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.