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

Thank you, Mr. Chairman. I’m in favor of maintaining the current stance of policy. I think that is the best chance we have at this juncture for having growth modestly below the growth rate of potential and inflation gradually ebbing. I am not as dissatisfied with that path as maybe some others around the table. After the inflation surprise of earlier this year partly related to an energy shock, a gradual decline in inflation is about as good as we can expect to do, and I do not think that is going to impair our credibility if people see that happening.

Now, I admit that that credibility may be built around a slightly higher inflation rate than others want to see. In that regard, I think we are in desperate need of the conversation we want to have at the next meeting about what our targets should be; how we should enunciate them; and once we are away from any target if we do enunciate it, how we should get back. But at this point I do not see any risk to our credibility from something that looks like the path that I expect to happen with keeping policy unchanged for now.

Until housing weakens further and begins to spill over into other sectors, the risk to our dual mandate comes primarily on the inflation side. So I am very comfortable with the inflation risk language. I do not think our reference to housing in section 2 undercuts our sense that we are worried about inflation and would act against it. I think it helps explain section 3, which says why we think inflation would moderate. So it does not bother me that much.

I am somewhat puzzled by the behavior of financial markets with respect to the expected policy. I am not puzzled so much by the downward tilt. That is roughly consistent with growth below potential and a gradual retreat of inflation and is not all that different from some of the Taylor rule simulations in the Bluebook, including some of those with a 1½ percent inflation target. It is also consistent with the Committee’s past actions judging from the forecast-based rule. But it does not seem to give much weight to the upside inflation risk that we sense or to the Committee’s priority of seeking assurance that inflation is moderating. More perplexing—and I think Vice Chairman Geithner brought this up—is the apparent certainty with which market participants seem to view this expected path; they do not seem to share our uncertainty or at least my uncertainty about the future course of policy. At some point, expected volatilities will rise, and some market participants will suffer losses; but for now the implied path of rates or the low expected volatility is not really impeding our ability to achieve our goals, and I would not attempt to use the announcement to change expectations in markets. I do not think they are so far off that they’re stopping us from getting where we want to go. So I would not favor B+. I would favor the language of B. Thank you.

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