Thank you, Mr. Chairman. I support your proposal for a 75 basis point cut and the language that’s proposed for alternative A. As I said in my comments, I’m very concerned about economic growth and agree basically with the Greenbook perspective. I think we are into an adverse feedback loop, and I agree with the Bluebook assessment that the equilibrium real funds rate has dropped substantially, maybe into negative territory. I don’t believe in gradualism in circumstances like these. I think the argument for more-aggressive action now is similar to when inflation is very low and we face the zero bound for nominal interest rates. I agree with Governor Mishkin’s comments about the lessons of Japan. I think that the sooner appropriate stimulus is put in place, the less likely it is that policy will end up facing very unpleasant consequences of essentially reaching the zero bound in this case because of a prolonged and severe recession. So I’d like to see the funds rate moved down to where it needs to go sooner rather than later.
I think the appropriate level of the funds rate is one that would provide some insurance against really bad outcomes for the economy, and I don’t see this move as taking us into insurance territory yet. So I understand the constraints that you have weighed into this decision having to do with the psychology of inflation expectations and the dollar, and probably this is as far as we can go sensibly today, but I think it is important to move as much as we can.
If the moves prove unnecessary, I think we can reverse the stance of policy quickly, with a good chance of avoiding inflationary problems. I agree with Governor Mishkin’s views on risk- management policy in the face of financial shocks. We had an interesting discussion last time about the possibility that a quick reversal might mean that we don’t have much stimulative effect on spending now because we may not lower long-term interest rates enough, and I think that was good food for thought. But having spent some time thinking about it, I think that a lower funds rate will actually lower long-term rates, in part because, by reducing the probability of a financial crisis, we will bring risk premiums down, which will lower long-term rates. A lower funds rate will also be stimulative because a good deal depends on short- and intermediate-term rates. I think there are also a number of other ways in which short rates matter to spending through channels like raising firms’ profitability and cash flow and lowering the stress from ARM resets. So I strongly support the action that you recommend.