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

Thank you, Mr. Chairman. As others have said, the choice among these alternatives, particularly A, B, and C, is not really a choice about the effective rate. It’s a choice about our clarity, our conviction, and maybe most important, our readiness in announcing a new regime. As I described yesterday, I think the zero lower bound is not zero, and so there are risks particularly in these markets of going there or threatening to go there. So the balance of my suggestions and edits come from the zero phobia. [Laughter]

First let me talk about C briefly. Alternative C is a sort of way station. It is our last chance to describe the old regime and to pivot to a new regime, whether the new targeted rate was 25 or 50 basis points. But seeing that there doesn’t seem to be much interest in that, I won’t try to reconcile the music and lyrics of C, which announces a target and then says we’re going to miss it; but I had a couple of suggestions to try to bring that together. So let me confine the balance of my remarks to the choice between A and B.

I think in alternative A we are all-in. It makes the new regime explicit. It is likely to be somewhat of a surprise to markets and puts a large burden on all of us—particularly you, Mr. Chairman—not only in the next few hours but really for the next days and weeks in describing with great rigor what the new regime is. I think we’re up to that, but it is certainly a tall task at a time of great uncertainty in markets. The way I would try to make that task a little easier is through various channels—suggesting that we are in some ways revealing the new target in paragraph 5 by suggesting that the implied effective target is 25 basis points, given what our change is on the discount rate and the interest rate on reserves. So that, I think, has a way of making the transition to the new regime less massive than it might be and reinforces my zero phobia point. I think that’s one way in which the bold, new regime with a lot of explanation in the next few weeks can at least be not as scary to the markets in the next couple of days.

What about alternative B? If we were to go in that direction, I’d make one modest suggestion. In the first paragraph, I would insert the word “between”—so “the Federal Open Market Committee decided today to establish a target range for the federal funds rate between zero and ¼ percent”—to suggest that you’re not going to be at that endpoint. Now, I’ll admit that’s not a massive change, but it makes me feel a bit better about my phobia and about how markets, banks, and others might react knowing that that is a point you do not want to cross. So a suggestion there.

Now, on your open question, setting a range in terms of the optimal level of inflation or not, I’m not crazy about a range. But if we have a range, I think it is scary, lurchy, to include it today, and so I wouldn’t do it. Conditionality, I think, is fine. I don’t feel strongly about our considering Treasury securities. I do like Governor Kohn’s suggestion about deleting “to continue” because bold new regimes aren’t continuations of what we’ve done. They’re bold and new. So I think that’s an important change by Governor Kohn. Thank you.

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