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

Thank you, Mr. Chairman. We were asked to comment on a long list of questions concerning economic projections, the minutes, and the statement. In addition, Governor Kohn has put out the broader question of the general thrust of the direction we’re going in, and I’d like to focus my remarks on the latter. Frankly, right now I think the most important question regarding the release of our projections concerns the relationship of these communication devices to our inflation objective. Everything else is more or less small potatoes right now. I believe it would be a mistake to release our projections without agreeing on it and communicating a Committee inflation objective. It’s inevitable; in fact, it’s intended the way you described it, Mr. Chairman, that participants’ third-year inflation projections will be interpreted as the equivalent of an objective. I think this would be problematic without an explicit statement of an objective for a number of reasons.

First, our projections display a nontrivial dispersion, admittedly a narrow range, but market participants are going to have a keen interest in whether we believe a 1.9 percent inflation rate, say, is too high or just about right. Financial market participants already believe that there’s a dispersion of the Committee members’ preferred inflation rate and that it lies between 1½ and 2 percent. I note that showing that every individual preferred inflation rate spans a range of 1½ to 2 percent is not equivalent to the Committee’s deciding that its collective preferred inflation rate is for anything within a band of 1½ to 2 percent. So I don’t think this is going to enhance the clarity of the public’s understanding of our intentions much at all.

Second, communicating our inflation objective via three-year-out projections would accomplish little by way of enhancing any commitment since we’d release the projections anew three or four times a year with the implication that our implied objective could change over time. I’ll remind you again about my brother-in-law doing retirement benefit projections, just to make the important point that a significant part of the value of an announced objective is to reduce long-run uncertainty about inflation.

Third, our inflation projections would be displayed alongside exactly analogous projections for unemployment and GDP growth in an exactly analogous way. This would confuse people about the economics of monetary policy. In that context, how do we convey that we do not have numerical targets for unemployment or growth? How do we convey that inflation is a variable that we control in the medium and long run, but we cannot peg growth or unemployment at any one number in a sustained way? In other words, how do we remind people that the long-run Phillips curve is virtually vertical? A related consideration is that, if we present our projections this way and do not clearly state our inflation objectives, it’s not hard to imagine someone in the Congress trying to hold us as accountable for our unemployment projection as for our inflation projections. This would be a dramatic step backward for us, I think.

Fourth, and probably the most pressing and immediate problem in my view, publishing our projections this way will do nothing to improve the clarity of our internal deliberations or to alleviate the problems we have and will continue to have in writing statements in the absence of an agreed-upon objective.

For these reasons, I believe that the release of economic projections containing participants’ forecasts for inflation three years out would be a poor and ineffective substitute for an explicitly articulated objective and would be problematic without such an objective. Now, let me be clear. I do think we should move ahead in this direction, and I applaud your leadership, Mr. Chairman, for putting something on the table today at the outset of the discussion. I just think we should do this in conjunction with the inevitable other step of agreeing on what we’re about here in the Committee. I can appreciate the sensitivity to the likelihood that various politicians may react to our communication of an explicit numerical objective; but over the past thirty years, politicians have reacted to many of our actions that were integral to our successes over that period. We should decide honestly what we believe is best for the country and communicate it clearly and with confidence. Thank you, Mr. Chairman.

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