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

Thank you, Mr. Chairman. I ended my previous presentation by saying that I would be very cautious about moving from the very accommodative stance we currently have. Rates are extremely low and obviously much lower than they have to be over the long run. But from a risk-management perspective, as you like to say, I think they are at an appropriate level right now. I think that keeping them low and moving aggressively if necessary makes sense in a situation in which the risks on productivity, costs, and prices are still pointed down. Total inflation is likely to fall. We haven’t seen any closing of the output gap. This is a situation in which we ought to be taking our risks on the side of ensuring a rapid return to full employment. The benefits in economic welfare would be considerable. A small overshoot that pushed inflation up a little would have essentially no cost and might even be desirable.

Having said that, however, I still support dropping the “considerable period” language and substituting “patience.” The “considerable period” phrase was inserted as a form of unconventional policy when we were concerned about deflation and the lower nominal bound. That’s not an issue anymore. Rates will rise when we move to “patience,” but the expansion is robust to a modest increase in rates. I think the rise will be modest since it is in the context of weak employment and low inflation. No one should anticipate that the Committee is contemplating an early tightening. I think retaining the slight downward tilt in the inflation risk sentence will help, and I believe that is your proposal as well.

There will never be a good time to eliminate the “considerable period” phrase. But I think that doing so today will be seen as a logical extension of what we did last time in terms of tying policy actions to economic developments and to the words that you and other members have used in speeches rather than as a sign of immediate action. You will have an opportunity in your testimony to expand on “patience” and that theme. Such a shift is not only about restoring our flexibility; with the economy strong, it might be a good time to let the market react more to incoming data. There are upside risks to our forecasts and to the path of rates despite the fact that my best guess is that rates won’t have to rise for a while. Sitting on expectations in these circumstances might not be stabilizing from the long-run perspective. This could damp some of the interest rate risk-taking that we see in the market. I’m not sure it will do much about credit risk, which people also have expressed concern about. I think the lack of appreciation of credit risk is a function of a very, very good economic outlook, and I hope that view doesn’t change even with this change in wording. I would be cautious about using that argument. It strikes me that it’s about second-guessing asset-price levels. It’s something we didn’t do in the stock market run-up in the ’90s, and I was pretty comfortable with how we handled that. So I’d be a little cautious about using monetary policy to try to damp asset-price movements.

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