Am I the only taker to be number one? [Laughter] Thank you, Mr. Chairman. I want to start with two observations. First, the distribution of the market’s outlook for the federal funds rate six months ahead—and the briefing paper that appeared in my hotel room last night has that shown on exhibit 1—is pretty symmetrical, although it actually has a bit more probability weight on declines in the rate than increases. But roughly speaking, it accords with my own view—a one-third chance that we will stay where we are, a one-third chance that it will be appropriate to ease, and a one-third chance that we will want to increase the rate. I come out with a very symmetrical view myself. I think of the views around the table—some people are probably there, some people are probably skewed on one side and some on the other side, but I come out very much in the middle.
My second observation continues a point that Tim Geithner made a few minutes ago. I had several conversations at Jackson Hole with Wall Street economists and journalists, and they said, quite frankly, that they really do not believe that our effective inflation target is 1 to 2 percent. They believe we have morphed into 1½ to 2½ percent, and no one thought that we were really going to do anything over time to bring it down to 1 to 2. I think that is very unfortunate because so many of us have talked about 1 to 2. Also, it seems to me that in the future it would be easy for people to say, “Well, it is going to be inconvenient. Let’s just sort of settle at 2 to 3.” They have already said that they would be at 1½ to 2½ effectively by the behavior of the Committee. Now, if we get data in the coming months that are unfortunate on the inflation side and lead us to increase our inflation forecast in the absence of any further policy action, I would certainly be on the side saying that we ought to act. We should firm policy so that we do not allow the forecast inflation to rise from where it is now.
One reason that I do not want the explicit reference to housing to be in the statement is that I would take that position even if housing were continuing to struggle, because I think it is extremely important that we not allow inflation to ratchet up. If housing is a casualty of that policy, we had better accept that situation. I would not like to see a mixed market signal because I would not want the market to believe that continuing weakness in housing would deflect us from acting as necessary to keep inflation from rising further. I think the explicit reference to housing in the statement conditions the market to think about our policy going forward in the wrong way.
At the same time, there is a clear possibility that we could see data in coming months that would be weaker than we now anticipate in the Greenbook forecast. What I know about forecasting error says that you have to think that coming in weaker on the real economy is a real, live possibility. I hope that we do not get unfortunate news on inflation and a downside on the real economy together, but I do not rule out that possibility.
I think it is unlikely, if we receive substantially weak data on the real economy, that we would be raising rates into a recession. But quite frankly, I would like for us to condition the market to accept this symmetrical view of the risks that we face going forward and for us not to have language in our statement that tilts us toward tightening. My own sense is that an asymmetric tilt toward tightening would not serve us well should we get downside surprises in the real economy. Indeed, we should be quite happy to see longer-term rates weaken in the event of weak data on the real economy. To have the market respond that way helps to serve as a built-in stabilizer for economic activity. It would tend to support housing and other interest-sensitive sectors, and we should encourage rather than discourage that response in the market.
Let’s see. What else do I want to say here? I would observe that the Greenbook forecast of a prolonged period of an inverted yield curve has no historical precedent. Usually the yield curve is inverted in the process of going from here to there, and you do not just sort of settle there. So I think that this situation is likely to be resolved either in the direction of higher long-term rates, as news on the real economy or inflation comes through in that direction or in the direction of lower short-term rates, for reasons I was just outlining; and I don’t know which direction it will be.
My view of the current stance of policy is that it is moderately restrictive. Money growth, whether measured by MZM (Money Zero Maturity) or by M2, has been modest, and in fact, real balances have been flat to declining for a year or more, which would be a rather traditional sign that our policy is restrictive. Thank you.