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

After looking closely at the new data since the last meeting, I do not see a compelling reason to materially alter my assessment of policy. I still think that the fed funds rate should be 5½ percent to bring core inflation down rapidly enough. My preference is based on an assumption that we want to bring core inflation down to 1½. That is how I think things through when I come into these meetings—I have not been told to do otherwise—and, without a firmer policy path, I think that core inflation is likely to decline no more rapidly than the glacial pace of the Greenbook.

I acknowledge that there are risks to real growth in the outlook and that raising rates may add to those risks. But the risks strike me as tolerably small partly because my baseline forecast stays a little further away than the Greenbook from your point-of-no-return thresholds, which I think are legitimate concerns. But since you have put that on the table and President Poole has echoed this, let me add to his statement that tolerating a rise in inflation to avoid a point of no return and recession is, I think, a grave error, and I think that the experience of the ’70s is strong evidence of that. Besides that, I think these risks can be significantly lowered to the extent that tighter policy shifts the public’s expectations regarding our future conduct. A lot of comments around the table just now have indicated that the public has substantial uncertainty about whether 1½, 2, or 2½ percent is where we are really interested in bringing inflation to.

I am not as concerned about a rise in inflation right now. We have experienced increases in core inflation in response to energy price shocks, and I am concerned about the possible effects on core inflation from the next round of fluctuations in the oil market. The process is repeatable, and just like the inflation dynamics that the Greenbook staff analyzed, the response to energy price shocks is a reduced form, and it embodies what people expect about how we are going to react to those shocks. I think the major danger is that we allow core inflation to persist above 2¼ percent for a substantial time. The longer we allow that, the more likely it is that the public’s expectations will collapse around a high rate of inflation and the harder it will be to bring core inflation down to 1½ percent, if that is what we settle on wanting to do.

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