestion.

    We haven’t really given Vincent’s simulations, and the inferences that we can draw from them about the feasible paths of inflation, a lot of discussion or scrutiny. I’d be interested to know whether the way in which the evolution of inflation expectations is modeled in those simulations is consistent with the possibility of more-sudden and faster changes in those expectations—as we saw, for example, in the middle of 2003 and as seems to have taken place over the last two intermeeting periods, though with small fluctuations. It strikes me that they leave out of the entire simulation the possibility of our communications influencing those expectations in a more rapid way. This is a debate that goes back three decades, and I don’t think we’re going to settle it here today. But my reaction to those simulations is that it certainly seems plausible to me that we could establish more rapidly in the public’s mind our intentions to aim for inflation at 1½ percent. And I don’t think we should shy away from attempting to communicate in a way to help that process along.

    Stopping when core inflation is accelerating seems to me highly implausible. I doubt that we would be willing to take that risk with the market. That’s exactly the problem we ran into in late April with the JEC testimony: In the presence of declining inflation, the thing that people singled out from that statement was the remark that we may pause even if inflation risks are on the high side. That statement probably did more to call things into question in these last two intermeeting periods than anything else. So, again, I think we need to focus on the way markets are going to interpret news coming in and the way they’re going to understand how we’re going to react. That’s why I’ve been harping on intentions.

  • Not to beat a dead horse here, but I think we have to be sensitive to the fact that we’re going through a very difficult time right now. After two or three years of the market’s having a good deal of certainty about exactly what we were going to do, seeing no other path for policy but up from very low levels, we’re in an environment in which everybody realizes there’s a great deal of uncertainty. I don’t think we should extrapolate from the way a particular piece of information is received or remarked upon in this period to our further discussion of where we stand with regard to our statement and the kinds of things that we want to talk about.

    Core inflation is a backward-looking number by definition. There will be times in which we will not want to move on our assessment of the forecast even when core inflation is rising, and I don’t think that we should view that decision as less of a commitment to inflation but rather as a reasoned balancing of our two goals. Whatever happened after the JEC testimony is more indicative of the period we’re going through and less indicative of how we should think about the way in which we communicate. We’ve got to keep the balance in mind. If we don’t keep the balance in mind, I believe we are subject to overreaction, and the economy pays a penalty for that. I don’t think we should be insensitive to that.

  • Well, let me thank you all very much for your extremely helpful and useful comments. I, too, think that we should raise 25 basis points at this meeting. I think it’s justified by the basic economic situation. The greater risk seems to be from inflation.

    I think also, following some things that President Lacker said, that a credibility–psychology issue is going on here. Late in April, perhaps because of my testimony, we had a small inflation scare. The TIPS spread widened. The commodity prices, metals prices, essentially went vertical for a while. The minutes, my remarks, the remarks of other Presidents and Governors succeeded in bringing those expectations down significantly, even though we had two upside surprises in the CPI during that period. So obviously some connection exists between our talk and market expectations. Having said that, I think we need to do what we say we’re going to do.

    Now, conditional on what we know today, I should also add that I think we’re getting very close to where we need to be. We don’t know for sure yet. Obviously we have to look for more information, but in our public utterances going forward we should be somewhat more balanced about the risks and also somewhat more uncertain about where we’re going in the future. The risk- management calculations associated with this move are quite difficult. President Poole has mentioned the risk that if inflation expectations get embedded at a higher level, it would be much more expensive to reduce them later than it is to nip them in the bud, so to speak, at this point. That risk argues for moving earlier rather than waiting to see what happens. That being said, I recognize that there are also some downside risks, some potential nonlinearities in housing markets and financial markets. So where I come out is that I think we should move but try to keep our options open and to move slowly if we do move further.

    With respect to the statement, I’m the first to agree it’s not a work of art. We have a very difficult balancing act here. First, we have achieved some credibility gains in the past few weeks. We’d like to hold onto those or at least as much of them as possible. However, we want to keep our options open for August, and we don’t want to generate in the market a fear that we are completely focused on inflation with no regard for output, the other part of our mandate. It’s a delicate balancing act to show that we are aware of the inflation situation but that we are not single-mindedly focused on the inflation situation. The statement is designed to show that we are cognizant of the inflation risk. We take note of the elevated readings. We mention that inflation risks remain. We also note, however, that output is moderating and give some reasons for that, and we say in section 4 that the moderation in output will reduce some of the pressure. Obviously there’s disagreement about how flat the Phillips curve is, but all else being equal, that will be a factor.

    Responding to Governor Bies’ suggestion, I think putting that first sentence of section 4 into the rationale in section 3 is more logical, but the way section 3 is structured, first it says, “Here are the things that are slowing inflation,” and then it says, “But here’s what we’re worried about.” So if we put it there, it will downgrade it somehow; if we put it in section 4, it will say that we are aware of the output risk. There’s also perhaps a subtlety in section 4 that the firming will depend on the evolution of the outlook for both inflation and economic growth. That’s actually an adaptation of a suggestion that President Minehan made, and what it does, I hope, is indicate that we’re looking at both variables as we make our decision.

    So I’m hopeful that this statement will strike the balance between conveying our vigilance, conveying our concern, maintaining our credibility gains, and removing the notions from the market that we are certain we will move in August or that we will pursue inflation single-mindedly at a rapid rate and independent of whatever happens on the real side of the economy.

    Again, with respect to some of the suggestions that were made, I think they’re all very interesting. President Poole made a very interesting case. I don’t think there’s a consensus for going to the restrictive language right now. However reasonable it may be in principle to use the first sentence in alternative C, section 4, or to say that readings are unwelcome, I fear it will tip the balance toward a higher probability in August; perhaps this nuance is too fine, but I am concerned about the effect on the markets of perceiving the Fed as too aggressive. There is a new Chairman. They don’t know me. As far as they know, I am an inflation nutter, and I want to make sure that they understand that output is one of our concerns.

    Those were the main points I wanted to make. Governor Bies suggested striking the last phrase in alternative B, section 4. I don’t feel strongly about that. Does anyone have a view on that? Vice Chairman Geithner.

  • I guess I don’t have any concern with doing it, except that I wouldn’t know how to answer a question about why we took it out of the formulation after having it in for some time. Every change we make to the statement has to meet that test, and I’m not sure how I would explain it, although I think I agree with you, Governor Bies, about the reason for it. But I just don’t think the benefits of doing it offset the need for explanation.

  • I was just suggesting a change owing to comments from some of the folks trying to interpret us. Whenever a piece of data comes out, the market reacts, and that reaction is part of the volatility. To the extent that the data are anticipated, they are implicit in our forecast, and we don’t want to imply that every piece of news changes that. I was just trying to respond to those comments.

  • Let me say that I hope in my monetary policy testimony to talk a bit about our framework, our focus on the forecast and on the outlook, and the fact that we will not ever respond to any individual number. I would be quite happy to receive any suggestions that members might have about how to explain these issues. We’ll be working on that over the next couple of weeks. President Pianalto, did you have a comment?

  • Well, just a comment that we’ve changed “implied” to “determined.” Is there supposed to be a difference? Again, it’s a nuance, but will people focus on that change of word? Is “determined” stronger than “implied”? That’s all.

  • Yes. It’s valid to change the word back to “implied.”

  • That would be fine. Good point, Sandy.

  • Very good. President Moskow.

  • I just want to clarify the point that Governor Bies and I were making. We were suggesting that we move the first half of the sentence in number 4, the clause “although the moderation in growth of aggregate demand should help to limit inflation pressures over time,” up to the rationale part. In the last sentence of section 3, you could remove the word “however” and just put that phrase right at the beginning of the sentence. I think the result still would have the same continuity that you want to see in the rationale section, and I think it’s more of a rationale point than an assessment-of-risk point.

  • It is, but logically you would have to say “ongoing productivity gains have held down the rise in unit labor costs, inflation expectations remain contained, and the moderation of the growth of aggregate demand would help to moderate.” Then you say “however,” signaling that these are the things that we are really worried about—resource utilization and prices of energy. The sentence as it stands signals to me that all these things are working to constrain inflation, but we are more concerned about resource utilization and commodity prices because we put them at the end of the sentence, at the end of the paragraph, giving them the greater emphasis. I think that putting this clause where it is conveys somewhat greater attention to aggregate demand as a new element in thinking about the inflation outlook relative to our thinking at the last meeting. I realize that it’s a subtle issue of emphasis, and as I said, I don’t think this statement is a work of art.

  • Of course, I understand the logic, but if you do put it in section 4, as President Geithner said, it has a tendency to stay there. We have to see what it would look like in future meetings as well. If you then take it out, you have to question why you are doing so.

  • Well, I think the risk assessment is going to change. We just changed the risk assessment from “further policy firming may be needed” to “risks remain.” So I think that structure is somewhat more fluid than the other parts. Governor Kohn.

  • I was going to make the point President Pianalto made.

  • Good. I would like to put the recommendation on the table for 25 basis points and alternative B as modified by the one word “implied.” You can take care of that later, Michelle? Do you have it to distribute? You’ve distributed it already?

  • We can insert it.

  • Fine. Could you please call the roll?

  • I’ll be reading the directive wording from page 29 of the Bluebook and the assessment of risk from the table that was handed out with Vincent’s briefing.

    “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 increasing the federal funds rate to an average of around 5¼ percent.”

    And “Although the moderation in the growth of aggregate demand should help to limit inflation pressures over time, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth as implied by incoming information. In any event, the Committee will respond to changes in economic prospects as needed to support the attainment of its objectives.”

    Chairman Bernanke Yes
    Vice Chairman Geithner Yes
    Governor Bies Yes
    President Guynn Yes
    Governor Kohn Yes
    Governor Kroszner Yes
    President Lacker Yes
    President Pianalto Yes
    Governor Warsh Yes
    President Yellen Yes

  • Thank you. We have two very short items. We can perhaps do those, finish the meeting, and then have our coffee. But first, we’ll be right back. [Laughter]

  • All right. Sorry for that interruption. We have a report now from the subcommittee on communications. Governor Kohn.

  • Thank you, Mr. Chairman. I distributed a memo earlier this week, a report from our communication with you about how you would like to proceed going forward. The main thing I’d like to do is hear whether there’s any reaction to that report.

    Very tentatively, our idea was to cover goals, broad strategies, and philosophy in August. A number of people thought it would be a good idea to start with that. It might provide a framework for further consideration. Then we would move on to the numerical definition of price stability in our two-day meeting in October, which Debbie will talk about in a few minutes. Most people wanted to start with the numerical definition of price stability, both because it would influence a lot of what else would happen and because it reflects on the discussion we’ve just been having. It’s relevant to the way we approach our monetary policy right now and in the immediate future. It will certainly influence some of the discussion we have about what the announcement should say. So a number of reasons were given for starting with that, and we proposed to do it at the October meeting. Does anybody have any reactions? Cathy.

  • I certainly think that at the August discussion we need to settle on the policy, the underlying goals, and all of that. I, for one, am looking forward to an October discussion of inflation targeting about as much as I would be looking forward to a root canal. [Laughter] I would be happy to put it off for a standard two-day meeting in January. I know I’m in a minority on this one, but I just wanted to register how much I’m looking forward to this. [Laughter]

  • Root canals save teeth that otherwise would be lost. No gain without pain.

  • You could skip it. You could stay home.

  • There’s another way to avoid that, I can tell you. [Laughter]

  • Any other comments or suggestions about these sorts of near-term paths? Hearing none, we’ll do that. From talking with my fellow members of the subcommittee, I’m not sure that there’s much background material we could provide for the August meeting. That will be a sort of broad philosophical discussion. If we think of something, we will let you know; or if you folks think of something that would be helpful, please let us know.

    For the October meeting, I’ll ask the staff to redistribute the material that was distributed in January ’05. It was a very complete study of some of the issues involved. We have a number of new members, and some of us haven’t looked at it in a long time. After reviewing that material, if we think there is some updating or some further work that needs to be done to inform that October discussion, we ought to proceed from that base. So I’ll ask the secretary to distribute the study soon and then ask people to get back to me if they see something else they think needs to be done before October. Thank you, Mr. Chairman.

  • What does that actually mean we are going to do in August? Are we going to have an existential conversation without facts, just a sort of general discussion about conviction?

  • Several people thought that defining the goals would help structure the rest of the discussion, and they also had some philosophical points they wanted to make. This goes to your existential point, perhaps, about the best general, broad, strategic way of accomplishing those goals. I think it would be useful, and a lot of people thought it would be useful. At least it might not be a long discussion, and we are trying to do it by extending the afternoon—that might shorten it. [Laughter] We do not have to spend a lot of time, but I think that, if there are issues to get on the table, it would be nice to get them on the table at the beginning of the discussion. President Minehan.

  • I know I’m talking too much at this meeting, but with regard to August, I think it’s also important—and this was the last item on your outline—to consider communications in a broad context, not in the narrow context of the statement. We communicate in a lot of different ways, and I think we need to recognize that in a deeper way than we have in the past.

  • That is certainly the intention of the subcommittee. All right. Thank you very much. Ms. Danker.

  • Just to follow up on the memo that was distributed summarizing the results of the survey on meeting format, that survey revealed a number of areas of clear agreement. The recent format with the separate go-rounds on the economy and policy is viewed as a good one, and there’s little appetite for substantial change to the format at least for now, but more give-and-take during the meetings would still be welcome by most. Also, special topics are overwhelmingly considered a good use of time, with strong sentiment for using staff from both the Board and the Banks as well as for allowing enough lead time for ample preparatory work. Finally, there appears to be widespread sentiment for lengthening the amount of meeting time, but opinions are split about whether two-day meetings are the best way to accomplish this.

    On this last point, the survey results and subsequent consultations suggest that a consensus could probably be reached around a steady state of, say, four two-day meetings each year. These four would consist of two meetings with special topics (two was, in fact, the modal response to the survey question on that) and then two meetings before the Chairman’s semiannual testimonies to allow a more in-depth discussion of the economy and the outlook with the lead-in of the chart show. For 2007, we are thinking of a baseline of two-day meetings in January and June, as those precede the testimonies, as well as two-day meetings in perhaps March and October for traditional-style special-topic presentations. Whenever possible, we would schedule those two-day meetings on Tuesdays and Wednesdays since that was the day-of-the- week option that appeared least distasteful to you in the aggregate. [Laughter]

    Now, coming back to the nearer term, as Governor Kohn noted, communications issues are likely to require significant additional meeting time before the end of this year, including perhaps a couple of two-day meetings. Therefore, we would like to add time to the August meeting both by beginning a bit earlier and by extending into the afternoon as much as needed. As long as the policy decision has been completed, the announcement could be released as usual at 2:15 in the afternoon, even while the meeting remains in session. In addition, we would propose to expand both the October and the December meetings to two days to accommodate the communications topic. Discussions on this topic are, of course, expected to spill over into next year as well, but for now we are not proposing additional two-day meetings for that purpose. Depending upon how the extended one-day meeting in August goes and how the communications agenda itself progresses, there would be various options for setting aside meeting time next year for those discussions.

    So, going forward, if you are broadly in agreement with this approach to the schedule, we will be sending to your offices in the next couple of days a proposed calendar of meeting dates for the remainder of 2006 and through 2007. We would request, if possible, a relatively prompt turnaround on identifying significant calendar conflicts because we’re receiving numerous inquiries about next year’s meeting dates, which would typically have been released by this point.

    Also, as to the special topics, we plan to survey you later this year to see what special topics would be of interest for the slots next year. So if you have any specific suggestions to make, please let Vincent or me know before then. Then once the topics are chosen, we propose to use the System Research Advisory Committee to organize the work, with perhaps Board staff leading one special topic effort and Bank staff leading the other.

    Finally, thank you also for the additional comments many of you provided on the survey. They will be useful going forward.

  • Are there questions or comments for Debbie? President Poole.

  • Does your tentative two-day meeting schedule, Tuesday–Wednesday, include the Wednesday right before I think most of us have board meetings? I have noted that, and I think it’s a particular problem. I know Richmond has subcommittee meetings of the board Wednesday afternoon, and we do sometimes in St. Louis. I know that there are a whole lot of constraints that make this scheduling extremely difficult. I understand that, and it may be that some of us are going to have to move these committee meetings to after our board meeting. But at any rate, if possible, I think we should try to avoid that.

  • Actually I like missing my committee meeting. [Laughter]

  • What is wrong with Monday or Tuesday in that sense? What makes it inconvenient—because Thursday is a crunch, particularly if you’re going to travel a distance.

  • Monday and Tuesday, again, was not the least distasteful option from the perspective of the survey respondents.

  • It was also the most distasteful option from the perspective of staff, both at the Board and at the Reserve Banks, because it does interfere with the briefings many of you receive and just makes our life more complicated. I appreciate that that’s not necessarily in your welfare function.

  • Tuesday–Wednesday is fine if it’s not right ahead of our board meeting. That’s the issue.

  • Is there a possibility of rescheduling some of the board meetings? Are they inflexible?

  • We’ve had second Thursday every month for our meeting since day one as far as I know.

  • I don’t want to jump in here, but I suppose that, for the meeting in October, we could check with people about what days the 2007 meetings should be on.

  • We will do our best to solve the over-determined system that you’re telling us about.

  • We’ll distribute the precise dates in the next couple of days and then please just get back to us.

  • Also remember that Debbie said Tuesday and Wednesday in part because we also have to line it up with the calendar of international commitments, which include BIS meetings and the annual meetings. So we start with Tuesday and Wednesday, but we may not get there.

  • I have complete confidence in Debbie and Vincent to solve this problem. [Laughter]

  • When will you announce the fact that we’ll have a two-day meeting in October and December, and how will you explain it?

  • I think the intention is to package the ’06-’07 calendar together. We hope to have clearance from your offices before the end of July, at which point we’ll go out with the calendar going forward. I’m sure our Public Affairs colleagues will assist us, explaining the additional meetings later this year on the basis of the communications topic, which I think should be straightforward since that has been in the minutes.

  • Remember that, by the time the calendar is released, the minutes of this meeting, the Monetary Policy Report, and the Chairman’s testimony will be out, and we already had a marker in the Report to talk about the formation of the subcommittee.

  • Any other questions? Thank you. The next meeting is on Tuesday, August 8. We are adjourned, and you can all join us for coffee outside.

  • And lunch. [Laughter]