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

Mr. Chairman, I would like to start off with where I was before I saw this draft statement and then react to the statement. At the risk of some repetition, to me the key policy issue this morning is whether we want to act today to preempt a buildup of disinflationary momentum or whether we want to wait a little while to see if the economy strengthens and that risk diminishes. As I said earlier, it’s an agonizingly close call. It was for me before I saw the statement, and it still is. But on balance the recent improvement in at least some of the data—and you added a few more in your earlier comments—had convinced me that staying where we are was the best way to go. So I favored leaving the rate where it was, reintroducing a bias, and making it a neutral bias. My preference for a neutral bias was based in part on my view that introducing a downward bias at this point could undercut the renewed optimism we’re hoping for, for which I think there is still some basis. I don’t want to frighten the markets and the public into thinking that the deflation problem, even though it may be more immediate, is greater than it actually is. In this statement we’ve unbundled the risks in one place but rebundled them in the final sentence of the third paragraph. In a sense this statement still suggests that we have a downward bias; that’s the bottom line. I’m not sure I’m comfortable with that for the reasons I just stated.

I was going to suggest something slightly different. Let me just throw it on the table briefly. Clearly, we do need to recognize the disinflation risk one way or another because it’s very real. I was going to suggest that one way to do it would be to reiterate in this statement the concern that you expressed—I thought very effectively—in your testimony last week. But in addition to that I would state clearly in the announcement that core inflation is now at the lower end of the range that we are willing to tolerate on any sustained basis. I recognize that this would be a departure from what we’ve done before and a different kind of departure than we did last time. But that is in fact what we’re talking about now, and I think it could serve us well in trying to deal with what is a very difficult policy choice today. A statement like that wouldn’t pre-commit us, but it’s hard to imagine circumstances in which we would want the flexibility to allow a sustained inflation below 1 percent. So that’s another way of going. I don’t know whether I’ve made it clear or not.

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