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

Mr. Chairman, you spoke of the road to Damascus. I was thinking about the movie “What About Bob?”—not because of my own neuroses about this exercise but because I think it is important to proceed with baby steps, step by step. President Minehan’s point is cardinal: It’s very hard to go back once you move forward. As I wrote in my memo of June 4, I believe it was, I think that you have summarized one of the most important things that we can do as a Committee, and that is to get a useful and credible inflation metric. Not only do I applaud the overall outline that you started us off with—and, again, thank you for bringing that outline to the table because it organized the conversation—but also I am a big believer in the need for us to come up with an inflation metric that is credible. Tim’s point on the PCE versus the CPI is very important to consider. As I have said before, I am more in favor of the CPI, but I do think we need to think that decision through in terms of the different instruments that are out there in the market and the precedent that has been set.

Now, I just want to make a couple of points. On the road to Damascus, we have to think of what the milestones are going to be. I want to be careful that we don’t labor under a conceit of false precision. I worry sometimes that, when we look at these histograms—and I want to come back to the histograms in a second—the reality is that only 20 basis points separate these things. The further we go out in the time horizon— you know the old saying that you only put something three points to the right of the decimal point to show that you have a sense of humor—we have to be very, very careful not to imply that we have ultra precision. We don’t have ultra precision; this is a judgmental business. So that is one point I would like to make.

I have very mixed feelings about the histograms. After listening to this conversation, I would suggest that we start with the central tendency analysis—the table that was put together. The problem with histograms, besides giving us a sense of false precision, is something that a couple of the Presidents and Governors pointed out or hinted at and Governor Kroszner just pointed to but I thought that he didn’t go far enough. Even if we do it anonymously, if we were to publish these, the press is going to poke and poke and poke—the red meat argument that President Minehan gave—and ask, “Who are the outliers, and why?” Once the press starts doing this, it is just a matter of time before a Congresswoman or a Congressman does the same thing. We row as a crew, as a team, and I want to be very careful that we don’t take any risk to undermine the unique aspect of this body. We sit around this table. We have differences of opinion. I noticed Governor Kroszner pointed to me when he said, “This guy is wrong.” It was just the way you were pointing. [Laughter] I realize that sometimes I am a total outlier here, but that is in the spirit of the comradeship that exists at this table. You put this out for the public, and I think you run certain risks of undermining the authority of this Committee, the authority of the Chairman, and the integrity of the process. The federalist process that we have is of value. Let’s be careful that we preserve it and don’t make this like every other Washington institution, because we are unique in the nature of our integrity.

Just a couple of other comments. I’m very wary, as I outlined in my letter, of being open about the fed funds rate path we envision. This is our central policymaking instrument. If we were to forecast it, I worry that we are going down a slippery slope. We would be under pressure to validate our forecasts by our actions, and I think we need to preserve some of the mystery that surrounds them. I remind you that FF does stand for “full frontal,” so I want to be careful, again, not to give the markets a full frontal view but to preserve some of our power.

With regard to the frequency with which we do this exercise—again, if we do it baby step by baby step, I would like the Governors to be mindful of the fact that the Presidents run businesses. We have other things to do. I think Vice Chairman Geithner pointed to that indirectly. This is not the only thing we do. We don’t have our own models. If Governor Kohn and the Bank Affairs Committee are willing to give us a few billion dollars more to build our own models, then we are happy to take the money. [Laughter] But the realism is that we key off the staff and off the FRB/US model. If you really look at all these numbers that were given out, not a whole lot of variation is there. We need to acknowledge the fact that we don’t have the wherewithal and that a lot of this is guesswork. The further we go out, the more it is guesswork.

One last point: I like your suggestion, Mr. Chairman, of the three to five years. As I have made clear, I have the opposite fear of President Lacker’s. I think that what President Lacker suggests puts us right into an argument with the political authorities about what our employment target is. This is a nice way to skirt the issue of formal inflation targeting and, in my view, inevitably being forced by the Congress into employment targeting. I support your suggestion that we use a three-to-five-year range. It is a nice, elegant way to get us out of a possible box. Yet if we decide to go down that road in the future—again, in this “What About Bob?” baby-step approach—we can do that later. I wouldn’t start out there. I think there are too many risks. Thank you, Mr. Chairman.

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