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

  • Good morning, everybody. Let’s start with Dave Stockton, who will bring us up to date on the overnight data releases.

  • We left at your place—and I hope you will find—a table showing the GDP release numbers relative to the Greenbook forecast that we had. I thought I would start out by just walking you through that for a minute and giving my impressions of what its implications are. As you can see, there was an advance estimate of third-quarter GDP of 3.9 percent—that was 0.6 percentage point above our estimate for the third quarter. Looking at the second line of the table, you can see final sales. We were actually surprised a bit to the downside—just a tenth—by final sales. The real area of surprise in this release, if you look further down the table to the level in chained 2000 dollars, was the change in nonfarm inventories. The BEA has a much higher estimate for third-quarter inventory investment than we do. Typically that change doesn’t carry a great many implications for us going forward. If anything, if we hold inventory investment at the level that we projected for the fourth quarter, the higher level that they are estimating for the third quarter would actually lead to a reduction in our estimate of fourth-quarter GDP.

    Going back just briefly to the components of final sales, as you can see, two areas explain most of the small downside surprise that we had in final sales. Personal consumption came in at 3 percent versus the 3.2 percent we were estimating, and equipment and software expenditures came in at 5.9 percent versus the 7.4 percent that we were estimating. One other area that came in a bit below our expectations was net exports, which is down there in the “level” area. Nathan tells me that his folks would not be inclined to take all of the lower estimate, so they would probably be carrying a slightly higher number for net exports going forward.

    We had two small offsetting upward revisions. One that was big in percentage change difference was nonresidential structures, for which the BEA is estimating 12.3 percent versus 3.7 percent. That miss was principally in drilling and mining, which would have been a big surprise to us in the second quarter. The BEA has some proprietary information on drilling and mining. I must say the big increases that they are showing for the past two quarters seem at odds with what we can see in the data that we look at for rigs in use and foot-drilled. Nevertheless, there is not really any strong reason to doubt that. Going to the very bottom part of the table, you can see for core PCE an upside surprise of 0.2 percentage point. That was all in the nonmarket component of PCE prices, the part in which the BEA is making various imputations. In fact, the market part of the core PCE came in 0.1 percentage point below our expectations. Again, we don’t typically give a great deal of weight to nonmarket prices.

    So that is the GDP release. I would say, obviously, it was stronger. I don’t see any reason necessarily to doubt this number. It will be revised as data come in. In looking at their estimates for September, for which they are missing data, we could quibble a bit on net exports and on inventories. Those quibbles would be largely offsetting, so if we had had this release in hand, today we would probably be showing a number something close to 3.9 percent.

    We had two other important pieces of information this morning. One was the ADP survey of private payroll employment growth. Their estimate for the gain in private payrolls in October is 106,000. That is above the 50,000 that we implicitly had built into our forecast. Again, this has significant information content in terms of its predictive content for payrolls; they have improved their methodology over the past couple of years as they have gotten into this. While I don’t think we would move our estimate all the way to their 106,000, we would certainly raise it from the 50,000 that we have—probably to 75,000 or 80,000, at least, for an estimate of payroll employment growth in October.

    The other piece of data that came out this morning was the employment cost index. It is showing hourly compensation for private-sector workers up at an annual rate of 3.1 percent in the third quarter. That is considerably below our estimate of 3.8 percent through the third quarter and leaves the twelve-month change in that measure of hourly compensation flat at 3.1 percent. So that basically is showing no signs of any acceleration whatsoever.

    Obviously, a lot of detail will come out later today and tomorrow in terms of the underlying data and assumptions behind this GDP release. So right now I am really shooting from the hip, but I will shoot away anyway. As I indicated, I don’t think we would necessarily fight the BEA on the 3.9 percent. We would probably mark down our fourth-quarter estimate from the 1.4 percent that we had in the Greenbook to 1.2 percent, with a smaller contribution coming from inventory investment. Again, we would probably raise our level of inventory investment a bit but not enough to prevent the swing from becoming a little more negative going into the fourth quarter. That change, if we were at 3.9 in the third quarter and 1.2 percent in the fourth quarter, would boost the second half from 2.4 in the Greenbook to about 2.6 and raise the year as a whole from 2.3 to 2.4. On PCE prices, I don’t think we would really do anything to our forecast. We would take the third-quarter estimate on board, but we would keep the growth rates of both total PCE prices and core PCE prices unchanged in the fourth quarter. So we would be adding somewhere between 0.1 to the second half and 0.05 to the year as a whole. That might cause the year as a whole to round up just a bit.

    I think that is basically where we would be. In going back to my remarks of yesterday, I think that these releases—certainly the GDP release—would not have affected in any important way our basic take on the data, which was that the incoming data have been stronger than we had expected at the time of the last meeting. But we still see good reasons for thinking that GDP growth will slow significantly going forward. If we do get 106,000 on payroll employment for October as in the ADP data, the extent of that slowing will probably be a little less than we thought in terms of the overall level of GDP going forward. In terms of the downside risk, I think we are still looking at a housing sector that has a significant amount of overhang and downside risk and that could be a bit worse than we’re expecting.

    Shifting gears completely—Vice Chairman Geithner asked yesterday about debt growth in our forecast and how it compared with the early 1990s and the earlier part of this decade. I have left a chart of that at your places. As you can see, our forecast has a bigger drop-off in debt growth than we have experienced so far in this decade but not nearly so large as the one that we experienced in the late 1980s and the beginning of the 1990s. Again, I would characterize this forecast as not really having what you would call a full-blown credit crunch but as having some significant restrictions on credit provision going forward. So I will take whatever questions you might have, and I will do my best to answer them.

  • Any questions for Dave? President Fisher.

  • Mr. Chairman, I just wanted to ask—and this is a question based on ignorance—you’ve talked about nonresidential structures, and you mentioned drilling and mining. One thing that has impressed me in talking to some of the bigger logistics companies— Fluor, Bechtel, Zachry—are the enormous numbers in what I mentioned earlier—the infrastructure developments in the Gulf Coast area and somewhat in the heartland, I think all the way up to President Hoenig’s District. The numbers are quite large, and they continue to surge. Would that be part of this nonresidential structure investment number?

  • Yes, most of that would be part of this nonresidential structure figure. But since we don’t know exactly what proprietary information the BEA has, I’m not quite sure what is included in the number. But conceptually, that should be there.

  • And the weight of construction and mining is what?

  • Drilling and mining in the overall economy is very small.

  • Yes, that’s what I thought.

  • I mean, nonresidential structures contribute about 3½ percent; drilling and mining I could get for you.

  • I think the two combined are something like that.

  • Yes, it’s a small piece.

  • Other questions for Dave? President Rosengren?

  • I had a follow-up question on nonresidential structures. You talked about drilling and mining, and I was wondering about the other parts of commercial real estate. Was anything in there? I don’t know if you had a chance to look at it, but the reason I ask is that, if you thought financing was starting to become a problem and you do have very weak nonresidential investment going forward, you would expect to start seeing it there. So I’m wondering if anything was in that breakout.

    I have a second question, which is that you didn’t mention durable goods. But if I thought that credit problems, particularly subprime and other things, were starting to create issues, I would expect to start seeing more imprints in the data for some of the durable goods. So was seeing durable goods a little stronger in the consumption figures a surprise at all?

  • We don’t have the details yet. In fact, a construction-put-in-place release will come out later today and will provide us with a bit more insight into the composition of the non-drilling-and-mining component. So I don’t really know what is happening there in terms of this particular figure. In terms of durable goods, given what we’ve seen, I think that it would still be early at this point for any credit restriction to have left much of an imprint on capital spending or durable goods orders. We are looking for that. We have been a little surprised at the strength there, so I think that would be part of a question mark in our own minds as to whether we have overestimated the restraint. But as I said yesterday, given the data that we currently have in hand, I think it is probably too early to see a significant mark yet from the credit restraint. If we don’t over the next three or four months, that will more seriously call into question our forecast. Now, we have not built in a very large capital spending effect from the financial turmoil because we basically think corporate finance is still looking pretty good. There may be some pockets of stress and some difficulties with tighter terms and standards in bank lending, but that is not the big area in which we are expecting constraint. It really is the household sector.

  • Mr. Chairman, I would just like to take this opportunity to remind the Committee that you will have the opportunity to revise your projections that you submitted a few days ago in light of the information available through the time of this meeting—of course including the data that were released this morning. We would need to get your revised projections by close of business tomorrow.

  • Thank you. Other questions? If not, Brian?

  • Thank you, Mr. Chairman. I will be referring to the package labeled “Material for FOMC Briefing on Monetary Policy Alternatives.” That package includes two versions of table 1: The first is the version that was discussed in the Bluebook, and the second is a revised version dated October 31. The revised table presents basically the same policy alternatives as the Bluebook version but with some changes in the rationale and risk assessment sections. To review, alternatives B and C contemplate leaving the stance of policy unchanged today, but they differ importantly in their assessments of risk: Alternative C characterizes the downside risks to growth as roughly offsetting the upside risks to inflation, whereas alternative B indicates that the downside risks to growth are the Committee’s greater policy concern. Alternative A, in contrast, eases the stance of monetary policy 25 basis points and indicates that the Committee assesses the risks to growth and inflation as roughly in balance. In discussing these alternatives, I will basically be working from right to left across the two versions of the table.

    As Dave Stockton discussed yesterday in response to a question from Vice Chairman Geithner, the Greenbook projection is a modal forecast. Without consideration of risks, the Greenbook analysis would seem to support the Committee’s selection of alternative C. In that forecast, which is conditioned on the federal funds rate remaining at 4¾ percent, economic growth slows in the near term, and below-trend growth over the next few quarters closes the small positive output gap that the staff sees as currently prevailing. Maintaining the present stance of monetary policy leads to a gradual strengthening of the expansion over 2008 and 2009 and by enough to leave the economy producing at its capacity. Core inflation stays under 2 percent, while total inflation runs a bit lower, reflecting declining energy prices. Judging by your projections, most of you would find such a trajectory for inflation satisfactory, at least for the next couple of years if not over the longer term. Your projection submissions, however, as well as your comments yesterday, suggest that many of you see less vigor in aggregate demand than the Greenbook does as well as appreciable downside risks—an outlook that might argue against alternative C. The Greenbook provided several alternative simulations involving greater weakness in housing and larger fallout from financial stress that illustrate some prominent risks to spending; they suggested that the path of the federal funds rate might need to run ¾ percentage point or more below baseline should such weakness in aggregate demand eventuate.

    The choice of alternative B could be consistent with a modal expectation along the lines of the Greenbook coupled with appreciable concerns about downside risks and a judgment that you need to await additional information before deciding whether to ease policy further. As noted in alternative B, section 2, of either version, the statement would in effect explain the decision to stand pat, first, by recognizing that economic growth last quarter was solid and perhaps conveying the implicit suggestion that the economy was likely to continue to expand at an acceptable pace, even if growth were to slow temporarily; second, by noting that strains in financial markets have eased somewhat on balance; and third, by indicating that the domestic economy apart from housing has proven resilient and that the global economy remains strong. At the same time, the statement would indicate that the Committee is concerned about downside risks to growth, explicitly citing the potential effect of tightening credit conditions. Regarding inflation, the language would be identical to that used in September. The statement would conclude by indicating that, on balance, the Committee saw the downside risks to growth as the greater policy concern.

    As Bill Dudley noted, the market was all but certain as of yesterday that you will ease policy today 25 basis points. Today, in response to the economic data released earlier, intermediate and longer-term interest rates have risen somewhat; however, futures quotes still suggest that investors now see high odds that you will ease policy today. Thus, the announcement of an unchanged stance of policy would come as a considerable surprise to markets. To be sure, the assessment under alternative B that the downside risks are the greater policy concern and its implication that further easing might well be forthcoming before long would soften the blow. But a selloff in bond and equity markets would no doubt ensue. Moreover, financial asset prices could remain volatile for a time, as investors attempted to recalibrate their expectations of the probable path of monetary policy going forward.

    Concern about such market reactions clearly would not persuade you to ease policy at this meeting if you judged that an unchanged stance of policy would likely be more consistent with maximum employment and stable prices, and hitching monetary policy to market expectations would make for extremely poor economic outcomes. But especially in circumstances of persisting financial strains, concern about unnecessarily adding to those strains might incline you a bit more toward easing, as in alternative A, if you were already strongly leaning that way today based on your view of economic and financial fundamentals. As I noted yesterday, your economic projections suggest that most of you believe that the stance of policy should be eased within the next six to twelve months, and many of you indicated that some easing was appropriate imminently. You may see several reasons for preferring to move earlier rather than later. In particular, you may think that a timely reduction in interest rates could be valuable now in buoying household, business, and investor confidence. Yesterday the Chairman noted the possibility of a vicious cycle involving a deteriorating macroeconomic outlook and tightening credit conditions. By bolstering confidence in the outlook, easing policy as expected could help reduce concerns about deteriorating economic fundamentals and declining asset values. Beyond reducing the risks of nonlinear responses, easing policy as expected by market participants would support growth of aggregate demand over time through the usual channels.

    Of course, you may also be worried about a possible increase in inflation. Such concerns may reflect a variety of factors—the further sharp increase in oil prices of recent weeks, the depreciation of the dollar, accelerating unit labor costs, and perhaps the relatively high level of resource utilization. But given the recent good inflation performance, you may feel that downside risks to growth are the more immediate danger and believe that further easing today to address those risks is warranted. You may also believe that, should the easing eventually appear to have been unnecessary, you could act as quickly to remove stimulus as you did to put it in place. If you were inclined toward easing policy another 25 basis points at this meeting, you would need to confront the question of the appropriate statement language. In both versions of alternative A, the first two sentences of section 2 are similar to those proposed for alternative B. But rather than emphasizing remaining downside risks, the statement would then repeat most of the “help forestall” language used in September. The language proposed for the inflation paragraph in both versions is identical to the corresponding paragraph suggested for alternative B; again, the language shown in the October 31 version suggests a bit more concern about inflation risks than the September language. Finally, both versions of alternative A would characterize the upside risks to inflation as roughly balancing the downside risks to growth. This indication might well lead market participants to reduce the nearly two-thirds odds that they currently place on another quarter-point easing in December and might trim the extent of the overall easing of policy anticipated over the next year or so. Thus, implementation of alternative A also could prompt some further backup in market interest rates.

    In closing, let me remind the Committee that the September trial run highlighted the potential for inconsistencies between the results of the projections survey and the Committee’s statement. Your latest forecast submissions indicated that, while a minority of you sees the risks to inflation as skewed to the upside, a slight majority perceives the risks to total inflation as broadly balanced, and a more-sizable majority judges that the risks to core inflation are in balance. These results could be seen as incongruent with the draft statements for some of the alternatives. For example, alternative A references upside risks to inflation. Several considerations might explain this apparent inconsistency. For example, your responses on skews in the projections survey may capture only the subjective probabilities that you attach to various outcomes, while you may see the statement language as capturing not only the odds but also the economic costs associated with those outcomes. Or perhaps the upside risks to inflation referenced in the statement should be interpreted as reflecting the views of all members not just of the majority who saw inflation risks as balanced, thus encompassing the views of those in the minority who see upside inflation risks. Finally, I am worried about the possibility that some of you may have provided your numerical projections under the assumption of appropriate monetary policy but may not have applied that assumption as well to your individual risk assessments. In your upcoming remarks, you may wish to address whether there is any tension between your own views of the distribution of risks and the risk assessments in the draft statements. Thank you.

  • Brian, do I have it correctly that the blue shows the change between the Bluebook and the current version?

  • So the only changes from the Bluebook in A-3 and C-3 are that there’s a more expansive description of the inflation risks, and in A-4 there is simply the phrase “after this action.” Those are the only changes from the Bluebook. Are there any questions for Brian? President Evans.

  • Brian, we don’t have a long history of announcing the risk assessments contemporaneously with the decision, so I’m curious as to your take on the likely response. In alternative B, section 4, it says that the Committee views the downside risks to economic growth as the greater policy concern, and I think you said that markets would likely see a funds rate decline as forthcoming. What has been our experience when we have invoked this type of risk and what has the actual policy been afterward?

  • I’m not sure I could answer that without doing a fair amount of research, President Evans. My sense is that, as I think I indicated in my remarks, for the policy decision today there is effectively 23 basis points or so of easing still built in. So there would be a considerable surprise in that dimension. According to a chart that I am looking at, the biggest upside surprise in the federal funds rate that we have experienced since the era of policy announcements began in 1994 has been more on the order of 12 basis points. So that dimension of alternative B would, I think, be pretty significant. I don’t really know how much the assessment of risks might moderate the shock. I think there would be some moderating effect there, but it would be limited.

  • So as I thought about this briefly, it seemed to me as though it’s not unusual for us to say that, because of the risks of higher inflation, we don’t feel we’d take action in subsequent meetings for quite some time. But when we have had this type of assessment—I think there have been only a couple of opportunities—usually we’ve had a decline pretty quickly thereafter.

  • I think the market takes the upside risk to inflation as more what central bankers have to say.

  • Right, and I think that the downside risk would be viewed as more a hint of the way that the central bank is leaning. So I don’t think they are symmetric.

  • I just wanted to ask you for a little more detail about the market’s reaction to the GDP numbers and the ADP data. You said that it’s the same. Can you be just a little more precise? Is there any movement at all in terms of the assessment of the federal funds rate cut at this meeting?

  • A very small one, I think.

  • November fed funds futures were up 1 basis point, December was up 2 basis points, January fed funds were up 2 basis points, and then as you go further out they are 4 to 5. So it’s fairly small.

  • Breakevens were up about 3 basis points across the curve.

  • I have two questions. One just came to mind. We are talking about very recent futures expectations. In light of what you just discussed, what has been the range in the intermeeting period in terms of the odds of a 25 basis point cut?

  • I think it has been as low as 30 and as high as—it’s nested, because there is some probability on 50 and some probability on 25. But if you look at the Cleveland Fed, I think it has ranged from about 30 to about 80.

  • So it has been all over the lot. My question really is maybe not so much of Brian but just to inform a decision here, or at least to inform an input. There was some discussion yesterday of strong hints about the need to have insurance—that is, insuring against the risk of downside economic growth that might be more dramatic than we would like. We did cut rates 50 basis points at the last meeting. David, when do you assume that kicks in—other than the psychological effect? I infer from the numbers in the Greenbook that you see it begin to have an effect on the kind of economic growth we were supposing sometime in the second half or at the end of the second quarter of next year. Or what is the lag? We have already bought an insurance policy. The question is, Is it enough? So I’m curious as to what your assumption is as to when that actually takes grip in the economy.

  • It starts immediately—small. The mean lag is about four quarters, so you get about half of the effect in the first year and the other half of the effect in the second year; and that, at least according to the models, feeds in relatively smoothly over that period.

  • Did it bump up your estimate for the second half of next year in terms of economic growth from where it would have been had we not cut rates 50 basis points?

  • Are there any other questions? President Rosengren.

  • Just a follow-up on your comment about thinking about the release and of uncertainty and risks around inflation and unemployment—it looks as though the nomenclature that we’ve used in the assessment of risks was in part intended to get at the direction of policy in the future. It does seem a little awkward if the language that we’re using in the assessment of risks looks different from these fairly stark histograms. Since we haven’t gone through this experiment before, seeing histograms that aren’t consistent with our statement seems like an awkward start.

  • Well, one point to make is that the histograms aren’t in the public release. They won’t see those data per se.

  • They will be. The histograms will be published—yes?

  • Not the asymmetry of the risk, but it will be described.

  • I think this emphasizes the importance of the point that Brian made about the opportunity everybody has to revisit their submissions, particularly in terms of how they think about the risks to the forecast in the wake of a possible move in monetary policy. We haven’t talked about this in much detail before, but if the expected path of monetary policy in the near term changes between when you submit and when we clarify, then that might change a bit and, I would think, would affect what those histograms might look like in terms of the balance. It won’t affect them dramatically, but it will affect them a little. I’m not sure it will make them converge fully to the way alternative A, section 4, is written now.

  • Just to follow up on that—we submitted this last Friday, right? I don’t know if people will know when we submitted it, but it’s not a huge amount of time between when it was submitted and when we are making an announcement. So if there were a larger span of time, I would think that awkwardness wouldn’t be as great.

  • I think your point about the awkwardness is right.

  • I have a process question. In this go-round, are we going to talk just about the policy decision in the statement, or are we supposed to include the discussion of the projections?

  • It’s a separate agenda item.

  • So it will be a separate discussion. That’s what I thought. Okay.

  • Yes. Are there any other questions for Brian? If not, President Lacker.

  • Thank you, Mr. Chairman. While the intermeeting period has seen a mix of good news and bad news, a substantial amount of good news, the net effect on my near- term outlook, as I said yesterday, has been negative, stemming largely from the continued slide in housing. I have come around to the view that the slump in housing activity is going to be deeper and more prolonged than I had thought. Many of you have read the intermeeting news as positive on the outlook. My sense of my shift in views is that I have come closer to the median view of my colleagues around the table about the second-half outlook. Taking all of this on board, my assessment would be that, even given the 50 basis point reduction in the fed funds rate at the September meeting, the current funds rate is probably somewhat more restrictive than is desirable. So I would favor a 25 basis point reduction in the fed funds rate at this meeting, along with a statement that contains no tilt, as in alternative A; and I endorse the passages in blue that highlight the inflation risks.

    Let me first comment on market expectations. You know, they have to influence our decision, but we need to be careful about that, obviously. I don’t think we should ever be afraid of disappointing expectations or putting a new outlier in Brian’s chart. At the same time, those expectations are a fact, and we have to take into account the likely effect of our action on markets. As I think Governor Kohn said yesterday, they do contain within them some market assessment, some information, that we can’t ignore or that we ignore at our peril. So that had some influence on my decision as well. I’m thinking that there may be a need for an increase sometime next year if the economy strengthens more than in the staff forecast. In addition, I have not lost sight of the risk of inflation increasing. In particular, I’d take this opportunity to endorse the public statement of Governor Kohn that an increase in inflation would not be in the public interest. [Laughter]

  • I stand by that.

  • That would be intrepid of you.

  • Well, I’m hoping that inflation drifts down enough so that pessimists about adjustment costs will swing around to endorsing a lower numerical objective for inflation. If we see signs of firming inflation or firming growth early next year, I would hope for a firmer policy stance accompanied by appropriate communications. So my preference today is a component of a preferred policy rule that has us responding with alacrity should things firm next year. That concludes my statement, Mr. Chairman.

  • Thank you. President Hoenig.

  • Thank you, Mr. Chairman. I’ll take just a second here because I realize how difficult today’s decision is and that it involves balancing contrasting and rather elevated risks. One risk is that the current housing and financial environment will cascade the real economy immediately into a slowdown, and that would cost output and jobs and prove after all to involve little effect on rising inflation. To do nothing in this instance, I realize, would at least seem to be a poor choice.

    The other risk, however, is that inflation is less contained than we would like to think. Aggregate demand is at least holding and looks firm. Commodity prices, not just energy, show a rising trend and are unusually high. The dollar has depreciated, as Brian pointed out, and if it continues to fall, will add to further inflationary pressures. Unit labor costs are increasing, and these inflationary factors are real and show themselves to be present in TIPS measures and in terms of expected inflation, as I mentioned yesterday, in a lot of anecdotal discussions that I have had. To ease further in this instance would also seem to be a poor choice.

    I realize that the intensity of these two countervailing forces complicates our decision, and I know that I might be only one view on this, among others who have a different view. But as I see it, we are having to choose a policy that involves tradeoffs around these two choices. One choice is to ease now. We would take an action that is oriented toward the short run, and the immediate easing could be looked at as an insurance policy, as I have heard it described, designed to mitigate further the possibility that the current upheaval in the housing and financial markets will lead to an unwanted slowdown in the real economy. If the economy strengthens, as President Lacker has pointed out, we can always reverse that easing—so we tell ourselves. The other choice is to hold firm now. Inflationary risks, as I’ve described above, are real; and while they are unlikely to affect us in the short run, they most certainly could affect us in the longer run if we continue to ease. If inflation above acceptable levels gets entrenched into the U.S. and global economies, make no mistake—as we all have experienced, this has happened before. Inflation does creep in. It doesn’t jump in—it’s a little at a time. Also, if we ease today and things don’t turn immediately, we will be reset for another discussion of what the market expects when we come to December. The cost to remedy inflationary momentum later is also high— indeed, as we all know.

    So what is the better choice, then, when adjusted for long-run and short-run considerations regarding these elevated risks? Personally, I think that we should hold where we are. When I analyze how the U.S. and global economies are performing and look at the projections for these economies that we shared here, I judge this to be the better long-run decision. We moved rates down significantly at our last meeting. Indeed, we front-loaded the action to ensure a strong result. Also, we are very close to neutral, if not there, I realize, and we need to be slightly firm if we are to hold inflation and inflationary expectations better in check. It strikes me that inflation is at the higher end of what most individuals prefer. If we need to move down, we can do so later. It is, in fact, easier to lower rates than to raise them back up. Our issue today, I think, remains for the moment principally liquidity, and we should remind the world that we have stepped up to this issue and reassure it that we are ready to meet the need further—and other needs, if necessary. But for now the risks on both sides of this policy decision are elevated, and we need to wait, watch, and be ready to act depending on how events play out.

    As to the statement, then, I prefer alternative B for the most part. I would prefer something along the lines in paragraph 4 that “financial markets remain uncertain,” and then “thus the Committee will continue . . .” or paragraph 4 in alternative C. Thank you very much, Mr. Chairman.

  • I’m sorry. You prefer C-4 to B-4, is that what you said?

  • Including the balanced risks?

  • Well, what I really prefer is that we go back to our last statement but say, “Financial markets obviously remain uncertain, and we will watch them. Thus . . .,” and then bring in “the Committee will continue to assess the effects of financial and other factors,” without the downside risk.

  • So that is basically the September assessment.

  • Thank you. Governor Kohn.

  • Thank you, Mr. Chairman. I agree with President Hoenig that this is a difficult decision between staying where we are—and I would have downside risks to growth on that—or moving 25, but with more-balanced risks. I think it’s difficult—we are balancing a number of very difficult things here. On the one hand, the incoming data, as Dave has emphasized, have been, if anything, stronger than we anticipated on the real economy and include data for September and some hints for October in here. On the other hand, many members of the Committee, myself included, have a sense that the real interest rate is still a little to the high side of where it needs to be to promote full employment and stable prices over time. We expect the output gap to move over the next couple of quarters, as housing holds down growth relative to potential. We expect inflation to stay low and inflation expectations, if anything, perhaps to edge down as people realize that inflation is going to stay at 2 or below. I wonder whether the 50 basis points we did last time was enough to offset the tighter credit conditions that have developed and the market disruptions that are going to impede, particularly, the secondary markets for nonconforming mortgages for some time. This stuff isn’t going to go away soon, and it’s going to weigh on demand.

    Partly as a result of this sense, many of us think that the risks to growth are on the downside but are still worried about inflation expectations. The risks to growth on the downside are compounded, as the Chairman and Brian pointed out, by the sense that financial markets are still fragile and there is the tail risk of getting into the feedback spiral between concerns about the real economy and reactions in financial markets. Not the most likely outcome, but certainly a tail risk.

    As I tried to square several circles at the same time, I came down on alternative A: reducing 25 basis points but going to risks being roughly balanced. I see this as preemptive but not open ended. I think that combination of preempting some of the tail risk, getting a little ahead of the possibility, and buying this insurance is helpful. But going to roughly balanced risks takes out the open-ended sense that we’re on a path toward ever-lower interest rates. I see the incoming data for inflation as consistent with this. Inflation has been low even with today’s data. I think the core PCE has been low; the CPI is up a little but not much. I found the ECI data kind of interesting this morning. I have been a little concerned about labor costs creeping up, which you could see from some of the compensation data. But the ECI is a good, consistent measure over time. It is not totally comprehensive. Also, the fact that there is no increase in the growth rate of the ECI to me is pretty encouraging that underlying cost pressures are not building. By emphasizing our concerns about inflation—that the risks are roughly balanced—we are signaling that we are not buying into the full extent of the market expectations for our easing, and I think that is a good thing. The “roughly balanced” language will raise the hurdle a bit for ourselves to ease again in December if we have some weak data, but it won’t raise it so high that, if the data are really weak, we can’t react in a constructive way to change it.

    So putting all of this together and admitting that it is a close call, I think that alternative A—roughly balanced risks—minimizes the deviations from where we want to be, helps us send the signal about what we think might be coming and what our concerns are, and comes closest to furthering economic performance toward our objectives. I certainly agree with President Lacker that alacrity will be required. I think I actually called it “nimbleness” in the speech I gave—I want to quote myself again—and that will be very much in the forefront as we go forward next year, I agree. Thank you, Mr. Chairman.

  • Thank you. President Lockhart.

  • Thank you, Mr. Chairman. One of my life-long purposes has been to make the world safe for ambivalence and indecision. [Laughter]

  • Well, I’m gaining ground this morning. [Laughter] Having said that, I prefer that we reduce the federal funds rate target 25 basis points. My thought process is that the softening of economic activity, at least in some sectors, and the lower estimates suggest that the neutral rate of interest may be falling. The downside risks to economic growth and the evidence of lingering liquidity issues are to me good arguments for taking steps that insure against an inadvertently restrictive policy stance.

    With regard to the policy statement, I am going to continue to use the inexperience excuse as long as I can, even though we have some newer members. But just a few remarks. The language in the rationale section of alternative A most closely reflects my assessment of the situation, but I am not entirely comfortable with any of the options for the assessment of risk. The real economic outlook faces uncertainties on the downside that are difficult to characterize. Because of that, I am skeptical that we can credibly claim near-term downside growth risks to be roughly in balance with upside inflation risks, as is done in alternatives A and C. That said, I worry that the wording in alternative B would be interpreted as a rather significant loss of confidence in the economy and a signal that another rate reduction is probable in the near term. At this point, I’d prefer not to send a signal that another rate cut is most likely in December.

    Since our last meeting, expectations were centered on no change in the fed funds target today until a string of weak housing and earnings reports moved the probabilities strongly in the direction of a rate reduction. Thus, judging from the evolution of market expectations since our September meeting, the assessment of risk language in our last statement was sufficient to convince financial market participants that our decision on the funds rate is being driven by incoming data. As I said, I think the assessment of risk statement should try to recognize the uncertainties inherent in our growth forecasts—and those uncertainties are greater than those associated with our inflation forecast—but without tilting expectations in favor of a future rate cut. As I said in my remarks yesterday, it is quite possible that we will enter another period in which headline inflation numbers exceed the trend suggested by core measures. If that is even a short-lived problem, my opinion is that—and this is based on the Bluebook version—we would be well served to note that fact by adopting the language in alternative C, section 3. However, I do note that the new language, as presented this morning, in alternative A, section 3, is quite helpful because it largely incorporates the language in alternative C. Thank you, Mr. Chairman.

  • Thank you. President Poole.

  • Mr. Chairman, thank you. Two weeks ago I was pretty adamant in my own mind that the recommendation I would be offering was no change, but I have reluctantly tilted in the other direction and favor a 25 basis point cut. I have changed my mind because of really two things. First, in my discussions with our directors, in my phone calls before the meeting, and around the table yesterday, I think there has been fairly pervasive anecdotal information indicating a soft economy—not disastrously weak but just soft, certainly softer than the hard data that have been coming in. Second, the financial markets are still unsettled, and with the markets putting a very high probability on action, I am concerned about the effects of violating that market expectation. I ask myself how big a risk it would be to violate the market expectation, and I am not really sure. But I am not sure that I want to find out either. It is just not a risk that I really want to run.

    That said, it is very important that we understand—I think everybody does, but I want to state it—that there can be no equilibrium in the economy if all we ever do is follow the market expectation. We have to get out front, and we have to help define what that market expectation is going to be. I think there are a number of things that we could do coming up to the December meeting not only in the statement but also in speeches and comments that we make. I favor the alternative A language for the most part, but I am a little concerned about the assessment of risk statement. If it is really true that upside risk to inflation is mantra, then what is operative in the statement is downside risk to growth in terms of shaping market expectations about the Committee’s direction in the future.

    As I try to think through the downside risks to growth in the coming weeks or the next few months, we can’t really do anything about what is going to happen in the remainder of the fourth quarter or the first part of next year. But when I think about the period over which the policy action makes a difference, I am not sure that the risks are really skewed to the downside. We could well see the recovery of normal market processes proceeding, plus the lower interest rates, giving more or less equal probability in the second, third, or fourth quarter of next year of a 50 basis point upside surprise or a 50 basis point downside surprise in the growth rate of GDP.

    So I would like to see us work on the language for paragraph 4. Given that paragraph 3 includes risks to inflation, we might concentrate just on the growth risk, and we might say something like, “After this policy action, the upside and downside risks to economic growth in coming quarters are roughly balanced.” Because I think this will be the thing that the market keys off of in terms of a hint about our future policy or likely policy direction. I would like to see us go as far as we can in the direction of saying that we think we’ve done enough, at least for the time being. Let’s sit, wait, and see what happens, providing that the information comes in more or less as expected and we don’t have any big surprises on that.

    Looking further ahead, we are at a point where we are really within reach of bringing the inflation rate down to about 1½ percent on a long-run basis. We’re also at a point that, in coming meetings, we could throw that option away. If we go too far or hang on with lower rates too long, then we’re going to end up eighteen months from now looking at a situation in which we have rekindled some inflation pressures. So this is a critical time in terms of not going too far and also of being willing to take back some of these cuts. I guess the way I look at it is that, if 5¼ percent was the appropriate funds rate in July or June, before the financial distress really took hold, it probably can’t be too far off where we want to be once the financial turmoil is largely over. We are going to end up substantially below that if we cut 25 basis points today. So I think it’s important that we not go too far and that we try to set market expectations that we have this much longer run view and that we’re not just reacting to the very short run data on the real economy. Thank you.

  • Thank you. President Plosser.

  • Thank you, Mr. Chairman. The last time we sat around this table, I and many of you argued for what the markets described as a surprisingly aggressive 50 basis point rate cut. At that time, the baseline Greenbook forecast was for 25 basis points, 25 in subsequent meetings, and then flat thereafter. Our rationale was that we were trying to act preemptively, trying to get ahead of the curve, to limit some of the potential spillover effects from what we then believed to be a weakening housing market, perhaps a somewhat softer labor market, and the financial turmoil. We also argued that higher-than-normal tail risk loomed out there, that it was associated with the financial market meltdown, and that it warranted aggressive action to help forestall the possibility of that. In the forecast that we submitted in September, and we all submitted a forecast, the appropriate policy varied. Nine of us submitted appropriate policy as being consistent with the Greenbook, which was 25, 25, and then constant. Of the remaining eight, seven of us had a 50 basis point cut in September, which we did. Many of those, including myself, had some further cuts to the funds rate but further out in the economy, more like in ’08, later in ’08, and ’09, as we move toward more-stable inflation, expectations coming down, a recovered economy, and so forth. I was certainly in that camp as well, and in fact, most people ended up with a funds rate forecasted at either 4¼ or 4½ percent—little differences but not much. In September, only two of us anticipated appropriate policy as dropping 75 basis points before the end of ’07.

    Of course, we all have the luxury, fortunately, of changing our minds in response to data and other things, and certainly all of us are doing our best to read the tea leaves of the economy, both aggregate and within our regions, and that influences the color and texture that we put around our forecast. We all work very hard at that, and I respect those efforts. But I think it is important that, as a Committee, we enforce discipline and systematic behavior on ourselves as our views evolve, particularly as those views influence policy choices. Without that discipline, without that systematic behavior, I find it very difficult to figure out how I am going to communicate to the public about what monetary policy is doing and why. It makes both our commitment and our credibility, either to inflation or to employment growth, more difficult to substantiate. It makes transparency in general more difficult. All of those things—commitment, credibility, and transparency—are important elements of what contributes to a stable economic environment. Now I have tried to impose that discipline about policy on myself by focusing on the incoming data, trying to focus on how those data cause me to revise my outlook for the real economy, not for tomorrow or next month particularly but for the coming quarters. After all, the monetary policies we have just been talking about operate with somewhat of a lag. In that sense, I think there has been a lot of discussion by myself and others around the table that we are data- driven, that we are forecast-based in how we think about our policy choices, and that we try to take a somewhat longer run view. I think that view is important to communicate to the public.

    I suspect that at the end of our last meeting—certainly I can speak for myself—many, if not most, of us probably would not have anticipated that we would cut again at this meeting. Perhaps some of you did. Certainly, your appropriate policy paths in our forecast at the last meeting didn’t suggest that. But we wouldn’t have anticipated cutting unless we thought that the outlook for the economy had noticeably deteriorated. So what has really happened since the last meeting? Well, the collective forecasts that we submitted—in terms of risk assessments, ranges, medians, and however you want to look at them—hardly budged. The Greenbook forecast didn’t change very much. The economy generally had better-than-expected news on many fronts—not hugely better but certainly the surprises were on average to the upside for most of us given our forecast from last time. I thought we generally agreed that the risk of serious financial meltdown, while perhaps it hadn’t vanished, had mitigated at least somewhat. As a consequence, neither the Greenbook nor our collective FOMC forecasts moved very much. To the extent that they did, they actually moved up a little.

    Based on that forecast and on the data that came in, I’m in a very troubled position in figuring out how to justify in my mind additional rate cuts at this meeting. Had this meeting been held two weeks ago, as President Poole suggested, before the market’s reaction to the write- downs in some of the financial institutions, before the fairly dramatic flip-flop in the fed funds rate futures market about the assessment of a future rate cut, I certainly would not have been in favor of a rate cut at that time, and I suggest that each of you should ask yourself the question that Bill did: Would I have chosen to cut rates at that time? I certainly would have also resisted the temptation, arising from those data and what has happened over the past two weeks, to be in any great rush to think we needed to call a special meeting of the FOMC to consider additional rate cuts. My attitude would have been that these financial markets are volatile and they are bouncing around an awful lot, we understand that there are risks, but let’s wait and get the data on the real economy and see how it is evolving and make appropriate decisions at the time. What worries me is that we run the risk of being whipsawed here by market expectations or by the financial markets that are moving around in a very volatile way. That leaves me with some concern that we may be putting ourselves in a position of either responding too much to these volatile markets or being accused by markets of being bullied by the financial markets.

    So at this point, my take is to say that we are going to get a lot of data between now and December. We are going to get two more employment reports, as we have discussed. We are going to get some more information about retail sales and consumption. I would prefer to keep my own approach to discipline-based policymaking by looking at the forecast and waiting for the data to tell me whether my forecast deteriorated significantly. If it has, I will be the first to argue for an additional rate cut in December if I think it is called for.

    Right now we have a difficult time justifying a decision. On what grounds are we going to justify it, particularly in a more systematic fashion? I think that creates problems for us. As we have already been discussing, it is creating somewhat of a problem in the language of the statement, and I will come back to that in a minute. But I also think that, without a very articulate rationale in the data and in reasoning that supports a systematic approach to policy, we run the risk of being capricious or arbitrary. I think we are in a situation, as Kevin Warsh said yesterday and Tom Hoenig spoke about, when many of us view inflation risks as more fragile perhaps than they have been recently, particularly more fragile in an environment in which we are cutting rates. I think that we run the risk, more so now perhaps than in other times, that inflation expectations might be at risk. I don’t want to raise those inflation expectations. They are much harder to get down. You can’t act nimbly to deal with movements in expected inflation.

    I also think we have to ask ourselves the question—and this ties into the balance of risks issue—if we choose to cut today when our forecast hasn’t declined and suppose the data between now and December look as they have for the past six weeks—kind of in line with what we expected, not much different one way or another with nothing really falling out of bed or booming—on what basis in that meeting would we choose or not choose to cut again? At this meeting we have had a hard time grappling with the criteria that we are using. If we are not very explicit about those criteria, we could find ourselves in the same boat next time. I think this is related to Tom’s point that, once we start on the path of making explicit what our expectations are or what the market is going to be expecting us to do without having a firm basis for saying we are doing this because of X or Y, we are going to find ourselves in an awkward position in December.

    So I share Brian’s concern about the assessment of risk language in alternative A being balanced when it seems to be out of touch with the way the Committee has described things. Again, I think that puts us in an awkward position of trying to balance those two things. So with that, I appreciate the time, Mr. Chairman. On net, I am troubled by a cut today. I would much prefer to wait until December and to assess the data that come in. If a 50 basis point cut in December is required, so be it; but I feel as though we would have a firmer basis then for making that decision. Thank you.

  • Let the record show I am asking this with a smile. President Plosser, you are not really suggesting that your colleagues, if they have evolved in their view, are undisciplined, unsystematic, or capricious in their rationale for that evolution, are you?

  • No, I am just saying that the communication of that rationale is tricky, and I did say that people are making their best efforts to make their forecast. I explained my view of how I discipline my forecast and how I discipline my policymaking.

  • Just to clarify about the submission you presented— you have, as I think you said yesterday, a 25 basis point cut early in the year, in the first quarter?

  • First quarter perhaps, but that was conditioned on inflation and inflationary expectations remaining well behaved.

  • Thank you, Mr. Chairman. I found the choice between alternatives A and B to be a tough call. I’ve struggled with this over the past week, and in the end I find the arguments for alternative A for a 25 basis point rate cut more persuasive. I have several reasons for this judgment.

    First, as I argued yesterday, further action to my mind is appropriate, even leaving aside the recent financial shock. With output near potential and inflation near my objective, the stance of policy should be close to neutral, and while we can debate exactly what the equilibrium real interest rate is—that’s an important discussion to me—it appears that, even after our action in September, policy is somewhat restrictive. I agree with President Plosser’s view that we need to maintain some consistency in our thinking over time, and I would say that I expressed this identical view at our last meeting and said at that time that I did envision a 75 basis point cut during 2007. So my views haven’t changed, and the data that we have seen in the intermeeting period haven’t suddenly pushed me in the direction of this move—instead, if anything, slightly away from it, but I regard those data as largely uninformative. So my views really haven’t changed about this, but it seems to me that the argument that we should be moving toward neutral does allow for quite a bit of flexibility in the timing of an additional rate cut. It doesn’t have to be something that we do in October. We could do it in December, or it could wait until January. So that argument in and of itself doesn’t completely persuade me that we have to do it today.

    But I do think it would be prudent to act today for a couple of reasons. The first has to do with the effects of the financial shock of the summer. When we came into the meeting last month, we faced credit conditions that were quite restrictive, and our goal was to offset that shock to avoid a significant economic slowdown. I think the favorable inflation results over the previous six months did give us the flexibility to take strong action, which we did. My judgment is that we have had some success so far. Financial conditions appear to be easier than they were in September, and arguably, as I said yesterday, I think we may have roughly neutralized the shock. But an important element in our success has been the decline in Treasury rates along with the further decline we’ve seen in the dollar and the increase in equity prices since we last met. Those changes are supported by the market’s expectations that we will ease further at this meeting and beyond. In other words, if we don’t ease today as the market expects, then rates may move up, and that raises concern to my mind about whether we will have accomplished the goal of offsetting the restrictive effects of the recent financial shock. A second reason for easing today is the asymmetric nature of the risks we face in achieving our goals. I do see some upside risk to inflation although I have not read the recent increase in five-to-ten-year inflation compensation as really reflecting a market perception of a deterioration in long-term inflation expectations. In my view, the more serious risk is the one that our Chairman discussed yesterday of unleashing negative nonlinear dynamics in the real and financial economy that could be difficult to reverse. Conditions in housing markets and their possible implications for housing prices and, in turn, consumption are at the center of these concerns. In addition, although liquidity in financial markets has improved, I think the markets are still rather fragile and subject to further sudden disruptions.

    I’m comfortable with the wording in alternative A, including the balance of risk assessment. Through the fed funds rate being 25 basis points lower, I do see the upside risk to inflation as being roughly balanced with the downside risk to growth. I think the statement does give us sufficient flexibility to respond in whatever way we need to, and that includes the possibility of taking back some of this easing should there be upside surprises. I do think that it’s important to signal to markets that this is not yet another step in a planned series of continuing rate cuts.

  • Thank you. President Rosengren.

  • Thank you, Mr. Chairman. I, too, find myself torn between alternative A and alternative B and have been anguishing over them much of the last week figuring out where I come out. The economic outcome detailed in both Boston’s and the Board’s forecasts with no change in interest rates seems reasonable. The evidence since the last meeting indicates that there may have been more strength in the real economy than we expected in the third quarter; and financial markets have been recovering, but they are certainly not back to normal. The risks are clearly on the downside, and our forecast expects a weak fourth quarter. So certainly an argument for alternative B is to cut when it is clearer that the fourth quarter will be weak or we have data of more-significant collateral damage from the housing sector. The argument for alternative A would seem to be that we should take out more insurance against the downside risks. The costs for such action are not great; and given the downside risk, some additional insurance is not unreasonable. However, we have discussed the modal forecast at some length, but our rigor around the tail is quite limited, making it difficult to determine how often and how much insurance should be taken out against downside risk. Thus, I prefer to wait until there are more data that the economy is weakening, which I think is likely to happen.

    Just to comment on the assessment of risks—when I look at the uncertainty in terms of GDP growth, I think of the histograms. That’s quite stark. If the major concern we have is downside pressure on prices of housing, which is my concern—that housing prices continue to decline and housing gets much worse—I think 25 basis points is probably a small premium to pay. But I doubt that I would change where I would put the weighting even with a 25 basis point cut. I think the housing scenario that is detailed in the Greenbook will still be there whether or not we cut the 25 basis points, and my guess is that between now and December we’ll have more confirmation that it is a concern.

    Whatever we do in terms of the language, we need it to be consistent and accurate, and I am a little worried about the language in alternative A being consistent and accurate with what we are going to portray in our uncertainty of risks if we show those histograms. So if we’re showing the histograms, regardless of whether or not we have a 25 basis point cut, I think the alternative B language is more consistent with at least what we put down. Unless people think that, with the 25 basis point cut, there is a big shift in the uncertainty and the risks to GDP growth, I do worry about how that will play out in the market and what kind of a tension there will be.

  • If the language in alternative A, section 4—the assessment of risk—were simply about the likelihood of rate changes in either direction and didn’t say anything about growth and inflation, would you view that as inconsistent with the assessments in our projection?

  • No. If the goal is to try to convey that we aren’t necessarily going to cut rates again, that is different from an assessment that there’s a downside risk that housing will get much worse. So whatever we put in that should reflect what we actually want to convey and certainly shouldn’t be inconsistent with histograms that we’re going to be publishing at the same time.

  • I asked this, Mr. Chairman, because I’ve said this before on a couple of occasions: The awkwardness about the assessment of risk statement is that it talks about rates but it talks about them using a code about growth and inflation rather than talking about the rates themselves.

  • Just for clarification—and, Brian, you can correct me—we are not going to publish the histogram showing the risks. We will describe verbally, generally speaking, the Committee’s views. President Evans.

  • Thank you, Mr. Chairman. I find myself in agreement with so many things that have been said already, no matter how the conflict may appear. This is a close call. I think it’s a tough decision. I have, frankly, gone back and forth in thinking about the nuances here. It is the case that the data have been better than I expected at the time of our September meeting. The ADP report this morning sort of continues that. It didn’t have to work out that way, but 106,000 is a pretty strong number. I’m still trying to figure out exactly how to project that to payroll employment. The bad news that we have seen in terms of surveys has hardly been surprising, given our views and what we would have expected in September. So I found myself grappling with many of the ideas that President Plosser was talking about earlier in terms of data dependence and our decision and discussion in September. One view is that 50 basis points in September was seen as enough, and we would be judging our future actions on the basis of deterioration in our forecast— data that come in worse than that or some information about risks that are hard to quantify but we thought would be important. I haven’t seen the impetus for that. So that’s one view. Then the other view is the risk-management perspective. Maybe many people, President Yellen included, thought that more than 50 was required but only 50 in September was really achievable without startling markets. So there’s a tension there.

    Mr. Chairman, I really enjoyed your speech in St. Louis, when you talked about different responses to different types of uncertainty. With the sort of standard Brainard response, when the economy might be changing but we have a lot of uncertainties, we go slowly and we look at it. Juxtaposed against that are other types of risk, such as the financial risks, where things could be moving much more quickly and we don’t fully appreciate the potency of policy and what we can do against certain tail risks. In that case, the robust control type of approach suggests that we should do more; then in the event that we find that policy is very effective, we can reverse it. Of course, reversing it is important—we talked about that last time, too.

    It seems to me that we’re close to the limits of initial risk management. That’s how I’ve thought about this, and I thought that Governor Kohn’s comment that we shouldn’t view this as an open-ended commitment to risk management was very important. After all, how can you ever argue that more insurance won’t help against some catastrophe, some unforeseen tail risk that hasn’t yet happened? There is a lot of value to setting a benchmark stopping point for how you would respond to that tail risk. Then if other evidence intervenes to make you reassess the likelihood of that tail risk or the cost of it, then there’s reason to do more. But I think there’s value to putting the benchmark out there. Another way to stop this insurance is if we end up balancing the risk. The actions taken move our inflation risk up, and we’ve had some concerns about that. I’m actually pretty comfortable with the inflation risks, and people have reminded me that I’m pushing this pretty far. I’ve taken more comfort from our ability to forecast inflation than perhaps others would—it seems to have a pretty reasonable trajectory. But as we continue to move toward more- accommodative policy in the hopes of addressing a tail risk, I think those risks go up, too.

    As I looked at table 1 and I struggled with the rate decision, it seemed to me that the balance of risks was more important, and what got my attention early on was the risk assessment under alternative A. I thought it was important to project our assessment that risks were a little more balanced. I can easily imagine that we’ll have reasons to reduce the fed funds rate because we think that r* is lower, but it’s purely opportunistic to take advantage of that now. We could have done that several meetings ago, but we can do it opportunistically. So I’m okay with the action of 25 basis points today, and I think that the balanced risk assessment is important. We probably do need to think about the linkages with our projections; I hadn’t really taken full account of that myself. That will put me and, I hope, many of us much closer to the views that President Plosser expressed in terms of data dependence because I think that the risks will be balanced in how the data continue to roll out in the intermeeting period. So thank you, Mr. Chairman.

  • Thank you. Governor Mishkin.

  • Thank you, Mr. Chairman. I take the view that a cut today is justified on the basis that keeping rates where they currently are leaves us with a lot of downside risk. That’s exactly what I’ve been hearing from other people. If there is, in fact, downside risk, why not move today? I would be very troubled by not changing and still using the language in alternative B because it says there’s a lot of downside risk. Then there is the problem of why we are sitting there and not doing anything. On just the straight economic issues, I think that a cut could be justified. In particular, I was one of the people who advocated a cut at this meeting. In fact, I was being a bit—I don’t know what the right word is—flamboyant when I suggested a cut of 50 basis points and then that we might move back up 25 basis points. I was trying to make the point that I was very concerned about the macroeconomic risk, the potential for a downward spiral of financial disruption leading to problems in the real sector and then feeding back on the financial markets, and really felt that we needed to keep ahead of the curve.

    What is key is that the response to our actions on September 18 was almost textbook perfect in the sense that the markets really got the message that we were not going to be asleep at the wheel. As a result, the macro risk was taken out of these markets, and we achieved exactly the kind of signaling that we intended. So clearly I do not feel that we need to get ahead of the curve in that sense, the way I did last time. Also very important in my thinking about the macro issues is that I think inflation expectations are contained. We have been able to achieve that. In particular, there is a bit of concern about inflation compensation having gone up in terms of the spread between nominal rates and TIPS. But the analysis that I’ve heard from people who are much more knowledgeable about the way yield curves operate is that the way to interpret this is that there’s an increase in uncertainty about what inflation would be. I hope that our communications strategy will help in that regard. In fact, that provision of information will actually help the markets in the current environment. Furthermore, the Michigan survey has, if anything, gotten better in terms of inflation expectations. I always get a little nervous about asking regular people what they think because if you ask them what they’re watching on TV, they’re never going to tell you that they’re watching Vanna White. They’ll tell you that they’re watching ballet or the History Channel. [Laughter] But I don’t see a problem there, and that the ECI numbers came in the way they did also gives me some confidence on the inflation front.

    I am very concerned about Charlie’s issue—I always call President Plosser “Charlie” because we have known each other such a long time—about being led by the markets. It is very important that we not get into that box. I worry about that, but I am a bit less worried about it in this context in that we affirmed last meeting that we were not being led by the markets because we sure as heck surprised them. So the fact that we don’t surprise them this time to me does not create a pattern that we’re just doing whatever the market tells us.

    I also want to raise a consideration that I think deserves some emphasis, which is thinking about scenarios of what may happen. This relates to what Bill talked about, but I want to be a little more explicit. I want to ask myself what might happen as a result of our policy actions today and what the implications might be for the economy. In particular, let’s think about the case of our doing alternative B. In that case, I think there is a significant probability that the markets would react quite negatively and that the macro risk that we took out by our action on September 18 might creep back into the credit markets. I’m actually very worried about the skittishness of the credit markets. When you’re in a financial-disruption type of world, things are much more nonlinear. So I would have no disagreement at all with Charlie on the issue that, if you are in a normal situation, then you definitely do not want to be led by the markets at all. But I think that we do have to worry about market considerations a bit more in the current situation, when we could have a negative reaction to what we do. That creates problems in the credit markets, and then that weakens the outlook for the economy and there is an issue about what do we do then. If we then cut in December and cut more than 50 basis points, that’s really bad. Or if we don’t cut and things head south, that could be very, very problematic.

    But I do not think that cutting today will have very negative effects on inflation expectations. However, I do think that the issue of going forward is very important, and this relates to the statement. I strongly agree that we need a much stronger balance and an indication that our action today—if we do what I suggest, which is to cut 25 basis points—does not mean that we expect to cut at the next meeting or further out. We really need to make that very clear. The statement will be one part of it, although I worry very much about the issue that we always put much too much weight on the statement and that we don’t have other means of communicating. I’m not sure what to do about this; I’ve been thinking about it and haven’t come up with any good answers. But there are issues in terms of how other central banks communicate things beyond the statement that are hard to communicate with fifteen words rather than something more extensive.

    So my view—and it is reflected in my projections—is that, if we cut 25 basis points, it’s not clear to me that the balance of risks is so much to the downside. I think the risks to the downside have been very substantially eliminated—not that they aren’t still there to some extent. I think they are but not really as much, and I think that is true of the actions on September 18 and today. Because I’m never very precise in my language—as you know, I tend to say pitiful things— somebody will craft this much better than I do. But I’m wondering about the assessment of risk. Let me make a suggestion, although I’m not sure this is the best way to do it. We need to emphasize that it’s not just the upside risks to inflation but also the downside risks to the economy that have lessened. It is also important when we have a 25 basis point cut not to say to the markets that we’re so worried about the economy. One possibility might be, for example, to say that “the Committee judges that after this action the upside risks to inflation roughly balance the somewhat reduced downside risks to growth.” So we would not be saying that there isn’t some downside risk but that it’s not really as strong as we thought. It’s certainly not as strong as we thought on September 18. But I think that, with this kind of reduction in rates, it would reduce the risk. Thank you, Mr. Chairman.

  • Thank you. It’s a little past 10:30. Coffee is available. Why don’t we recess until 11:00? Thank you.

  • [Coffee break]

  • Let’s recommence with President Fisher.

  • Thank you, Mr. Chairman. Flying home last time I thought it would have been nice to have been at the Bank of China and cut 37½ basis points. [Laughter] I don’t want to repeat what has already been said at the table because so much has been said. But it is important to note that, since we last met, the data on the economy are stronger. Some of us have expressed concerns about inflation. Credit markets, as I said yesterday, are at least in remission, if they haven’t fully recovered, and are in better shape than they were. Listening to the arguments, I took particular note of President Poole’s comment that he’s not sure that he wants to find out what the market reaction would be if we did not cut rates 25 basis points. I lived through three market corrections as a market operator, 1974-75, 1987, and 2001. I lived through a dollar crisis as a public servant in the U.S. Treasury. And I haven’t heard a person yet talk about some of the risk. The Riksbank, by the way, last night and the Mexicans raised rates; but more important, the Europeans are talking tough because of their concerns about inflation. I am worried about the pernicious effects of inflation. I think President Hoenig hit the nail on the head when he said it’s easier to lower than to raise.

    I would simply counsel, since I don’t have a vote, that we should consider the value of keeping our powder dry. It’s very dangerous in my opinion for policymakers to be driven into a cul-de-sac by futures markets. In response to the question I asked earlier, the markets have been all over the lot. I am worried that we have too much of a discussion about what markets expect of us since the fed funds rate is designed—as you have made very clear in your speeches, Mr. Chairman—to affect the economy and should be so driven. So were I to have a vote today, I would be thinking along the lines of Presidents Hoenig, Plosser, and Rosengren in terms of their expression. Everybody has been grappling with this issue. We would make a great wrestling team. We are thinking very hard about these matters. But in the balance of risks that I see, given the improvement in the data, I’m tempted to consider the value of another cut as insurance against weakness. Yet we took a huge step last time—we took out a double-barreled shotgun—and it seems to be reflected in the data that the staff projected. I’m a little worried not so much of being accused of being asleep at the wheel but of having our foot too heavily on the accelerator if we cut 25 basis points. Thank you, Mr. Chairman.

  • Thank you. President Pianalto.

  • Thank you, Mr. Chairman. I, like several of my colleagues who have gone ahead of me, find myself torn between alternatives A and B. I also wrestled with many of the issues that President Plosser articulated so well. I left our September meeting thinking that the 50 basis point cut pretty much put us close to where we needed to be given our outlook, and my outlook hasn’t changed much in the past six weeks. As I said yesterday, I’m not certain about whether the weakness that I’m hearing or have heard about during this intermeeting period is simply evidence of the business conditions that are unfolding as I thought they would or whether there is more weakness than I anticipated in September and more weakness than I have reflected in my projection. The Committee has said repeatedly and for good reason that our decisions are going to be dependent on the incoming data, and as many have already said, the data seem to be confirming my outlook. But financial markets do remain on edge. Moreover, many of the incoming data are backward looking and, hence, don’t provide me with great comfort when we’re trying to ascertain what might lie ahead. The projection that I submitted for this meeting, as I said yesterday, is rather fragile, and it wouldn’t take much additional market turmoil or deterioration in household and business confidence to push my near-term growth outlook even lower. So I think this risk is the predominant one that we face today, and it is a risk that has weighed heavily on my deliberations for this meeting.

    The assessment of risk language in alternative B addresses these concerns, and I was contemplating supporting no change in the fed funds rate and the language in alternative B. However, in the climate that we find ourselves, I believe that just saying that the risk to the outlook is to the downside isn’t enough. I do think that we should be taking out some insurance against possible further deterioration in the near-term outlook. So I support a 25 basis point cut in the fed funds rate target today, and I support the language that’s embodied in alternative A. I believe that the language does acknowledge the likely slowdown in the economic expansion. It also acknowledges that, if we take this action today, the risks are roughly balanced, and importantly, it suggests that further policy easing may not be forthcoming. I also like the language that was added regarding the recent inflation numbers. Finally, as Governor Mishkin pointed out, it is difficult to express all of these issues in our short statement. It seems to me that we can draw some comfort from the fact that the minutes will be providing the public with a greater understanding of the different views that were expressed today and some of the challenges that I wrestled with. Thank you, Mr. Chairman.

  • Thank you. President Stern.

  • Thank you, Mr. Chairman. As I commented yesterday, I think there’s a respectable chance that by the middle of next year or so the economy will be growing again at a reasonable rate, and because of the lags between our actions and their effects on the economy, there is not a lot we can do about what happens in the intervening period anyway. It seems to me that those kinds of considerations are at the heart of something like the case for alternative B. Leave well enough alone. There has been some progress in the financial markets, and that step—that is, taking no action today—would in my view be consistent with long-term achievement of the dual mandate. But I am an economist. So on the other hand, financial conditions are still unsettled, and it’s difficult to know the degree of restraint that changes in the cost and availability of credit relative to conditions back in June will have. It might well be prudent—this is the case for alternative A—to take additional steps today to err on the side perhaps of doing too much since it seems to me that it is inevitable that a lot of uncertainty is associated with the economic outlook.

    Weighing those two cases, I come down in favor of alternative A but with misgivings, and let me share those misgivings. I think that there is some chance that financial conditions will remain unsettled for several more months at a minimum, and so in some sense that part of the environment may not change very much in the next few months. You pointed out yesterday, Mr. Chairman, that an important ingredient in the Greenbook forecast is a cessation of the drag from housing roughly around the middle of next year. Let’s suppose that, in fact, turns out to be precisely correct. That’s all well and good, but we won’t recognize that it has actually happened with any degree of confidence, given the flow of data, probably before August or September at the earliest even if the anecdotes get a little more positive. So I can see a situation in which the circumstances we confront over the next series of meetings don’t look very different from the circumstances we’re confronting today. I think we have to be very careful of not letting good intentions on a decision-by-decision basis get into what turns out to be a policy error as a consequence of an accumulation of those kinds of decisions. It’s the time-inconsistency problem obviously, and that gives me some pause even though I come out at the moment in favor of alternative A.

    As far as directive language, for a variety of reasons that others have expressed, I am uncomfortable about characterizing the balance of risks the way they are characterized in alternative A. I think that a way we might consider going, although it’s not the most elegant solution, is perhaps just to drop that first sentence under alternative A. We succeeded at the last meeting in making it clear that we were data dependent, and you had significant swings in probabilities of funds rate reductions over the intermeeting period. I think this would leave us in that circumstance. As President Pianalto pointed out, we have the minutes coming out, and we may well have the communications package, including the narrative, coming out with it. Obviously there’s a three- week lag, but it seems to me that that would be an effective way of communicating what we want to communicate and perhaps of putting the attention on that communications package, which I think would turn out to be valuable.

  • Gary, I’m a little puzzled here. I’m not sure I understand. What I understand from your reasoning is that the key issue is that you don’t want to give an impression that we are going to keep on cutting.

  • So if you take that first phrase out, you’ve taken out any issue of balance of risk. My view is that the markets would interpret this as actually indicating that the Committee would be more likely to cut in the future.

  • Well, I don’t know. If you look at the language from the last meeting, we were careful not to pre-commit to anything, and it seemed to me that the markets understood the data dependence. I forget the precise numbers, but I guess the probability of a ¼ percentage point cut ranged from 30 percent to 100 percent, or more when you think of it in terms of bigger cuts, too. It seems to me that the proof of the pudding is in the eating. That seemed to work out okay.

  • But in this case, if we do alternative A, we will have cut.

  • Well, I don’t follow that. We cut even more significantly at the last meeting.

  • Thank you, Mr. Chairman. Let me be the most recent but, I guess, not the last to say that this is a close call. I suppose I take more comfort in that than some around the table because I am pleased at the progress though it is not perfect and we’re not even back to an honest view of normal in the financial markets. That it’s a close call suggests to me that the data in the financial markets are normalizing. I guess the alternative of a close call would have been to have this be an easy call, and I suspect that the only way this would have been an easy call would be if we continued to have bad data and bad sentiment in the market. So I think we’re in the realm of a close call and we shouldn’t completely rue that situation. Again, that’s probably a function of the resilience of the economy, the resilience in the markets, some time and patience, and maybe even a little good monetary policy. So I’m okay with that, I think.

    The judgment that we make on moving or not moving ¼ percentage point today matters, but it strikes me as being considerably less important than what the future path of policy is expected to be in the capital markets. So I think that the most important judgment we make is in the fourth paragraph rather than the first paragraph. Let me spend a moment on what the financial markets are telling us with a degree of certainty which, speaking for myself, is quite surprising. Again, I think they have responded to real data over the past couple of weeks. They haven’t changed their probabilities based on utterances from the Chairman or from any of us, and I take some comfort in that. I might disagree with what they’re saying, but I don’t think that they’re just giving us a mirror image of our own views. So I take what they’re saying and the certainty with which they have taken on board that we’re going to move today. It’s not determinative. It’s not dispositive, nor should it be, but the debt capital markets, at least, think that the economy is worse—worse than the Greenbook and worse than many of us feel. Again, I would say that I have to take that on board without giving it too much predictive capability.

    I think that Brian is right—given the fragility in the financial markets and given the surprise that we had for them last time, I wouldn’t want our judgments today to add to that volatility, which I think would be quite possible. In sum, I would say that I support alternative A as written on this revised page. I think that, absent having strong language in alternative A, section 4, it would look to some as though the markets dictated this outcome. I think A-4 and robust balance of risk language is important so that the markets don’t believe incorrectly that we succumb to what their wants are. I think that previously, including at our last meeting, when we spoke about uncertainty, they seemed to understand what that was—that it wasn’t that we’re just calling it uncertainty but we really have cuts ahead. For better or for worse, they’ve now learned a lesson. Uncertainty with even pretty good data led us to cut this time, if we end up adopting alternative A. So if we use that same uncertainty language, I don’t think it would have the effect that it had last time of letting folks be on both sides of the bet on whether we would have continued actions. So I’m comfortable with alternative A, paragraph 4. It is a way of addressing market expectations and addressing our uncertainties by insurance, but being very clear to the markets that they ought not prejudge nor have we prejudged the outcome next time. The references to inflation risks there and in alternative A, paragraph 3, are useful to address some of the broader concerns we have about commodities and the foreign exchange value of the dollar. So with that, I think that alternative A is the right thing to do and that it does preserve for us plenty of ability to call it as we see it when we meet next. Thank you, Mr. Chairman.

  • Thank you. Governor Kroszner.

  • Thank you. As I discussed yesterday, I take very much a risk- management approach. But I also like the way that President Evans characterized that risk- management approach as your having to think about the costs and the benefits and very much focus on the potential costs. So in thinking about the best way to go, I think about if we do or don’t move, then what are the downside risks to each? We’ve seen, as many people have said, a lot of progress in the financial markets. We have also seen a little backing up of some of that progress and a flattening out over the past couple of weeks. In particular, the one set of markets that we haven’t seen as much progress in as certainly I would like is housing-related markets. That is for me the most direct channel between financial turmoil and the real economy.

    As I described yesterday, my tail risk scenario is sort of a slow-burn scenario. It is not one in which this financial turmoil will get out of control and we will have an incredible mess so we need to cut interest rates to prevent it. I think that was more the concern and focus in our previous meeting. We have seen improvement, although I don’t think we’ve seen normalization, particularly in the housing markets. Given that we’ve had some but not full normalization and then given that we have resets coming and the tightening of credit standards, the elimination of a lot of subprime lending, the rules that we are going to put out, and the rules that the Congress is considering, regardless of how carefully we craft them or whether or not the Congress makes progress, the effect on the housing market will undoubtedly be somewhat chilling. So I see a potential slow-burn scenario in which it is valuable to be buying some insurance against that as early as possible. These problems may be peaking toward the middle of next year, because that’s when they have the most potential to have a negative effect on housing prices, which, as others have described, could have this sort of simultaneity issue or vicious cycle aspect that could lead things to go down.

    Given that we have those conditions and we have that potential going forward, it seems worthwhile to buy that insurance now. What is the cost of doing that? Of course, it is in terms of inflation and inflation expectations. As the markets have changed their expectations about what we’re likely to do at this meeting and even as they have dramatically changed their path of future policy moves, there’s very little evidence that inflation expectations, at least up to the five-year horizon, have moved up significantly. There is a question of how to interpret that longer-term change in inflation expectations; I take it very seriously, and I think we have to try to understand it better. But I don’t think that there’s an enormous cost in terms of moving now versus six to nine months from now to buy more insurance against what I see as a challenge from the recent financial market turbulence. I think there is also a concern, which President Poole raised, that if we have a fairly large surprise to the markets, it could reduce or even reverse some of the progress that has been made in some of the markets, potentially forcing us to move more than we would like at the next meeting.

    So that said, I think it is very important and very valuable that we make a move now. As other have said, it is a close call because we have to worry about the cost with respect to inflation. One way to contain that cost, as a number of people have said, is to clarify the path going forward, to show that what we’re doing now is responding not to current data but to the forecast about the data. Obviously when the markets were expecting GDP at 3.1 and it comes in at 3.9, we’re not saying that we’re reacting to current market data by making a cut. But we are thinking about the potential future effect and then trying to give some guidance through a balance of risk statement. I’m open to a modification of that statement to try to convey that we think we don’t necessarily need to do more with respect to the challenges that are coming now but we’re going to continue to remain vigilant and look at things like the housing market and other markets that have potential to have negative ramifications for the whole economy. Thanks.

  • Thank you. Vice Chairman.

  • Thank you, Mr. Chairman. I think the economy is slowing. Even the nonhousing part of the economy is slowing a bit. Housing prices are still obviously sliding down. We don’t really claim to know much about where they’re going to end up or where we are in that process, but it seems that they are falling and probably at an accelerating rate. Our modal forecast—“our” meaning from the submissions—is for an economy that slows further and runs below trend over several quarters. But if you just look at the size of the bars on the submissions, the size of that bar about downside risk to growth is very high, much higher than the bar about upside risk to inflation. There is a huge amount of uncertainty about what equilibrium is and where short-term interest rates should be over time. But I think it is fair to say that we are now at the high end of, if not slightly above, most of those estimates of where equilibrium is. Therefore, it seems to me sensible that most of our submissions had a downward slope to the path of the fed funds rate going forward over this period.

    The question then is not principally whether to move but when and what signal of a change or no change should come. I think it is a very close call, and everything that I say I say with a lot of unease and discomfort. If the choice is to stay firm but to signal more explicitly than we did in September that we’re likely to move further, that seems to me just a bad choice. I think it is likely to amplify many of the risks that you are all worried about and it probably would make people more tentative about coming in and doing what they’re going to do to let this thing work through the markets because they will be living with our acknowledgement of substantial downside risk without action and uncertainty about whether we’re going to move. I think you might argue that a decision not to move with an explicit asymmetry in the balance of risks to growth would lower the path going forward and add to that uncertainty in some sense.

    I do not think that the markets are so fragile now that they could not take an adverse surprise of this magnitude, even though it is a very, very large adverse surprise relative to recent history. I don’t think that’s a good argument for moving. I think the best argument is that we’re still in the midst of what is a very delicate and consequential asset-price adjustment in the U.S. economy with a fairly dense, thick, adverse tail on the potential implications about the evolution in housing. The Chairman spoke eloquently early in the year—I think it was early in the year, but maybe it was late last year—about the pattern of history and the acknowledgement that weakness tends to cumulate, and you don’t really have a lot of experience with sustained periods of below-trend growth without falling into a more substantial rise in unemployment rates. Those risks have to be substantially greater when you have an economy going through this kind of asset-price adjustment.

    I found these charts discouraging, not reassuring, in the sense that we’re anticipating a slowdown in the rate of growth of credit for the economy as a whole that’s comparable to ’01. I think the pressure on bank balance sheets is probably—it’s hard to make these statements with any certainty—greater than it was in ’01. At least a reasonable expectation is that it’s going to be bigger than it was in hindsight in ’01, and I think you have a much more substantial impairment to the functioning of what Kevin calls debt capital markets—the industry around the design of securitization and structured finance, et cetera, which has been so important to the way credit gets originated and moved. That disruption could take a long time to resolve, and I think that just has to amplify the density of the adverse tail and the growth outcome, certainly with more uncertainty at this time.

    I think that it is hard, but the better course of valor is to move today, and I like the language in alternative A. Let me just go quickly through the arguments against it that I find most compelling. The best argument against is the fear that many of us spoke about—that even though the inflation numbers have been reasonably reassuring and we haven’t seen substantial erosion in inflation expectations that we can measure, there is a bit of deterioration in the feel, in the psychology. We have to be very careful that we don’t add to that through our actions or people’s expectations about how we’re going to behave going forward. But we should take some comfort from the fact that the market is pricing in more than 100 basis points of easing over the next two years. You have to believe that a fair amount of that is already reflected in breakevens, reflected in what people are willing to pay for insurance against adverse inflation outcomes, and reflected in the dollar. It doesn’t mean that if we validate part of those expectations you won’t see erosion, but we should take some comfort from that.

    Just one more thing. We have been through three years of very substantial relative price shocks in energy prices, commodity prices, and some other things. Those hit an economy that was growing over the period above most estimates of potential, and we have had pretty good performance of underlying inflation and inflation expectations in that context. So even though we look forward and we see what’s happening in commodity prices, energy prices, and the dollar as posing some potential risk of upside pressure on input costs, that is hitting the economy in a very different state. The experience of those last couple of years should give us a fair amount of confidence in the judgments we bring as to how we think about inflation going forward. I think we have less uncertainty around an inflation forecast than we would have had two or three years ago and still substantial uncertainty around the growth forecast inevitably given what the economy is going through. The balances suggest that it is better to move today because of that. As I said, I’m comfortable with the language in alternative A. I would be comfortable with Governor Mishkin’s amendment to A—I think that helps a bit. I have a lot of sympathy for all the arguments against the first sentence in alternative A in any form, but on balance, I would say that we just don’t want to take the risk that, by omitting some statement like it, we cause people to price in a steeper slope to that path going forward. It is something that we should try to avoid, and the best way to achieve that is the language in A. Thank you.

  • Thank you. Thank you all. Well, it has been said many times, but this is very, very close, and I’ve thought about it quite a bit, obviously. I have a lot of sympathy for President Plosser’s very clear analysis. There have been good data since the last meeting. We have talked about the importance of spillovers. We have not so far seen evident spillovers from housing into other sectors. We did take a preemptive action in the last meeting. Inflation is a concern. I think not immediately, but some of the factors like input costs are there, and market expectations alone are obviously not a reason to move. All of those things are valid, and I have thought about all of them.

    So why do I favor a cut? Most of the arguments have been made. The downside risks are quite significant, if the housing situation, including prices, really deteriorates. I think part of the difference between what the market sees about housing and what we see is that we are a little more sanguine about price behavior than the market is, and a decline in prices has effects both on consumers and on the credit system. So I think that risk is fairly important and may swamp some of the other issues. There is some new information that is relevant. The senior loan officer survey and other information suggest that credit conditions are tightening and that this will have an effect, I believe, in some significant markets, certainly including housing. Other information, like consumer sentiment and consumers’ views of the labor market, suggests some slowing and some weakening. The decline in sentiment in the markets in the past two weeks is very interesting. On one level I feel as though we failed to communicate somehow; however, I don’t know exactly where the mistake was. The markets seem to be responding to information about earnings reports and projections of future activity and so on, both in the financial sector and in the real sector, and as a number of people have said, I don’t think we can entirely ignore that information. So I think there are some good reasons on the real side to take out a bit more insurance, as has been said. I agree with the Vice Chairman that the credit markets probably could stand the surprise, but they have become somewhat more uncertain, and I think their basic problem is macro uncertainty. It has to do with concerns about tail risk, and that is something that we can, I think, address a bit.

    The point has been made a number of times, first by President Yellen, that the current rate could be construed as being slightly restrictive and that creates an argument for a somewhat lower rate. An additional argument is that the core inflation rate has come down some since last year, and so the real federal funds rate on that basis has gone up.

    Finally, an argument that I would bring to you is about tactics, and the Vice Chairman also alluded to this. Most of the paths that we submitted include a path for policy that is perhaps slightly lower than the current one, and the question is how we do this. If we take alternative B, which I think is the most obvious alternative, on the one hand we don’t take an action and on the other hand we express alarm about the economy and say we’ll probably be cutting in the future. That makes calibrating how the longer-term expectations will respond to that very difficult. I think it would, on balance, tighten expectations a bit because we didn’t act, but it does create some uncertainty. The advantage of alternative A, even as we take a cut, is that we will, I hope, curb expectations for sustained additional cuts through several mechanisms. First, in the economic growth paragraph, we have switched language from actions “intended to help forestall”—very indirect—to “should help forestall,” suggesting that we are now more confident in our ability to prevent bad outcomes in the economy. Second, we have—and this will certainly be noticed—taken note of energy and commodity prices, among other factors, and we have highlighted our concerns about inflation. Third, the rough balance of risks certainly indicates that we are not eager to cut again quickly unless the data clearly support it. So a lot of this is tactical, about how to take control of expectations— you know, how to manage the market’s views of our policies. And I just felt a bit more comfortable with taking the action but then using that to recalibrate our balance of risks. For what it is worth, 75 basis points of easing has been pretty much the standard Fed medicine for financial crises ever since 1970 or so; in that respect we are in good company. That’s my recommendation—25 basis points with alternative A. Any questions or comments?

  • With the Mishkin amendment or without?

  • What exactly was the Mishkin amendment?

  • It was to add a phrase before the downside risks to growth to say, “The Committee judges that the upside risks to inflation roughly balance the somewhat reduced downside risks to growth.” It would give a flavor that, in fact, our actions have reduced the downside risk.

  • I worry about that. For example, by saying that the action “should help forestall” instead of “is intended to forestall” I think we address that.

  • I didn’t feel strongly about this. It was just maybe I’ll do it in speeches afterward.

  • The other comment that came up, I think President Hoenig and President Stern mentioned it, is not exactly softening but emphasizing the uncertainty that surrounds our judgment. So another possibility, and I have always regretted making suggestions on the statement, is that we could take the first sentence from the September paragraph 4, cut out the phrase “since the Committee’s last regular meeting,” and say, “Developments in financial markets have increased the uncertainty surrounding the economic outlook. However, the Committee judges that . . .,” and we could put that at the beginning of the assessment of risks. Is that as appealing? I don’t know. I guess my prejudice is, unless there is strong sentiment, to stay with what we have because that is what people have talked about.

  • I think the problem with that is that developments of financial markets on balance since the last meeting have been reassuring. The panic has receded. The disruptions are more contained, and so I don’t think that works.

  • Okay. I withdraw that. Any other comments? All right. If not, Ms. Danker will call the roll. Let’s just note for the record that for the first time we will be voting on the entire statement.

  • I will start with the directive from the Bluebook. The language is as follows:

    “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 reducing the federal funds rate to an average of

    around 4½ percent.”

    Then the statement, which I will not read in its entirety, is as written under alternative A in the revised October 31 table that was handed out.

    Chairman Bernanke Yes
    Vice Chairman Geithner Yes
    President Evans Yes
    President Hoenig No
    Governor Kohn Yes
    Governor Kroszner Yes
    Governor Mishkin Yes
    President Poole Yes
    President Rosengren Yes
    Governor Warsh Yes

  • Thank you very much. I need to have the Board for a moment.

  • [Meeting recessed]

  • Let me just address quickly the last item on the agenda, which is communications. On October 19, you received a memo from the subcommittee that describes the latest round of changes to the projections. I won’t repeat what they are, but if there are questions, we can take them. I don’t believe we received any comments on this round. I’ll talk in a moment about getting this ready for prime time. But what I’d like to talk about now is, as I discussed in September, asking the Committee for a consensus to release these projections. They would be released with the minutes of the current meeting on November 20, which is one day less than three weeks because Wednesday is the day before Thanksgiving. So we would release it on Tuesday. The necessary explanation of the projections—what they mean and how to interpret them—would be in a speech that I propose to give on November 14. That speech would be preceded by a press release from the FOMC describing the plan in general terms. You received copies of the press release. Michelle, do we have other copies? Does anyone need it?

  • It was not changed from what you received. I have extra copies if you need one.

  • All right. If anyone needs a copy, Michelle is happy to give you one. I would talk in general terms about this approach, why we’re doing it, what the implications are, and so on. I’d be happy to share my draft remarks with anyone who would like to look at them. Let me be clear—I do not plan to reveal any of the data from the projections. They would be released to the public for the first time in the minutes, and so it would obviously be very important for everyone not to release that information. President Plosser.

  • Your speech is November 14?

  • My speech is November 14, and the release of the minutes will be on November 20. That would give people some time to digest the ideas. Yes?

  • And the press release?

  • The press release would be on the morning of November 14 before my speech. On previous occasions when the FOMC has announced communication changes, they have followed the meeting by some weeks. It’s not unusual for that to happen.

    There are questions about timing, whether we should think about doing it later. We had some discussions about this. My own view is that this was the most convenient time. January would run into the monetary policy hearings, for example. If there are serious problems in the markets or anything like that, I am prepared to add material about the markets or to substitute another speech—to do whatever is necessary to address that issue. But I do think that, besides the natural rhythm and the fact that we are about as far as we are going to get in fine-tuning this, the fact that this has appeared in the press suggests that we should just go ahead and get it out soon, if possible. In a moment I’m going to ask you for your comments, and then I’ll ask you for your consensus—first, on releasing the material and, second, on the speech and the rollout of the press release.

    Let me just say that, as Brian indicated, we do have until tomorrow close of business to revise our projections. This counts. This is the real thing. Please take a look at your projections in light of this morning’s data and in light of the discussion today. In the future we will not be doing this every meeting, only four times a year. So in that respect it won’t be such a burden as I know it has been. So I urge you please to do that. Let me now open the floor for any comments or questions about projections, the rollout plan, or anything. President Poole.

  • I have two comments. Brian talked about the skewness, which I gather we are going to describe in words but not use the histogram. I have the following question about the skewness. I was one of those who said “broadly similar,” and here’s how I would look at it. You start with some point estimate. Let’s make it simple—next year, fourth quarter to fourth quarter. You ask yourself how far down you would have to move the point estimate such that the probability to the right and the left would be about the same. If the amount that you would have to move that point estimate is a fraction of a standard error, then I would interpret it, roughly speaking, as that there are symmetrical risks. I just have the suspicion that people who are talking about “weighted to the downside” are in a way mixing up the first moment and the third moment of the probability distribution. So I worry that, as I think Brian was worrying, that this will give a message that’s going to interfere with the communication that we also want to offer about the policy path. That’s the best way I can think about it—to ask about how far you would have to move your point estimate to make the probability to the right or left roughly the same. I would also note that the Greenbook, for example, has reduced the point estimate for next year ¾ percentage point from June to now, roughly speaking. Maybe I can even ask Dave about whether he thinks the distribution around the current point estimate is very skewed, and I could also go on and ask how far down he would have to move that point estimate to make the probability to the right and left about the same.

    The other point that I want to make—and it is really in many ways a much more important point—is that, when we disclose the 2010 inflation projection and presumably, Mr. Chairman, at the February monetary policy hearings—assuming that some member of the Congress actually asks you a question related to monetary policy, which is not a given—[laughter] a very logical question either then or sometime in the future would be where you personally stand, what your number is in that projection. I would very much like to know that answer in advance because I would be more than happy to conform my estimate, which I regard as a target, to the number that you would throw out. I think there’s an issue here. In an inflation projection for 2010 that varies from roughly 1.5 to 2, the numbers are materially different, and I think that question is going to come back at us over and over again. So I won’t say any more about that, but I do believe that I would hate to be in a position of having to explain why my number is different from yours.

  • Well, let me say first on the mode and the median, you make a good point on the first issue about risks. The question to ask yourself is, Given your most likely forecast, on which side are the largest and most costly deviations most likely to occur. In which direction are the risks skewed? That is the way to think about it.

  • Well, I would keep separate the cost from the distribution itself.

  • No, I don’t think so. I think you ought to put in some costs—

  • I’m not saying I would ignore the costs, but maybe we need to be clear about what this probability distribution is supposed to mean. I thought that this was supposed to mean simply the weights that I would give on various possible outcomes in terms of the probability that the forecast might be 1 percentage point below or 1 percentage point above the central tendency, however I described it. Now, I agree that a full analysis requires that you also add the costs to those, but I would interpret that as not being part of the projections process for GDP and inflation but rather you’d fold that in through the policy decision as to how you weight those various possible outcomes. But I have interpreted it all along as being really a statement about your probability distribution on the outcomes unweighted by the severity of the outcome.

  • Okay. I think that the answer would be pretty similar in either case. So we can discuss this at another time. On your second question, I think I’m kind of a special case because people will overweight what I say if I give a number. So I would not give a number, and what I would say is that what matters are the views of the broad Committee, and I don’t want to distinguish myself from the broad Committee. It is a Committee decision process. If individuals want to give their numbers, I suppose that’s okay. But I would urge you to consider the externality a bit, which is that there will be some desire to figure out who is where on the distribution in order to assess who is holding which type of policy preference and so on. Certainly many of us have often given our views of what price stability is and so on. I don’t think I want to prohibit that, but my recommendation would be to be a little fuzzy, a bit careful about being too precise and too sharp about that number.

  • Well, it won’t really matter very much with me because I will be out of here before too long, but I have long been on record as bringing the number down, and so I can’t back off that. That’s what I believe, and so I’m going to keep that.

  • But I’ll disappear from the calculus next spring anyway.

  • Mr. Chairman, I appreciate your answer. The one worry I have had about this exercise, which is much better the way it is now expressed and presented—I think it is ready for prime time—is that we might be divided as to our individual instincts. We do operate as a Committee. We have said this a million times, but I’d like to reiterate it. To me it’s the last bastion of integrity here in Washington. To go down a path of who is saying what just threatens to tear us apart, and I would urge your response on everybody else as well. Thank you for the spirit in which you answered that.

  • Anybody else? President Lockhart.

  • Has there been any reaction to the Greg Ip story? Have we received any feedback from the principal audience for the projections?

  • Yes, and there have been no problems. The response has been positive.

  • Yes, Vice Chairman. I’m sorry.

  • I want to come back to President Poole’s question. President Poole, you said a fraction of a standard error. How large a fraction of a standard error would you want to use as a basis? Really, I’m not sure what the standard error is in this context. But just in terms of how you think about this, how large a fraction of the standard error?

  • Well, I was one of those who put down B—that both the distribution and the skewness were broadly similar to the past twenty years. So I came out that way. I was trying to offer a way to think about this issue and, for those who believe that the probability distribution is way over on one side, a way to think about it: How far would you have to move that point estimate? I wasn’t trying to give the answer; I was trying to give a way to approach the question.

  • Mr. Chairman, maybe we should clarify just this one point. Did you leave the question about—I don’t know what this chart is called; it is not going to be in the addendum to the minutes—what those bars show about the balance of risk? Is it about just the probability of the outcome or about the probability of outcome and the costs or consequences of the outcome?

  • May I ask the staff, do you have institutional memory on this question?

  • I am not sure what the question is exactly. What is the question?

  • Is the skew that determines the risks simply the probability of outcomes, or is it the probability weighted by the cost of certain outcomes?

  • Well, I think it is a matter of how the members interpreted it in responding. [Laughter] The memorandum to the Committee asks whether the risks around your projection for each variable are weighted to the upside, weighted to the downside, or broadly balanced.

  • I think the balance of risk statement in the announcement has had the utility weight on it; there have been times when the Committee was more concerned about falling to one side or another. But I at least interpreted the forecast as simply whether there were skews to one side or another. If I may have the floor to talk a bit to President Poole’s point. I think we do say in the statement that there are upside risks to inflation and downside risks to growth. So I would be concerned if the whole Committee shifted to the middle because then I think we would be contradicting the announcement that we made, so I think your point is good. I mean, you ought to be sure that you really do think there is downside risk to growth and upside risk to inflation, or whatever, and adjust it for the policy choice that we made today.

  • The utility cost is relevant in the statement, and you can’t take a balance of risks unless you compare them in terms of cost. There is no other metric by which you can compare them. So in that case, it has to be cost-weighted. But I think it is more or less equivalent—the univariate answers you are giving about mode versus median.

  • But if we view the projections as being a statement just about the probability distribution of the various outcomes, this might be an important point for you to explain in the speech that you give because the whole thing is labeled projections—I guess we have been calling it a “projections exercise”—and so I have interpreted that as a discussion of the numbers.

  • I think we won’t go too far wrong by interpreting it as a probability distribution in the shape of the probability distribution for outcomes.

  • That’s the way I have interpreted it.

  • Okay. President Lacker.

  • At the risk of introducing further moments of the probability distribution into the discussion, have we been instructed as to whether our projection is a mean or a maximum-likelihood estimate?

  • I think our standard procedure is that it is a modal.

  • A maximum-likelihood estimate.

  • The memorandum to the Committee says, “Please provide your projections of the most likely outcomes,” et cetera.

  • I’m sorry, President Plosser, we have kept you waiting.

  • It’s not important. I don’t have any comments. I just wanted to say that I think the staff has done a great job and the subcommittee has done a great job. This is a very important step forward for us, and I am strongly supportive of it. I want to thank Governor Kohn, Janet Yellen, and the other members of the subcommittee for getting us here and you for taking this step forward. I believe that, as we go through this time after time, it will be refined. We will stumble over a few things and the language is going to be tricky, but I just want to commend the Committee for taking this step.

  • Let me also commend Governor Kohn, President Stern, and President Yellen for their excellent work. We really appreciate it. Governor Mishkin.

  • Thank you. I just want to return to the point that the Chairman, President Poole, and President Fisher raised. In my conversations, people have expressed different views at this juncture about what the optimal long-run inflation rate is. People know that I am a 2 percent kind of guy, and I know good people here who are 1½ percent kinds of guys. But in talking to people about this, I hear a lot more consensus and that people don’t feel strongly. So I would be in concert with what President Poole said. If the Chairman said, “How about X?”, I would be more than happy to say, “Giddyap, I am with the Chairman.” So, again, my colorful language. But the key point here is that I think it would be very helpful at this juncture that people really not emphasize differences but that, in fact, there really is consensus on this Committee. That takes one of two forms. One is if you had something in the past, that’s fine; but you can say that you had that in the past but you are actually comfortable with where the general Committee is, and that way you can soften it. Two is a case in which somebody like me has not actually publicly talked about an inflation goal. In that case, I would keep my mouth shut on the issue. In terms of this initial launch—again emphasizing the fact that there really is a lot of consensus on the Committee because we know that the press loves to create the opposite of consensus because it sells newspapers—the more we can be supportive and to the extent that we can look unified on this, the better off we are. I sense that is actually where the Committee is, so I would encourage it in this process.

  • I just wanted a clarification. In the explanation, will we say that the projections are based on what we have done? For example, today, given that we are having a policy move and I am not sure that everyone around the table had anticipated that move today in their path, will we be articulating that these are not the numbers that we came into the meeting with, but these are the numbers that we think after the policy action has been taken?

  • Yes, let’s do that because it will be more consistent with the statement. So let me ask everyone to rethink their risks conditional on our policy move today.

  • Sorry, Mr. Chairman, two points. One is a concern to which I have no solution. The chart that is now called chart 1, which has evolved over time, has a slight disadvantage, because it doesn’t have fans around it because we all didn’t like the fans, of having the sense of a pretty narrow range of likely outcomes for the future. I just wonder whether anybody is uneasy, given the relatively low probability that we are going to end up within those over time. I don’t have a solution to this. I was wondering whether, if you changed the scale—[laughter]. This is a concern with no real suggested solution—I apologize. My second point is more significant. Bill, I think you asked a good question. Mr. Chairman, another question that is interesting is, when asked whether the world should interpret the central tendency of the Committee at a three-year horizon for PCE inflation as the rate that is consistent with the Committee’s long-run view of price stability, how will you answer it?

  • It represents the diversity of views on the Committee about that, with the additional caveat that not everyone may necessarily believe that we will approach their ideal level of price stability even in three years, conceivably. So it is a mixture of elements, and that’s what I will talk about. Again, if you would like to look at the speech—

  • No. I think that is consistent with how it is described and what is discussed, but it just goes to the point that, Bill, you raise, which is for some of you your optimal horizon is always going to be two years or three years. But you said all that could be said, I think, about that.

  • I’m sorry, but I need to understand what you just implied. Are we to go back now and redo our projections for this meeting under the assumption that we took the action today?

  • If you wouldn’t mind, yes.

  • And appropriate policy going forward.

  • Okay. But it’s not what I based my decision on.

  • Tom, if you took a view about what appropriate policy was last Friday and you have a chance now to assess, in light of what the Committee did, what appropriate policy is going forward, whether that has changed, and what implications that change has for your forecast—isn’t that the way to say it?

  • But the whole point of the process was to prepare us for this meeting, and now I am going to go back and reassess the process I went through in light of what took place in this meeting. If everyone is comfortable with doing that, then I would be happy and able to do it. At least I understand that we are all going in the same direction that way. So I am fine with it, as long as that is what, in fact, we’re doing.

  • But the Greenbook won’t be changed. This confuses me a bit. I wasn’t quite clear—I thought I was, but I guess I wasn’t.

  • We can do whatever we want as long as we all agree to do the same thing. [Laughter]

  • If that’s it, then I’ll go back and do it. I just want to make sure that’s what we all agree we’re going to do. If that is, then fine; but I didn’t have that understanding before you made that statement.

  • Is there an inconsistency in adjusting a forecast after the meeting when the minutes are the minutes of the meeting and the forecasts informed the judgments that were expressed in the meeting?

  • No, I don’t think so. It is based on the information in the meeting, including the data we received this morning.

  • I’m not sure I see minutes reflecting subsequent actions or subsequent decisions.

  • We’re releasing this with the minutes?

  • We’re releasing it with the minutes. It’s not part of the minutes.

  • Oh, okay. Good point.

  • It’s like an annual report that has updated information in it. As long as everyone is doing the same thing.

  • I hope, President Hoenig, that you won’t be in this situation too often. [Laughter]

  • I’ve got a long record, and I haven’t been in this situation too often. But I have been in this situation before.

  • Any other questions or comments? May I have the sense of the Committee to proceed with the release? Thank you very much. I appreciate it, and I appreciate everyone’s hard work and cooperation. I think this is a very important step, and I am very pleased with the outcome. Let me just describe now the sequence of events. I will now give you the date of the next meeting, and I will adjourn the meeting. Laricke Blanchard is here to talk briefly about congressional issues for us, and the lunch for Cathy Minehan begins at 12:30. Okay? So our next meeting will be Tuesday, December 11. The meeting is adjourned.