So much on the table here! First, with regard to the policy action, obviously I’m not a voting member; but if I were, I could have voted for an easing in policy, and I could have done it on the basis of the concerns you expressed at the end of your testimony last week. That is, we may need a more stimulative stance of monetary policy in the situation of lower-than-expected inflation because policy is less, rather than more, accommodative than we had planned. So, in order to keep the status quo, we might need to ease a bit to take real interest rates to a position that is as accommodative as policy was, let’s say, immediately after our last move. I thought that might be a way to explain an easing action—to say that it was more or less an attempt to keep the status quo—that would not affect the markets so directly.
I certainly can go along with your proposal and I understand what your concerns are. On the matter of straws in the wind, the economy is going to grow, so sooner or later we’re going to see these little straws. The question is, When are they going to cumulate to be enough to make a difference in terms of an economy that is growing sufficiently to absorb all the excess capacity that is out there? To me the problem is not that inflation is falling so much as that we have an output gap. The declining rate of inflation is related to that output gap, and I think we ought to be concerned about that gap. Our best guess at forecasting suggests that the gap will remain for more than the next few quarters that are mentioned in the first sentence of the third paragraph of the statement. So, I’m a little uncomfortable with this approach, but I’m willing to go along with it.
I totally agree with you that the balance of risks statement has gotten us into the pickle of too tightly coupling inflation and growth or disinflation and no growth. So I like the idea of splitting them apart. I’m a little troubled by the wording “upside and downside risks to the attainment of sustainable growth.” What do we mean by the term “sustainable growth” in the context of that sentence? I usually think of sustainable growth as noninflationary growth, but I don’t know what upside and downside risks mean in the context of noninflationary growth. Inflation is going down by all of our best guesses. Do we just mean growth at potential? I don’t understand what we mean. You probably do.