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

Core inflation has come down recently. But as I mentioned earlier, my sense is that it could well rise again. In any event, it doesn’t seem likely to fall much further. So I think we have to position ourselves to do something about inflation when we are more certain that the soft patch is behind us. I support the actions in alternative B. I support Vince Reinhart’s language from yesterday. I am sure there will be more amendments put on the table. I don’t want to start now by commenting on everything that has been put on the table. I will just say that, as we recognized at our last meeting, if inflation fell, we would have a problem characterizing inflation, and core PCE inflation has indeed fallen and could well go below that number on Friday, according to the staff. So it seems appropriate to recognize that improvement.

The difficulty, of course, is how to do so in a way that respects the fact that we haven’t yet decided whether our objective for inflation is 1½ or 2 percent. This is what motivated my letter to the Committee last week. I didn’t think the first draft of alternative B was sufficiently agnostic on the question. My advisers and I put our heads together, and we couldn’t figure out a way to rewrite the statement to acknowledge the decline but not tip our hand toward preferring one objective or another. So that is why in my letter I proposed that we go ahead and make a decision by choosing between language consistent with 1½ and language consistent with 2. After all, we are widely seen to want an inflation rate between 1 and 2, and we communicated that via language in our statement expressing displeasure with inflation below 1 and, more recently, expressing displeasure with inflation above 2.

Sure enough, however, some people with far more expertise in the mysterious art of drafting FOMC statements seem to have found a way around this, and the revised statement seems to finesse this pretty well—the language “moderation in inflation has yet to be convincingly demonstrated.” In other words, we don’t have to say how we feel about 2 percent inflation because we are not really sure that inflation is 2 percent yet. Now, I think this will finesse the problem for the time being. Assuming that it does finesse the issue—and that is sort of a big “if”—I don’t think we are likely to be able to finesse this issue forever. If core inflation does spend some time near 2 percent, as the Greenbook forecasts, then eventually it will become convincingly demonstrated that inflation is indeed 2 percent. More broadly, the lack of a decision about our objective will continue to pose difficulties both for our statement and our deliberations, and I think it is going to be increasingly unsatisfactory to say we are still thinking about it. So I hope we can make progress on that soon. Thank you.

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