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

Thank you, Mr. Chairman. These are, indeed, troubling times, and I think in troubling times it’s even more important that we be as transparent and clear as possible. I think it’s time that we publicly convey that we have entered a new monetary policy regime. To do otherwise perpetuates the view that we are no longer in control of monetary policy rather than that we have opted to implement policy through a different means, particularly our balance sheet.

There’s ample room for judgment here and disagreement, but, Mr. Chairman, with all due respect, I’m deeply troubled by elements of the steps that we are taking today. In effect, I interpret our proposed actions as substituting credit-allocation policies for monetary policies. Both the expansion of our balance sheet and the fed funds rate are now determined or will be now determined by decisions about which markets or firms are deemed worthy of our intervention and support and some assessment of how much money we want to throw at them. I think we all agree that we are looking for the best policies. I think that it’s also true that best policies are based on clearly articulated goals and objectives and in credible and systematic actions to achieve those goals and objectives, and they can also be credibly communicated to the public. I feel that our approach to credit policy comes up lacking in each of these dimensions. Our goal may be to prevent systemic risk, but we haven’t clearly defined what that is or the criteria that we’re using to decide whom to lend to and when to lend to them. It’s very important for both clarity and transparency that we rectify this deficiency, or we may continue to create moral hazard and to see market after market after market seek our help.

The message from the literature we discussed yesterday is that near the zero bound our credibility and our commitment to generate inflation and prevent expectations of deflation to develop are paramount. My reading of the proposed language is that it does little to signal that commitment. Indeed, it seems to suggest that our primary objectives are and will continue to be credit interventions. Confusing our monetary policy objectives with our credit policies is not the kind of message that I’m comfortable with. I think we need to be careful not to convey to the market that monetary policy has become ineffective, and I don’t think anyone at this table wishes to do that.

President Lacker articulated the importance in the current environment of keeping inflation expectations well anchored, and measures of the base—or if you would rather, look at the asset side of the balance sheet, either way they’re both measuring the balance sheet—are a means of anchoring those expectations. I don’t think the language of the directive or the statement is clear enough in addressing either the effectiveness of monetary policy or the credible commitment to avoid deflation or even to maintain inflation near our target, which is clearly not deflation. I’m not quite as fearful of deflation as President Bullard or some others, but I think we need to be mindful and reinforce our commitment to low but stable inflation.

On the governance side, I continue to believe that the FOMC is the appropriate body for making monetary policy decisions and that replacing monetary policy with credit policies that are unconstrained by this Committee is to violate both good governance and the spirit of the operating understanding of the FOMC. Yesterday and in my memo to the Committee earlier this week, I argued that the directive and the statement should clearly state that we are in a new regime and should articulate how that new regime will operate going forward. My interpretation is that the proposed language, particularly alternative A, does help indicate that we are moving to a new regime. That’s important, and therefore, I lean in that direction. But that language fails to articulate how that new regime will operate, except to say that the Board of Governors will continue credit market interventions. It says nothing about the terms and strategies that we’ll employ to do so. The implicit message is—and I think the market will clearly interpret it this way—that the FOMC has ceded monetary policy decisions to the Board of Governors, and I think that will be damaging. Such a step, in my view, is not good policy, nor is it good governance, and it may have political ramifications as well. Once the Committee sets the precedent that the Board of Governors can assume sole responsibility for monetary policy, we run the risk of losing the strength and the diversity of views that the System has always brought.

My sense is that this Committee’s setting some kind of cap on the size of the balance sheet was an effort to clarify the role of monetary policy in contrast to credit policy. I think the reaction I heard yesterday around the table was a litany of reasons why setting base growth targets is not appropriate. While that might be an interesting debate to have, that was not the point I was proposing. I was requesting that we have a debt ceiling, if you will, and that the FOMC would review and adjust that debt ceiling as it deemed appropriate—not targets for balance sheets per se. Such a debt ceiling would not prevent the Board of Governors from managing the asset side of the balance sheet via 13(3) lending. Only when unsterilized lending exceeded the debt ceiling might formal approval be required from the FOMC. Mr. Chairman, my discomfort is not a matter simply of good governance. It is more fundamentally about the lack of clarity, discipline, and transparency that the strategy is offering, and I have deep concerns.

I’d like to offer a couple of suggestions for the Committee to consider about language, and I’m working off alternative A, which I think is probably the working hypothesis here. So to answer your questions, Mr. Chairman, I have been and continue to be in favor of an explicit inflation target. Most of you are aware of that. I am sympathetic to the view, as I think President Lacker said, that slipping it in in the dead of night is probably not the right way to go about it. I would add that I do not like the bracketed phrase regarding the Committee’s seeing some risk of inflation coming in too low. As President Lacker suggested, it might cause fear in the marketplace. But I do think we could change the second bracketed statement, which was struck out: “In support of its dual mandate, the Committee will seek . . . a rate of inflation . . . of about 2 percent.” I think we could change that and heighten the importance of inflation to us and our dual mandate by saying something to the effect of “in support of its dual mandate, the Committee will seek a low and stable inflation rate over the intermediate term.” That would be short of specifying an inflation target but would reinforce the notion that we are still committed to achieving a low but stable inflation rate.

My biggest problem is with paragraph 4, which I think could be simplified greatly. I would like to emphasize that monetary policy remains in the purview of the FOMC and that we have entered a new regime. So I would propose, just for the sake of getting it on the table, that paragraph 4 be simplified to say that “the focus of the FOMC’s monetary policy going forward will be to continue to support the dual mandate and the functioning of a financial market to stimulate the economy through open market operations and other measures that entail the use of the Federal Reserve’s balance sheet.” Then I would say, “Today the FOMC affirms the expansion of the Fed’s balance sheet up to $3 trillion and will periodically review and adjust that in the pursuit of our dual mandate.” Repeating the litany of credit-market interventions that we have engaged in seems just repeating what we’ve already done. I’m not sure that serves much purpose in the context of monetary policy making at this point. I’m not opposed to buying GSEs. I’m not opposed to buying longer-term Treasuries. I think we need to modify Brian Madigan’s statement about the conditions under which we should purchase GSEs so that we are being internally consistent, but I don’t have any objection to it.

So I think we could be clearer. We could be less confusing in our policies by emphasizing again our commitment to keep inflation stable and at a positive level and clearly indicating that quantities do matter and that this Committee is responsible for those quantities and will interact with the Board of Governors and our credit policies to see that we can achieve the goals that we all decide on. Thank you, Mr. Chairman.

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