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

Thank you, Mr. Chairman. I share many of President Lacker’s concerns, but I come to a different conclusion because I strongly support this proposal. It is a major step, but it is incremental. But I’d like to go through some of the issues that President Lacker discussed because I think that they relate to where we may be heading in the future and how we may have to handle things now. The concerns that he raised are very, very important ones.

The first is that a third-year or a three-to-five-year projection does not reflect a commitment. We know that there are some very strong benefits to having a commitment. A particular thing that’s important here is that being opportunistic in terms of changing what our view is of where we will head in the future creates very bad expectations dynamics. In fact, it creates an anti-stabilizing influence rather than a pro-stabilizing influence because, when you overshoot, you might tend to have higher projections. Similarly, when you might undershoot, you might lower projections. This has become an issue, by the way, in other countries. In countries that have inflation targets, when they were undershooting for a long time, people actually pushed them to lower the inflation goal. Doing that turns out to have very negative effects on the economy because, when you get a negative shock to the economy, people lower their expected inflation. That raises the real interest rates and means that you have a contractionary impulse. That’s very problematic and a serious concern that we have to worry about. I’ll talk about how I think we can deal with some of these issues.

Second, I also very much worry about the issue of the projections. Although they have the benefit of giving information about what people’s views of our inflation goals are, they could be interpreted in relation to output and unemployment as also being speed limits, goals, or whatever. In the end, that is a very dangerous thing to happen.

The third thing that I think is an important concern is that, without a consensus of this Committee, it is much harder to deliberate. It will be much harder to write our statements. I have been struggling with this. I am willing to go along on this for a period of time because we are still not there yet, and a question is whether we can get to a consensus. So I am willing to hold off. But there will be a point at which some of us may say, “Gee, I can’t sign on to that statement unless a consensus is built.” I think that problem could become serious in the future.

So how do we deal with these issues? The reason that I’m comfortable with this step at this point is that through speeches we can clarify some of these issues. So, for example, if we go with this approach, I would give a speech and say that, although some information is here about inflation objectives, we should not think about it as having information about unemployment or output objectives because we have much uncertainty about what potential GDP or the NAIRU is and, furthermore, we can’t control either. So I think that we can clarify some issues in speeches. I’m sure that the Chairman will do it.

The point that I think is relevant, and the reason I am discussing these issues, is that people have to realize that, even though this step is exactly the right way to proceed, it will still leave us with problems, and the reality is that we will have to deal with them. The advantage of proceeding this way is that it gives flexibility, particularly to the Chairman for dealing with the political considerations.

Eventually we will have to go to a numerical inflation goal. Not doing so will get more and more untenable over time. A question is, What is the right time to do it? What is the right time in terms of the political environment? What is the right time in terms of where the economy is? So people have to be aware that this is really a first step. To be honest, I will not be satisfied with this as the end game. At the same time, the question is, When would be the appropriate time to move forward from here? We will have to use our best judgment on this question, and the Chairman will have to use his judgment as well. So I am very supportive of this proposal, but I want to make clear that I think that we’re not settling the issues. I’m sure we will have to deal with them in the future, and I think we will deal with them in the future. So those are the general issues.

Let me go to some of the specifics. The issue about the horizon is really very tricky. I am very comfortable right now with a three-year horizon because things are working out pretty well. Thank goodness the economy has been coming out pretty much in line with our forecasts—that we actually have inflation coming down and that it is very close to what the goal of anybody on this Committee would be because we are all between 1½ and 2 percent. Given a goal of 1½ or 2 percent and a three-year horizon, we should get approximately there. So I do not think there’s a problem now with a three- year horizon. However, I don’t see this as stable because, God forbid, there could be cases when we get shocks and where we are substantially away from where we want to be, and then a three-year horizon will not be adequate. President Yellen and Vice Chairman Geithner made this point. The issue here is that doing three years now is fine, but we will have to rethink this in the future. At some point, we may have to go to a longer horizon, or the alternative will be that we will have objectives—so it is one or the other. I think people know where I stand on that issue—I have a preference. Right now, I’m actually very comfortable with three years because three years plus a long-run inflation goal will provide the information that people need. If we don’t have a long-run inflation goal, then at some point, if things don’t go right, we may need a five-year horizon as well.

I get concerned about providing a federal funds rate path. I am known as a person who is very pro-transparency, but I wrote a paper called “Can Central Bank Transparency Go Too Far?” The problem here is exactly the one that Governor Warsh and others have mentioned. Even though we know that, when you put out a path, it is completely contingent on events and a lot of uncertainty is around it, making that clear to the public is very hard, particularly to politicians who want to use things in their own way. It’s amazing, when you testify in the Congress, you’ll say something, and then they will try to use whatever you say in a way exactly opposite to what you said. Everybody knows it is exactly opposite, but they will do it anyway. So you have to be very careful with what you put out there. This has been a problem with other central banks. The Swedes actually had problems when they first announced their path because they didn’t clarify the uncertainty and some problems arose in the marketplace. We shouldn’t rule it out in the future, but it is a tough thing to think about. For the time being, I would certainly not advocate it, and I have serious concerns about it.

On the issue of the CPI versus the PCE, a lot of details are here, and my view is to let the subcommittee decide. I’ll go with whatever they want here. I do have a preference for the CPI, but it is very slight—I don’t even think it’s a second order issue, maybe third order; it’s not really critical. An advantage is that CPI is better known. Vice Chairman Geithner mentioned it is actually involved in a lot of contracts. One reason that the CPI is used is that it is not revised. That turns out to be the reason that I lean to the CPI rather than the PCE. I think the PCE is a slightly better measure, but the CPI is not revised, which will make our lives simpler because we know that we’re making decisions ex-ante with the information we have now. However, when the PCE gets revised, people can second-guess you. We’ve had this in the past, when our PCE was getting very close to 1 percent. It turned out to be revised quite a bit upward, and then people said, “Gee, why weren’t you tougher on inflation?” So I think that using the CPI has a political-economy advantage, even if there is a slight disadvantage from a technical viewpoint.

I share some people’s concerns about the histograms. But I love to see the histograms. They were very useful to me. I like them because they provide information and actually show that there is less diversity. What was remarkable about them—and I don’t think that this will be a problem in the future—is how close we generally are. I think that actually will help dissipate some of the issues in the press. But, again, I don’t feel particularly strongly about this issue.

A very important issue that comes up here is where we put the enhanced projections into our documents and their relationship to how quickly we do the minutes. I lean toward having the projections as a separate document in some form, either as an addendum or whatever, because I think it gives us a lot of flexibility. I am going to say something that may get me an IED (improvised explosive device) in my office later on, but we’ll talk about that in a second. [Laughter] There is also an issue about the times of the testimonies, which are happening two times a year. I suspect that we will end up with testimonies four times a year, and in that context it may be difficult to have the full minutes done within three weeks. We will definitely need to expedite the enhanced projections. In fact, if we have the flexibility of having a separate document, we may be able to do one and then do the other; that way we can basically relieve some of the pressure on people. We’re going to end up having to speed up the process on that part of the picture, so separating them to some extent has the advantage of giving us more flexibility.

So the last issue, for which I may get the IED in my office and which I think is going to happen even if I didn’t propose it, is that I think there really is an advantage to having these enhanced projections as part of a Monetary Policy Report that is issued four times a year. My suspicion is that we will be in a situation when we do this that the Congress will likely want testimony more often. I am sorry for the Chairman here, but I would welcome the increased testimony because it gives us a bully pulpit from which to provide more information to the markets and to tell them our point of view. I wouldn’t have to do the testimony, but there is a little work because, as a Board, we have to go over the testimony. I’m going on vacation, so we have to do a conference call about the testimony. I will have to do that four times a year, so there is a little cost for me but more for the Chairman. Having a Monetary Policy Report with these enhanced projections will actually be a plus. Again, it gives us an opportunity to express our views, and I suspect that it will actually end up improving the quality of the Monetary Policy Report. It could be an important part of our communication process.

Now, let me mention an issue so that I don’t get the IED but instead just a water gun shot at me by the staff. We have a really serious problem right now in that our staff at the Board is getting severely overwhelmed by work. That is of great concern to me and, I think, to other members of the Board. The situation is such that, if we don’t fix it, I think the staff will break. This means that we have to think about the products that the staff produces for us. Do we absolutely need them? Even if we like them a bit, if they’re very costly to produce, do we need them? This will be an issue going forward. The process that we are talking about now will increase work for the staff. If we do a Monetary Policy Report four times a year, it will be even worse. We may need to think about what goes on in terms of FOMC documents. Can they be done in a more efficient way? Do we need certain information? What is the most efficient way to run a research operation? The issue here also is that there has become a discrepancy in terms of the workload for the Board staff versus the research staff at the Banks. I think that it is great that the Banks actually have the research that is coming from them, which has greatly improved over time. That is a major positive for the System. But the discrepancy in terms of workload, which is killing our staff—if in fact their work is increasing relative to that of the Banks—is not a healthy situation for the System in the long run. So one of the things that I am proposing is more work in a sense, but the Committee will need to think about the issues of how we can use our staff more efficiently to continue to provide us with all the services we need, so that the quality of work does not decrease. If it’s done right, it can improve the quality of work for us and can actually take some of the pressure off the staff. So I’m doing this so that I don’t end being a victim of Jihadism, but I actually strongly believe it. Thank you very much, Mr. Chairman.

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