Thank you, Mr. Chairman. I support an unchanged fed funds rate target. However, I strongly favor a symmetrical balance-of-risk statement because I believe that we will then be well served by market responses should incoming data differ from our current expectation. That was certainly the case when long-term interest rates fell after their June peak as the economy weakened. The Committee has chosen not to act more forcefully against the current rate of inflation—which most, if not all, FOMC participants believe is too high—because of the expectation that inflation will decline over time. I agree with that expectation and support that policy.
The market believes that it is unlikely that we will be raising the fed funds rate target in the first half of next year. Perhaps the market’s expectation is based solely on the view that we will not get bad inflation news. However, judging from the lack of market response to the PCE price index report on November 30, which was higher than the market expected, the market believes that we will not act to raise the fed funds rate target during the first half of next year even if we have more bad news on inflation. The reason is that the bad inflation data will eliminate the market’s current expectation of easing next year. Under these conditions, the ten- year Treasury rate might rise over a period of eight to twelve weeks, say, by a total of 75 to 100 basis points, and the stock market might fall 10 or 15 percent. I’m guessing the market believes that, if that happened, we would be unlikely to raise the fed funds rate target. That is certainly my view. Suppose, on the other hand, that we see a combination of benign news on inflation and weak news on the real economy. In such a situation, we should be delighted if the market bids down the ten-year bond rate. We should encourage that response, and that is why I favor a symmetrical risk assessment. Doing so does not imply that we are soft on inflation. The policy stance depends on more than just the policy objective function. Policy stance depends equally on the structure of the economy and the important objective of pursuing a policy that is as predictable as possible.
If the Committee adopts the risk statement in alternative B, I ask that the minutes explain that at least one member strongly favored a balanced risk assessment. I believe that the staff forecast makes good sense and that the risks are symmetrical on both sides of that forecast, for both output and inflation. My position would be captured by a section 4 something like this: “Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information. The Committee judges that risks to the inflation outlook remain the predominant concern.” This language expresses our concern about inflation but does not say that we are contemplating a policy firming at our next meeting or the meeting after that.
Incidentally, the market inevitably reads any hint about the fed funds rate target as applying primarily to the next meeting. Anything after that will be superseded by the decision at the next meeting. I take the position I do not only for its advantages should data on the real economy come in weaker than expected. Suppose we experienced an inflation scare, including significant depreciation of the dollar on the foreign exchanges. With the dollar and the stock market falling and with bond rates rising, would we want the market to conclude that our language suggesting policy firming in the future, language repeated at every meeting since the pause in rate increases in August, should now be taken seriously? I believe that we would not want the market to reach that conclusion on the basis of language crafted for a different purpose. We might want to send that message, but we might not. In the middle of an inflation scare, taking out that language might be difficult. Doing so would imply that we are not considering a policy firming. Yet we might be uncomfortable leaving it in because we might not believe a policy firming would be a good idea in the midst of market volatility. Why not avoid that potential problem now? I also take the position I do because I believe that our reference to policy firming is simply not credible. Events might transpire that would make policy firming a live issue. But given the information currently in hand, I believe that it is improbable that the Committee would vote to raise the fed funds rate target in January or March. Is it good policy to advertise a policy that we do not expect to pursue? To put it another way, what conditions would lead us to raise rates in January or March? Are those conditions remote, or do they carry a nontrivial probability?
In sum, I am not arguing for a relaxed view on inflation. Inflation risks are, and should remain, our predominant concern. However, I believe that a balanced risk statement, with an expression of concern about inflation but without a hint of future policy firming, will best serve us in the period between this meeting and our January meeting and perhaps beyond. Thank you.