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

Policy should be straightforward today. We’re waiting out a lull in growth while inflation is unacceptably high, at least to most of us. When the downside risks have sufficiently diminished, I’m presuming we’re going to want to take action to bring inflation down; but in the meantime, we are on the sidelines obviously with regard to rates.

Coming into this I had thought the statement was going to be a pretty straightforward matter as well. Evidently not. Markets finally figured out what we meant in the last statement. I think you are right, Mr. Chairman, in your autoregressive model of the statement language. The markets do a Kalman filter on whatever we issue and attach great importance to whatever we change. I do not think much has changed about the outlook to warrant significant changes in language, although I’d be sympathetic to taking out “on balance” on the theory that it is a hawkish move in general. [Laughter] About what Gary said, I am really sympathetic to the notion of changing the way we refer to the relationship between resource utilization and inflation in our statements. I say that because the best mainstream understanding is that resource utilization and inflation are the joint outcome of economic decisions given our actions and given what we’re expected to do. One can talk about resource utilization affecting inflation. One can just as well talk about moderating inflation keeping resource utilization high. There is really no superiority to one characterization or the other. So the idea that a sort of independent thing is wagging around there driving inflation, rather than both of them being the result of our actions, is an area in which we could improve the public’s understanding of our understanding of how monetary policy affects the economy.

I would also like to endorse the spirit of President Poole’s remarks about inflation and what we want. You know, about this notion of opportunism or the idea of an interim target, I think again about my brother-in-law sitting down in front of retirement planning software. I guess I would be left telling him, “Well, you should put in between 1 and 2,” depending on when we decide to take the opportunity to reduce inflation below 2 percent. I do not think that’s satisfactory. I think we can do better. When we choose an objective, we should view it as a once-and-for-all thing. Part of that reflects a sense that, well, if transition costs are something we are going to describe as keeping us from going to where we now think we ought to be ultimately, what if shocks bump us up to 2¾ or 3 percent? Are we going to say the same thing then? I mean, it is inviting people to think that, and it is just sort of painting ourselves into a corner. Governor Kohn, you referred to the net welfare costs of 2 versus 1½ percent inflation. If you do the optimal-policy calculation, the only thing that governs where you get in the long run, no matter how long it takes, is that net welfare calculation. So that’s what should govern where we choose to set our objective, not whether we think transition costs are going to be high now or not. That concludes my remarks, Mr. Chairman.

Keyboard shortcuts

j previous speech k next speech