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

Thank you, Mr. Chairman. I put a very high weight on policy regularity, and I believe that improved regularity has had a lot to do with policy success in the last quarter- century. But it is worth discussing this for just a minute because of some of the issues you will have to face in the context of signaling. If we were to cut rates today in an intermeeting action, immediately the market would be wondering what happens on January 30. Are they going to just stand pat on no change, then, on January 30, or will there be more? Those issues would be very difficult to resolve by any of us. We would not want to make a flat statement that we would rule out further action on January 30. On the other hand, it would be very uncomfortable in explaining what that would be. So we would increase volatility in the markets and increase questions about our policy strategy and policy direction. So I think it is wise not to act today. I think we should reserve those actions for days or conditions when immediate action is required that can’t wait three weeks until the next regular meeting.

Now, in terms of the signaling issue—and I share all the concerns that have been expressed both about inflation and about the state of the real economy—next week we get important information on the real economy. We get retail sales and industrial production. We also get housing starts and permits and the PPI and the CPI. One reason for maintaining a policy strategy that focuses on reserving the decision to the time of the regularly scheduled meeting is that we can say that at that time we will incorporate all the information at hand and not try to make a judgment in advance of that information when we don’t really have to reach that judgment. If today were the regularly scheduled meeting, I could support 50 basis points for the reasons that people have been saying. But it’s not a regularly scheduled meeting, so you’re going to have the same problem in terms of signaling that we would have if we were to make an intermeeting decision. Now, you could avoid this issue by talking about baseball, I guess, or some other subject; but, in fact, that would be totally inappropriate, so you’re going to have to say something. You can’t be totally noncommittal. If you look at the options market, there is apparently a 0.6 probability of a 50 basis point cut on January 30, when we make that announcement. I would certainly not favor trying to nudge that dramatically one way or the other. It seems to me the most important thing to communicate is the overall strategy that we follow. If you were to quite deliberately nudge that a lot higher, trying to push that probability to 1.0, then you could be—we don’t know, but you could be and we could be—in a very uncomfortable position if we got outsized increases much higher than anticipated in the inflation numbers that come next week. Indeed, you could have upside surprises in the real economy numbers as well. Then, having almost committed ourselves to the 50 basis points on January 30, we would be in the very uncomfortable position of how we take that away. So it seems to me that the signaling strategy should be to concentrate on the way in which we reach decisions by incorporating the best information that we can gather and the most thorough analysis that we can apply to the problem and by making the decision at the time that we have the regularly scheduled meeting.

If the data on the real economy continue the trend that we have already seen and if the inflation numbers are more or less as expected, the market is going to bid up that probability of a 50 basis point cut. If we then reach exactly the same conclusion, we will have a very good synchronization of our policy and market expectations. It seems to me that what we don’t want to do is produce a signal that then produces a risk of an immediate conflict between that signal and the incoming data. Thank you.

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