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

From a prudent risk-management perspective, I think we made the appropriate decision to pause at the previous meeting, and again from a risk-management perspective, I think we should continue to pause at the moment. Certainly there are downside risks to the outlook that we have talked about. The lagged effects of the interest rate increases are still not in, and there is a lot of uncertainty with respect to the housing market.

With respect to the way the markets reacted to our statement from last time, I am somewhere between President Stern and the person formerly known as the Vice Chairman of the FOMC, Governor Kohn. [Laughter] I think that the markets reacted broadly reasonably in terms of the level of expectations to what we had said, but I find it a bit hard to understand their apparent thinking that there is little uncertainty about where we are going or where the economy is going. So I am somewhere between those two. Certainly I have had people say, as many people around the table have heard people say, “Where exactly is your comfort zone on inflation? Is it moving up?” But if you look at the surveys, you do not see that; and if you look at the TIPS spreads and other places where people are putting their money where their mouth is, you’re not really seeing that. So I am not quite sure how to weigh those reactions. Obviously I do not want inflation expectations to become unhinged: That would be very, very costly, and certainly there is a nonlinearity in trying to put the hinge back when the hinge has come off. But the situation we are in is very different from that. Even though I think that we need to convey to the markets our concerns about inflation risks, I would not favor alternative B+ because it takes away some of our flexibility going forward and also suggests more certainty about what we will do next. There was a lot of uncertainty around the table, and our concern that the markets are thinking that we are too certain might push us in the other direction.

However, I would like to put on the table a suggestion for a change. In alternative B, section 3, we have added the phrase “on balance” in the first sentence: “Readings on core inflation have been elevated on balance.” The innovation of the two words “on balance” is perfectly reasonable because, as the Chairman said, the data on inflation since the last meeting have probably been slightly on the lower side of expectations rather than on the higher side and many of the three-month measures of inflation peaked earlier. But I am a bit concerned that, with just the small amount of data that we have seen recently, by saying “on balance” we are making the qualification that it is only on balance and that we are not so concerned about the elevated levels. I think this also reflects some of the concerns of the people around the table. So I put out for discussion that we consider deleting “on balance” because, from my prudent risk-management perspective, I think we shouldn’t be making a particular commitment about that at the moment.

I would object to the B+ language; I think it takes away some of our flexibility, which is not a prudent thing to do at this time. On the point that was raised about the difference between the first sentence and the subsequent sentence in the discussion of energy, I think the energy discussion clearly relates to headline inflation and that there certainly is some effect of energy prices on headline inflation. I do not think it is inappropriate to acknowledge that at that place.

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