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

Thank you, Mr. Chairman. It is still too early to know whether our current policy stance will succeed in lowering inflation to an acceptable level over time, but the data since our last meeting reassured me that our decision to step off the escalator was wise, and I think we should remain on the sidelines today. Recent inflation readings have contained no adverse surprises. Inflation expectations remain contained. I think the inflation outlook is slightly improved because of the reduction in energy and commodity prices, and growth during the second half of the year now appears quite likely to fall short of trend. I view the risks to the attainment of our objectives as more balanced than they were in August, and I certainly judge the downside risks to growth to have increased. Your discussion of nonlinearities, Mr. Chairman, was interesting, and it is important to be sensitive to that possibility. That said, I think that the upside risks to inflation still outweigh the downside risks to growth. With inflation projected to remain uncomfortably high over a sustained period and with the economy still likely operating beyond potential, I favor alternative B and think it’s important that we do at least hint at an upward bias for fed funds rate changes.

With respect to the language, I prefer alternative B to alternative B+ because the latter points to a greater possibility of a near-term tightening. I am concerned, however, that markets appear to think that the fed funds rate has peaked and that cuts seem very likely by next spring. I do not think alternative B would shake that view in the market. In contrast, I find myself more in agreement with the Greenbook baseline for the fed funds rate, suggesting that we’re likely to want to hold it near its present level for some time to bring inflation down. Now, markets obviously may turn out to be right. But if, as the months go by, developments raise our confidence in the Greenbook baseline view, then I think it would be useful for us to think about ways to signal to markets— possibly through some forward-looking language—an extended policy path in somewhat clearer terms than any of the options in table 1 currently allow.

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