Thank you all. The discussion was very good as usual, and let me just assure you that I listened very, very carefully. So I’m certainly hearing what you’re saying, and I understand the concerns that people have expressed. I play Jekyll and Hyde quite a bit and argue with myself in the shower and other places. [Laughter] Let me first say that I think we ought to at least modestly congratulate ourselves that we have made some progress. Our policy actions, including both rate cuts and the liquidity measures, have seemed to have had some benefit. I think the fear has moderated. The markets have improved somewhat. As I said yesterday, I am cautious about this. There’s a good chance that we will see further problems and further relapses, but we have made progress in reducing some of the uncertainties in the current environment.
I also think that there’s a lot of agreement around the table—and I certainly agree—that we have reached the point where further aggressive rate-cutting is not going to be productive and that we should now be signaling a willingness to sit, watch, and listen for a time, for two reasons. First, risks are now more balanced. That is, there is more attention to inflation risks and dollar risks, and although our output risks remain quite significant, the balance is closer than it has been for some time. Second, given that we have done a lot in a short time and moved aggressively and that we’re seeing fiscal actions coming in and perhaps other policy effects as well—lagged effects of our own actions— it seems to be a reasonable time for us to pause, to watch carefully, and to presume that we’re not going to move unless conditions strongly warrant it. So I think that, at least in that broad respect, there’s a lot of agreement around the table.
The two alternatives that have been discussed by most people are B, which is to move 25 basis points today but to send a fairly strong signal of a preference to pause after this meeting, and C, which is not to move but to keep some elements of the downside risk alive in our risk assessment. Like a number of people, I think both are plausible. Both have appeal. Alternative C, in particular, has the appeal of pushing back against some critics on the inflation side who have criticized us for not being sufficiently attentive to the dollar, to commodity prices, and so on. As I said yesterday, I think that inflation is an important problem. It’s a tremendous complication, given what is happening now in the other parts of the economy. In no way do I disagree with the points made by many participants that inflation is a critical issue for us and that we have to pay very close attention to it. As I said yesterday, I do think that some of the criticism that we are getting is just simply misinformed. I don’t think there’s any plausible interest rate policy that we can follow that would eliminate the bulk of the changes in commodity prices that we’re seeing. I think they are due mostly to global supply-and-demand conditions. A small piece of evidence for that is that yesterday the ECB was mentioned favorably as having the appropriate inflation attitudes compared with our attitudes. I would just note that headline inflation in the euro zone is about the same as it is here, despite their stronger currency, because they are being driven by the same global commodity prices that we are.
I would also say that, although the inflation situation is a very important concern, I don’t see any particular deterioration in the near term. Since the last meeting, oil prices have gone up, which is very high profile, but gold, for example, has dropped about 12 or 13 percent. Other precious metals are down. Some other commodities are down. The dollar is stronger. TIPS breakevens have moved in the right direction. Wages, as we saw this morning, are stable, and I would urge you to compare wage behavior over the past five years with wage behavior during the 1970s. Wage growth then was not only high but also very unstable and responsive to short-term movements in headline inflation. So I think the canary is still getting decent breath here. [Laughter] I want us to be careful not to overpromise. We cannot do anything about the relative price of gasoline, and I don’t think that we’re on the edge of an abyss of the 1970s type. I do think it’s an important issue, and I do think that there is benefit to pushing against the perceptions. In this business, perceptions have an element of reality to them, and we understand that. That’s an important part of central banking, and I fully appreciate that point. So again, I see a lot of merit in the alternative C approach.
As I think you can conjecture, I’m going to recommend alternative B—25 basis points but with a stronger indication of a pause. Let me discuss why in the end I come down on that side. First is the substance, the fundamentals. I don’t think that 25 basis points is irrelevant. For example, one-month LIBOR is up about 35 basis points since our last meeting. These short-run financing costs do matter, particularly in a situation of financial fragility. So it is not just an issue, as President Evans mentioned, of long-term interest rate expectations. Overnight and short-term financing costs do matter for the financial markets, and a lower rate will help the markets to heal. It will affect other rates. To take an obvious example, it affects the adjustable rate that mortgages move to in the economy. So I think there’s a case to be made on the substance. I will not add much to the discussion about how we define “accommodative.” But one way to do it, I guess, is to look at the Greenbook’s very thorough analysis, which rather than using rules of thumb attempts to look at a broad forecast conditional on what the staff can ascertain about the financial drags that we’re seeing. Their analysis suggests that something around where we are or a little lower is consistent with slow economic growth but also price stability within a relatively short time. That is one way of trying to calibrate. Obviously, there are other ways as well.
The second point I’d make, besides just the substance, is the consistency with our own projections. Virtually everybody around the table still thinks that the downside risks to growth are significant, and we’ve mentioned the same factors—financial conditions, housing, and a few other things. Those remain very serious downside risks. I don’t think anybody thinks they are under control at this point. Yes, we also see an increased number of people with upside risks to inflation. But again, in terms of the numbers we’ll publish, I think the downside risks are still held by more people than the inflation assessment. That, by the way, suggests why we can’t really do what President Plosser suggests—hold and move to the alternative B, paragraph 4, language. Not to move and to say that the risks are balanced would, I think, be clearly inconsistent with the risk assessments that are in the projections.
The other issues have to do with communications. We are at an important transition point in our communication strategy. One of the risks that we took when we made the very rapid cuts in interest rates earlier this year was the problem of coming to this exact point, when we would have to communicate to the markets that we were done, that we were going to flatten out, and that we were going to a mode of waiting. It was always difficult to figure out how that was going to work in a smooth way. Whether through luck or design, market expectations have set up perfectly. I mean, basically they’re now assuming a flat path going forward, with some increase later; and that appears to be consistent, as Vice Chairman Geithner noted, in the last few days with significant dollar appreciation, declines in commodity prices, and declines in inflation expectations—all the things that we want to see. It appears that we’re in a position that had seemed really problematic some time ago, so we are now able to make the transition in a way that will be relatively clear and, I hope, not too disruptive.
Now, I want to come back to the issue of disappointing markets. I agree with President Fisher and many others that disappointing markets can be a good thing. It is certainly not always a bad thing, by any means. I think the issue is a little more subtle than that. The issue here is the clarity of what we’re trying to say and the way our message is going to be read. Let me make two points about that. If we were to do alternative C, I think there would be essentially two issues. One is that, although we would not be moving, which would be a surprise, we would also not be declaring a pause because of downside risk, which would be another surprise. We’d have a surprise both in the action and in the statement. The risk there is that we confuse the markets about what our intentions are and what would cause us to respond. For example, the Greenbook’s projections of Friday’s employment numbers are somewhat more pessimistic than those being held in the market. If we took action C today and Friday’s numbers were consistent with the Greenbook forecast and with our own projections but worse, significantly worse, than the market expectation, would statement C then lead to the building in of additional ease? I think there would be a lot of confusion there—a lot of uncertainty about what exactly we are saying about when we’d be willing to respond.
The other communication issue that I have with alternative C—and this, again, is something President Fisher said yesterday—is that if we don’t move and we put C out there, the stock market could go up because it might be read as saying that the Fed has increased confidence, is seeing things looking better, and is feeling stronger about the economy. I’m not sure that really is the assessment we have, and if we then have bad data on the labor markets and the financial markets weaken somewhat, will we be seen as having made a wrong call, as being blindsided by circumstances? This is more discussion than it’s worth, but what I’m trying to convey is that it’s not just a question of disappointing or not disappointing markets. It’s a question of whether or not we’re sending a clear message. I think alternative B, while it’s consistent with our risk assessments, is also a pretty strong statement. Let me, just for what it is worth, assure you now that data that come in within the general, broad ranges of what we’re expecting, even though they will be weak, should not cause us to ease further, given this statement. I believe that this statement will provide us with plenty of cover. No matter what the markets expect, we have said that we have come to a point at which we need to take a pause, we need to see what’s happening, and we are going to be watchful and waiting.
With respect to the language, I just want to point out how much the language in alternative B has moved from March. It really is a very significant change. First of all, we are acknowledging explicitly how much we have already done—the substantial easing of monetary policy to date plus the measures to foster market liquidity—and expressing a general confidence implicit in that first sentence that we have done a lot; that it is likely to help; and therefore, that we should wait and see what happens. Second, we removed any reference to downside risk to growth, which has been in there for a long time. That’s a very strong statement. That says a lot about our inclinations going further. Third, we’ve added the phrase “continue to monitor,” which to me suggests very much a watchful waiting rather than an active approach to developments in the economy. Finally, we have made it clear that we are going to be data dependent and, in particular, though we have done a lot, we are expecting continued weakness, and we’ll act as needed. But we have taken out the “timely manner,” so the presumption that we’ll be responding in a very rapid and aggressive way, I think, has been moderated.
I think of alternative B as being a compromise in the sense that it takes a step that is consistent with the fundamentals in terms of the underlying tightness of the financial system and the risks that most of us see to economic growth as well as inflation. At the same time, I think it is a rather strong step in expressing a shift in our strategy—that we are moving from the phase of rapid declines and aggressiveness to a phase of waiting and observing how this economy is going to evolve. Again, with full respect to everyone’s comments, I understand. Unlike Governor Mishkin, I wasn’t sitting on the fence; I thought that was a little uncomfortable. But I understand the concerns and the arguments. The communication issues did concern me, and largely on that basis, I would advocate B today. Are there any comments? If not, could you please take a roll call?