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

Thank you, Mr. Chairman. I agree that there’s no need to move policy now. The far more important issue right now is what we say about it. It has been clear from our discussion that risks are perceived on both sides of the Greenbook forecast—growth and inflation. Some believe we could be surprised on the upside with both growth and inflation. Others see supply trends as possibly leading to declining inflation even in the face of what may otherwise be strong growth.

This raises the question—and you, too, raised this issue in your comments—of where it is most costly to be wrong. I think some of us believe that being wrong on the inflation trend side—that is, lower inflation than we are projecting—would be more costly. I have questions about that along the lines that President Stern just suggested. I don’t believe that price decreases prompted by strong productivity create a pernicious form of deflation. On the other hand, if supply contracts faster than we expect and both growth and inflation take off, there is way too much accommodation in the pipeline. Fiscal policy is accommodative, monetary policy is accommodative, and financial markets are increasingly so. I agree with your position that being wrong on that combined risk may in fact be more costly than being wrong on the inflation side. It is true that we have yet to see the kind of strong employment growth that we expect. But by modifying our language I think we get a bit of flexibility for the time when we do see that growth and a little more space to move proactively in the face of a strongly growing economy. So I feel that it’s a good move on both sides.

I also think that it’s better for markets to see us take several steps in removing the “considerable period” language because there seems to be some froth out there. It’s going to take a little while to get rid of some of the bets that people have been making on how long the “considerable period” will be. If we step back gradually, the market reaction will be less.

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