Thank you, Mr. Chairman. I favor alternative A—no change in the funds rate and a balanced assessment of risks designed to leave market expectations concerning the path of the funds rate roughly unchanged. Oops, I made a mistake, there is no A. [Laughter] So I propose to create it by changing the wording of the first sentence of alternative B, paragraph 4, to read, “Both downside risks to growth and upside risks to inflation are of significant concern to the Committee.” As it is currently worded, B(4) downplays the downside risks to growth, which have intensified since our last meeting as the credit crunch has worsened and emphasizes inflation risks, which have moderated slightly as oil prices have fallen. The assessment of risks in alternative B, as it stands, is unbalanced and—as Brian just pointed out and the Bluebook does also—is more hawkish than the primary dealers and most market participants generally expect. So it is likely to shift the fed funds futures path and other interest rates upward.
I see no case, at this juncture, for signaling that we are likely to adjust policy upward before the end of the year. Indeed, there is a non-negligible probability, to my mind, that the next move will be down and not up. There is already significant slack in the labor market, and with the economy expected to grow at a near-recessionary pace in the latter half of this year, the unemployment rate is poised to rise further. This growing slack is working to contain inflationary pressures as evidenced by the stability and low level of wage growth. I expect that growing slack will continue holding down wage inflation going forward. Long-term inflation expectations seem relatively well contained, and core inflation has been stable for the past several years. Finally, a major component of the surge in headline inflation—oil price increases—has finally started to show some sign of reversing direction. Although the real funds rate remains quite accommodative by the usual metrics, we are clearly not in a business-as-usual situation. We are in the midst of a serious credit crunch that has, again, worsened during the intermeeting period, as exemplified by the developments at Freddie and Fannie and the other things that many of you have pointed to in our last round. We are likely seeing only the start of what will be a series of bank failures that could make matters much worse. Given these financial headwinds, it is not clear to me that we are accommodative at all; I agree, Mr. Chairman, with the comments you just made on this matter.
Given my preference for an inflation target of around 1¾ percent and equal welfare weights on the inflation and unemployment gaps, I view the Greenbook policy path and forecast as a roughly optimal trajectory to the attainment of our goals. Although core inflation exceeds the level I consider consistent with price stability, unemployment also exceeds the level consistent with full employment. Given our dual mandate and a forecast that envisions a growing unemployment gap, coupled with declining inflation under the Greenbook funds rate path, I see no case for jolting expectations in such a way as to, in effect, tighten policy now. I feel especially strongly about this in view of the major downside risks to the economy from an intensifying credit crunch.