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

Okay. So, Mr. Chairman, I am very supportive of the path you laid out. I think it basically is the optimal balance today between what the consensus of the Committee will bear now on the merits and what our unique institutional structure as a central bank permits. Now, your view and the Committee’s view of that balance may change over time, but I think what you described has to be pretty close to the optimal balance of those needs today. What is the objective of this exercise? I think I am completely comfortable with what you and Don said in terms of the broad objectives of what we are trying to achieve through these enhanced projections. But I think fundamentally that it is important to recognize that we are not principally trying to give a lot of detail about dispersion and variance within the Committee. What we should try to do mostly is to give more texture around the central tendency view of the Committee about the likely evolution, the desirable evolution, of the economy over a two-to-three-year, maybe longer, period so that people have a better sense of what informs our basic judgments about the appropriate stance of monetary policy. We should make sure that we keep to that objective as we think about what to put into a proposal regarding enhanced projections.

On the specifics, I am fine with a third year. I would like to discuss a little further the merits of three years versus three to five years. I think the tradeoffs between the two are very interesting, and I want to say something about that in a bit. I am fine with quarterly. I agree that we should have projections on both headline and core and that they should be based on the same index, not different indexes. Before we decide to go to PCE and core PCE, again, we should discuss how to think about what it will be like to live in a world where we still have TIPS paying the CPI. We still have a whole bunch of survey-based measures reporting the CPI. If we’re going to give a lot more emphasis to the medium-term implicit objectives of the Committee in some quantitative sense like this, we should think through whether it will work or be comfortable over time. I agree that this should be done on a view of optimal policy that is undisclosed for the reasons that have been put in favor of that, although I think President Plosser did a nice job of explaining the alternative view.

I would also be in favor of expediting the minutes on the grounds that I think there is a lot of virtue in saying that you want to have a short period between what we say about what we did and why we did it and the greater narrative texture that has to come in the minutes. The longer the gap between those two things is, the greater the risk that you have two events with signaling impact on monetary policy rather than one. This is complicated to do and must have some cost, but I’d say that a bias toward collapsing the two as close as possible is the right bias.

On the third-year question, Mr. Chairman, you talked about how you would describe what people should infer from the third-year projection about the objectives and preferences of the members of the Committee individually. My own bias would be to still try to qualify heavily whatever we say about the meaning of that third year. If we believe, as you’ve said many times I think, that one wants to think about the period for bringing inflation back down to objective as something that will probably have to vary based on the circumstances, it is really important not to set up a dynamic in which people view that third-year projection as our fixed objective for that horizon. We want to have a fair amount of flexibility for a view of the appropriate path of inflation over time to change meeting to meeting and not be too locked into a judgment about that. So I would say that I am inclined to keep that softer for all the reasons the proponents of a flexible horizon have laid out.

There is virtue in laying out the central tendency of the Committee’s view about what the appropriate path is likely to be today, but there may be circumstances in which we want to be above target or objective for a longer time than three years. Again, our view about that path might actually vary meeting to meeting. So I would want to soften that up a little. But as we elaborate the package and the drafts of how this gets presented, people will have a chance to look at whether the balance is right.

On dispersion and what we say about dispersion across the Committee, I think the histograms have a lot of appeal, and I have been in favor of them and of disclosing them in the past. But I am a little worried about the following: There is some risk that they are demystifying. Either the dispersion is going to look too wide, or it is going to get kind of narrow. If we had to decide today, I would be inclined to say for this next step that we should use the narrative description rather than the histogram to characterize dispersion. One reason is that we don’t have nineteen people doing independent, fully fledged, internally consistent forecasts with a fully elaborated view that is independent of the Greenbook’s view of the structure of the economy and its evolution. We are not like the respondents to the Survey of Professional Forecasters in some sense, and so to have a histogram presented of nineteen different views with this degree of diversity and what goes into that gives probably a bit too much emphasis to the quantitative number of the individual views with which people come to the table. But they are very appealing as a device for conveying uncertainty, so that’s the virtue. I would say maybe start with trying to put more texture into a narrative description rather than in a histogram.

The issue about the relationship between the narrative description that would accompany the projections and the minutes is something we need to think through more carefully. I’m still uncomfortable in that I think what we want to do is to try to give people a little more sense of the story that defines the central tendency of the Committee about the likely desired evolution of the economy—of output and inflation. The part of the minutes that talks about the outlook shouldn’t be too narrow and shouldn’t be too short in its horizon. In many ways, we are making a broad judgment about the forecast horizon at every meeting. I don’t know what the solution to this is, but I would think through the relationship a bit more carefully, and my inclination is to go for integration. Four times a year we do minutes like today, and four times a year we do something that has more texture, more detail, and a little bit more on the medium term and has some tables accompanying it. Again, what we should try to do is give people more of a sense of the view of the central tendency of the Committee that informs that judgment about the appropriate stance of monetary policy over time. To view them as separate, distinguished things leaves me slightly uncomfortable, so I think the topic deserves some more thought.

On timing, Mr. Chairman, in terms of it launching in October versus January, I think we should defer to your basic judgment about what makes sense. My view is that you should set a dynamic in motion now that gives you the option of doing it in October if people are comfortable enough by that time and if it looks as though the state of the world at that point would be conducive to this kind of announcement. But I think that you want to make sure before we go forward that you have a good sense of how we’re going to describe this, what it’s really going to mean, and how we handle all the obvious complicated questions that we’re going to get.

Is this enough? Will it leave us with an unmanageable set of problems internally in how we think about decisions on monetary policy or externally in terms of the ambiguity it still leaves in the market about what our objective is? Let me just say a few things about that. I don’t think it is right to say that the market is fixated particularly on the question about whether our implicit view about what we’d like to see inflation do over time is 1.5, 1.75, or 2. I think what the market wants, really, more than anything is to know what we are going to do with the fed funds rate [laughter] at the next meeting, the meeting after that, and the meeting after that. They would like to know more about what we think about the economy, but really what they want to know is what we are going to do with monetary policy tomorrow. It is very important—as you read that people complain about the ambiguity we live with today, have lived with for several decades, and are likely to live with in the future about what we are going to do to inflation over time—to remember that what they want to know is what we are going to do with the fed funds rate tomorrow. My own sense is we can manage, as we have managed in the past, with a framework that leaves the present degree of ambiguity about our objective unresolved. There is a lot of value and flexibility in that ambiguity. I don’t view it as a particular vice. I don’t think that there is any compelling evidence to support the view that the burden that ambiguity presents today is unmanageable—certainly not relative to the past two decades. Of course, we can evolve further. As the Chairman said, we should view this as an evolutionary process. We should be prepared to revisit over time each judgment we make and to continue to explore whether there are things we can do beyond this to improve the way monetary policy works in the United States. So I think it’s not right to think about this as the beginning with a clear evolution for something beyond this. It is also not right to view this as the end. I think you should view it as this is what is next, and we’ll continue to think through things that might help us do monetary policy better over time. That’s all I’ve got.

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