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

Thank you, Mr. Chairman. Reports from my directors and business contacts are consistent with what others have said this morning—that overall economic growth has slowed appreciably since the beginning of the year. Pessimism about the near-term outlook has increased. At the same time, many are troubled by the continued elevation of prices and price level increases and are apparently becoming less convinced that inflation will moderate any time soon. In my view, the deliberations this morning and the decision we make must be about, first, financial system stability—the threat to the broad economy of severe financial instability— and, second, inflation risk and the role of rate policy in response to immediate problems. One addition to the list of concerns is the continuing dollar depreciation since we met last and its role in price pressures and overall uncertainty. In the run-up to this meeting, I heard little that casts doubt on where the economy is trending. My assessment is that we have entered recession territory. Previous forecasts premised improvement in the second half on the stabilization of house prices and financial markets. Neither has materialized, nor are there early encouraging signs.

In the current circumstances, financial stability must be priority one. That said, the inflation picture has become quite troubling. Headline inflation, perhaps excluding last month, has been elevated since late summer, as have measures of core inflation, though less so. The expected easing of pressures hasn’t yet convincingly set in. A longer view leads to the conclusion that inflation has been relatively high, on average, since 2005. We must be mindful of this as we address financial stability concerns.

I mentioned the dollar’s trajectory when I listed what in my view are the relevant considerations today. I am concerned about what I perceive as growing mention of the possibility of a dollar currency crisis. Although only one conversation, I also heard mention of a developing dollar carry trade fueled by interest differentials, expected rate cuts, and possibly the view that recessionary conditions will persist for some time.

Policy is often a balancing act, but I see our current constraints as tightening. The real side has entered recession in all probability. There is increasing risk to the inflation objective. Financial stability is profoundly in play, exacerbated by the trajectory of the dollar, although to be measured about this, I think the current round of financial market problems has not yet thrown the economy irreparably off balance.

I intend to support a downward rate move today, but with reservations about the utility of continuing cuts in addressing financial stability problems. Discussion in the policy round may address this, but I will comment now that balancing our policy objectives in such a risk-laden environment may require decoupling rate policy from liquidity measures. Thank you, Mr. Chairman.

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