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

Thank you, Mr. Chairman. I agree with and strongly support the path that you’ve outlined for us for the reasons you’ve articulated so nicely. Let me add a few things and then give a few specifics. I think this would be a very important contribution to enhancing the understanding of the public, the markets, and the legislators about what we’re doing and why. Just to emphasize something that you just mentioned, Mr. Chairman, this systematic approach to thinking about the risks and the symmetries and the asymmetries around the risks will be very useful in our communication with the public, and a systematic and regular approach to talking about the changes in the forecast will be very useful to explaining to the public how our forecast is evolving. From my perspective, these explanations are among the most important things that we can do. The write-up that President Hoenig was asking about is key here. To my mind, the forecast is really a framework for putting all of our explanation, our write-up, in place, and is a disciplining process for explaining our thoughts about how and why the economy is evolving. I think it’s more those explanations than the specific numbers that we use to educate the public about what we’re thinking, how we think things are developing and, looking at the risks and the uncertainties, how we’re likely to react to incoming information. This would put that endeavor on a much more systematic track than it has been in the past when it has relied from time to time on ad hoc speeches by the Chairman or on mentions of it in the announcements, minutes, or whatnot. So I think this will be very good.

I agree with you that the third-year forecasts are mostly people’s preferences for the long run. I admit to being that opportunistic disinflator to whom you were referring. Maybe there are others around the table. I don’t know. I wrote down 1.9 for year three, and I might prefer something a little lower over time. But given the starting place, I thought the welfare benefits of going down to 1.8 or 1.7 or even 1.6 or 1.5 were less than the welfare costs of the potential unemployment that we would incur doing that. I’m also somewhat skeptical about the credibility bonuses from making announcements. But obviously, I wouldn’t have written down a number that wasn’t very heavily influenced by my objective over time. So the public will be correct in interpreting those third-year numbers as pretty much where the individual members of our Committee want to go even if it’s not exactly the right number. I note that the 1.5 to 2 that’s in our forecast is not that wide a range. It’s narrower than the inflation targets of some countries, like New Zealand and Australia. So it won’t contribute that much to uncertainty. I also note that in Mike Leahy’s charts yesterday the inflation compensation changes in the United States over the past couple of months were about the same as in the inflation-targeting countries. I don’t think there’s a huge amount of uncertainty about what we’re doing. Now, some people might think that the inflation expectations are tied at too high a level—I think that President Plosser pointed that out. But I don’t think that the public is afflicted with a whole lot of uncertainty about what our objectives are relative to some other, inflation-targeting countries.

I see this as sort of a risk-management approach to talking about our long-run inflation objective. We get this out there, see what the reactions are, see what kinds of questions there are, and then proceed. If it looks as though the right thing to do is to actually vote in the Committee about what our long-run objective is, we can do that then. But we haven’t gone that extra step, which we will never be able to take back again if there’s some sort of reaction that we haven’t anticipated. The Federal Reserve is in a very different place relative to our democratically elected representatives than a lot of other central banks. We report to the Congress. We don’t have a Minister of Finance or a Chancellor of the Exchequer that intercedes between us and the Congress. The Congress has given us goals in words and not in numbers, fortunately. I wouldn’t want them to give us goals in numbers. There were some numbers in the Humphrey-Hawkins Act, which on the unemployment rate were potentially quite damaging if we had gone for them. They haven’t asked us to put numbers on these goals. They haven’t looked at this for ten years, but in the mid-’90s when the Senate looked at this, they didn’t go anywhere with it. They rejected it. So I think we are out in front by doing this. If there were to be a backlash against even this limited step, then at least we wouldn’t have committed to something that might provoke a bigger backlash. So I see this as a step toward possibly specifying price stability numerically, a step that helps to manage the risk that it might provoke some reactions that we would have trouble living with. So I’m very strongly in support of the path you outline.

I think the subcommittee needs from the rest of the Committee some answers even before we get to the specifics here. So, do you agree that we ought to proceed with an enhanced projections process like the one we’ve been going through the past two times? We might have some specifics. Should we do it four times a year? I think we should, but not everybody might. Are we doing approximately the right variables, noting that we’ll have to adjust our price variables? I agree with you, Mr. Chairman, that adding total inflation to the core is a very good idea, and we ought to use the same index for both of those, whatever it might happen to be. So we’ll do some adjusting.

Do you agree that there ought to be a write-up of these projections more or less like the one that the staff has produced, approved by the FOMC so that it is an FOMC document, and released to the public? Now, we might discuss exactly what’s in that document. Like you, Mr. Chairman, I kind of like the histograms of how many people were lined up at the particular answers to give a sense of the dispersion of views on the Committee; they are much easier for me to look at than the central tendencies and the broad range things, but not everybody might agree. So I think there are some questions even before we get to “Are you satisfied with the general thrust of where we’re going?” I think that’s what we really, really need to know more than other things.

Let me address some of the things in exhibit 1. I like the sharing of forecast submissions anonymously. I guess I’m concerned that if it was by name, it would potentially be harder to change your mind at the meeting. It would put pressure on those submitting to have more-elaborate submissions. My sense was that I got the information that was important to me about where people generally were. I thought the way we provided information on the federal funds rate path was useful as well. We need to recognize that as we go forward with this—I hope we go forward with this—there will be public pressure on us to release the underlying federal funds rate path. I think we need to go into this with our eyes open. That pressure will be there, but we need to resist that pressure. The process that we used last time worked pretty well. But let’s be aware that there are risks associated with releasing what we think is the path of the federal funds rate going forward. Some central banks are doing that now, small central banks or small countries in the north and the south, in the Antipodes and up in Scandinavia. Let them experiment with this for a while and see how the market reacts and how that interfaces with their own decisionmaking processes before we go down that path.

I also like the change in characterizing uncertainty in the risks around the forecast. That is, here’s a table. Include that table. How do you feel relative to that table? I think the table will help the public understand how little we know about the macroeconomy. [Laughter] One thing that concerns me about the projections process and delivering these things is the decimal point—to the right of the decimal point. There’s a bit of a risk that we would be perceived as knowing that there’s some difference between 1.7 and 1.8 percent inflation—that we can really determine it—and I think that including the table will tell people that’s not really the case. So I think it is important that the table be in there.

Regarding in what form the projections should be released, your thought for two times in an enhanced Monetary Policy Report—in February and July—and two other times—either in the minutes or in a separate document released around or just before the minutes, but really just being that enhanced write-up—strikes me as right. So two updates that are very compressed and not much more than what we agree on and then the two Monetary Policy Reports in which they would be embedded strike me as the right way to go.

In terms of finalizing the projections, as I think Vincent noted, I’m of the view that we shouldn’t be updating our projections except from what we hear at this meeting. The projections we release are how we explain what we did; why we did it; and when we sat around this table, how we saw the path forward that influenced our decision. As for information that comes in after we leave this table, we will not have had an opportunity to digest it or to discuss it and its implications among ourselves. So, yes, if we want to update our projections after the meeting, I would have a very narrow window, and the update would be based on the information you heard at the meeting.

In terms of the minutes, as indicated by my question to Vince, as a general principle I’d like to shorten the time before they come out. President Poole, I can’t speak to a specific advantage of dodging one piece of data or another, but the minutes are a very good, nuanced view of what we discussed and why we made the decision. I found it always very helpful to have them out there when I give a speech or answer questions, particularly when I answer questions from the audience and I can’t control what I’m saying. [Laughter] Right. Freudian slip. Let’s see. We’ll clean that one up in the transcript. [Laughter] I think the sooner we get the minutes out there the more helpful they will be for the public and for all of us who are out in the public, but we can’t put so much pressure on this process that we don’t have an appropriate review. The words will be even more important, particularly four times a year. I’m not quite sure how all of this fits together with your testimony and all that, but if we can, I think we ought to shorten the time. I think the minutes have approximately the right level of detail in them now. Some central banks give much more detail about what one view was and another view was and what one person said and another person said; but with nineteen people sitting around the table, that would be impossible. So I think we’re there. Also I like the idea that President Poole suggested a couple of years ago and I think Vincent did as well, of taking that stuff about the past, the first eight pages or so through the staff forecast and making that a staff document. So we could say, “As background for the meeting, the staff prepared or supplied the Committee with the following information.” However they want to do it—if they want to make it part Greenbook or whatever, it is their thing. At the least, that takes it out of our hands. It helps us with the editing process. It helps them with the editing process. So I think that would be a helpful innovation. Thank you. I am sorry to have gone on so long.

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