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

Thank you, Mr. Chairman. As people said before, I, too, am in favor of keeping the fed funds rate at 5¼ percent. The economy does seem to be rebounding in the second quarter. The lingering uncertainty over housing suggests that now is not the right time to take more-aggressive action. I am in agreement with that. However, the most current readings on core inflation, while they have been good—just to reiterate the point—I, too, believe there is a lot of evidence that it may be transitory, and we have to be very careful about the fact that headline inflation has not been very cooperative recently. Inflation expectations remain somewhat high from my perspective, and based on our previous discussions, that is a worry for me. I do tend to favor our announcing an inflation target. I am not yet convinced that we will see inflation expectations where they need to be to achieve my goal by the end of 2009.

If we look at the projection narratives prepared by the Committee members, we see that a majority believe that the flat fed funds rate will get us to a PCE core inflation of 2 percent or slightly less by 2009. If my own goal were 2 percent, I might be more comfortable with a flat fed funds rate going forward. In fact, even the Greenbook suggests that there is a model where that could happen. The bottom line is that I think we can’t avoid the elephant in the room. How can we sensibly talk about the forecast and appropriate policy choices, either in real time, as we do today, or prospectively, when we can’t articulate or agree upon what our objective is? In the absence of agreeing on a numerical long-run inflation objective, we, as individual members, face increasingly difficult choices in arriving at an appropriate policy stance in any given meeting and even greater difficulty conveying our Committee’s decision to the public in an informative and transparent manner.

Individuals could be advocating different policy paths either because they have different models of the economy or different inflation goals or both. At a minimum, I believe it would help our internal deliberations—and it would certainly help mine—if the causes of these differences in our projections were more transparent. If we are thinking about our forecast as a communication device, this would seem to even be more imperative. That brings me to language. I think the language in the revised alternative B is incredibly well crafted and it tries to get around the problem that we are facing in dealing with what we meant by “elevated” and how we think about this going forward. Citing growth over the past two quarters as having been moderate is a step in the right direction because it encourages the public and the markets to look through shorter-run, transitory movements. Similarly, we need to be looking through transitory movements in inflation as well. As several of you have pointed out in your comments on the proposed statement language before the meeting and as Vince pointed out in our last FOMC meeting, how we characterize the inflation outlook in our statements going forward is becoming increasingly an issue since we have not agreed on what our objective is.

I have two related concerns. The first is that, in eliminating “elevated,” we run the risk of signaling to the market that we are satisfied with the current rate of inflation, even though we haven’t communicated what that means. Are we looking forward twelve months? Two years? Three years? Are we looking backward at the past three months or the past twelve months? Are we basing our judgment on forecasts of the next twelve months? Are we concerned only about the core PCE, or are we concerned about headline PCE or some version of the CPI that is relevant to our concept of inflation? As I said yesterday, my concern is that there is considerable confusion in the marketplace about why we focus on core and what it means to us and how we communicate that. Internally, we are not clear on these issues, so how do we expect the public to divine our meaning when we are not willing to do it internally? In essence, I think there will be a great deal of speculation, even with this language, about what we mean. Will the market conclude what we think it should, or will we just accept whatever the market divines our intentions to be?

My second concern about changing the language dramatically is that it might convey to the market the notion that we are satisfied with inflation at current levels. We may reveal through our projections next month that we actually are forecasting inflation to be lower than it is today on a twelve-month basis. This was the point that President Yellen made in her memo. It creates somewhat of a contradiction in how we describe our current views. If the market infers that we are satisfied with a year-over-year core at 2 percent and then our forecasts come in at 1.8 or whatever, I think that will send some confusing messages. On the other hand, releasing the forecast later may clarify for the market what we are expecting and that may be the interpretation. But there is no way for us to know what the outcome of that is without being more specific about what our objectives are. Why do we want to create that much confusion and speculation in the marketplace about what we mean? I understand the desire to extricate ourselves from the language about core inflation, but I think we are being unnecessarily confusing and cryptic in our choice of language, and it will be difficult for us to control those expectations given the way we are trying to manage the language.

I am not going to get engaged in all the details of the wording. There must be people who are better at that than I am. But I would just like to conclude by noting that, even if we are successful—and, indeed, we may be with the current language in alternative B—in wordsmithing ourselves around this delicate problem, it is not going to go away. We will continue to grapple with it in this environment—and we are going to continue to be pushed by the markets, by commentators, to clarify what in fact we mean. So the problem isn’t going to go away even if we sort of finesse our way around it in the short run. Thank you, Mr. Chairman.

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