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

Further questions? If not, let me make just a few short remarks. The general outlook, as best I can judge, has been fairly well described around this table, and I don’t have anything significant to add. I do want to respond in a way to President Minehan’s last remark. The only thing that I think should be, and probably is, on the table, is whether we should encourage lower ten-year interest rates, given how close they are to levels that would prompt a lot of mortgage refinancings and a significant drop in duration in the mortgage market, with the potential cumulative effects of such a development that others have pointed to.

We have to be careful largely because, while there’s no question that some softening has occurred in the overall expansion of the economy, the numbers in the Greenbook, if they materialize, are really quite strong, and in that regard it’s quite credible to forecast much more rapid growth in employment than we have experienced in recent months. That’s largely because the standard error in the payroll series is quite large, and other indicators of employment have been quite a bit stronger than the payroll series. For example, in recent months the net difference between hires and separations in the private sector has shown strength, job openings have increased, and initial claims have been remarkably low. So it is by no means out of the question, especially since productivity growth is probably slowing at this stage, to come up with some outsized employment number. And if we take seriously the scatter diagram that Vincent has shown with respect to the response to employment surprises, we could get a fairly dramatic change in financial conditions in this particular market.

One concern in the latter regard is that the carry trade has come back. If duration falls on top of that, we may end up with a situation that, in the event of an employment surprise, could create some significant collateral damage in the balance sheets of American businesses, with negative repercussions on the economy. Remember that a surprise in which interest rates fall and, hence, create capital gains in balance sheets, never caused anybody to go broke. There’s an asymmetry here relating to the speed of adjustment.

So it strikes me that, even if it is our opinion today that we will pause at the November meeting, we should not convey that message at this point because we would be taking risks that I think are unnecessary and could be quite costly if we are wrong. On the other hand, the risk of fostering a presumption at this meeting that we will increase rates further in November and even in December leaves us in a position where we can pause in either of those two months or in both, if we choose to do so, without significant consequences. If we do decide to pause later in the year, we will end up with lower long-term rates, higher bond prices, and presumably higher asset prices on the balance sheets of a number of financial institutions.

In sum, I think we have to lean against conveying the presumption that we will pause or essentially bring to an end our current policy course, which I think has been more successful than we generally expected when we initiated it. Keeping our press statement essentially unchanged but obviously leaving open the possibility of a policy change therefore strikes me as the best thing to do. Accordingly, I recommend a 25 basis point increase in the federal funds rate and a basically unchanged statement as in alternative B. Remember that we have a seven- week interval before the next meeting, and a lot can happen one way or the other in that period. Before we take a vote, I’d like to have copies of the proposed statement distributed. Why don’t we all read the draft release, and the floor will then be open for discussion. [Pause] President Poole.

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