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fomc | 1,996 | But it does not obligate the Federal Reserve to pursue that goal. | 14 |
fomc | 1,996 | The fact that it is promulgated in a statute does not mean that it is achievable or that it is something that we assume is achievable because it is in the statute. If I can get the two of you to reconcile, we can move forward. | 50 |
fomc | 1,996 | I'm not really sure that we are approaching the problem that differently. I am talking more about the process. | 21 |
fomc | 1,996 | Something is happening to the sound waves between there and here. [Laughter] Go ahead, Bob. | 21 |
fomc | 1,996 | Mr. Chairman, is there a way to focus on what was agreed to between them as an interim step? It looked as though both had the same view about the desirability of not allowing inflation to go higher. There also was a very explicit agreement that inflation should begin to move lower, and I think I heard Janet say somethi... | 73 |
fomc | 1,996 | I agree, yes. | 5 |
fomc | 1,996 | Why not set that out as an objective, and then we can have another meeting when we reach it. [Laughter] | 25 |
fomc | 1,996 | I would like to second that. I think that is a great idea. | 15 |
fomc | 1,996 | That would mean more progress than we have made in 11 years. | 14 |
fomc | 1,996 | Janet, didn't you say that? | 8 |
fomc | 1,996 | That is actually what she said. | 7 |
fomc | 1,996 | That is what I said, what Bob Parry just stated. | 13 |
fomc | 1,996 | That's progress; now we have to talk about when and how. | 13 |
fomc | 1,996 | There are 17 other people besides the two of us. | 12 |
fomc | 1,996 | That's okay, but you would be surprised at what happens in a discussion. If you let everybody speak and if they all deliver the speeches that they prepared before walking into this room, we will come out of this room with chaos. Let me see if we can establish some structure for our discussion. Can you give me three sen... | 88 |
fomc | 1,996 | Mr. Chairman, will you define "price stability" for me? | 14 |
fomc | 1,996 | Price stability is that state in which expected changes in the general price level do not effectively alter business or household decisions. | 23 |
fomc | 1,996 | Could you please put a number on that? [Laughter] | 13 |
fomc | 1,996 | I would say the number is zero, if inflation is properly measured. | 14 |
fomc | 1,996 | Improperly measured, I believe that heading toward 2 percent inflation would be a good idea, and that we should do so in a slow fashion, looking at what happens along the way. My presumption based on the literature is, as Bob Parry summarized it, that given current inaccurate measurements, heading toward 2 percent is m... | 73 |
fomc | 1,996 | Could we leave it at that? Let us now move on. President Jordan. | 16 |
fomc | 1,996 | I'm not sure I'm going to offer anything helpful in terms of how this discussion is progressing. I may want to come back in a moment to the issues about productivity because I think that the incentive effects, on business decision-makers in particular, with regard to efficiency and productivity versus what Janet was ci... | 805 |
fomc | 1,996 | President Minehan. | 4 |
fomc | 1,996 | I know you will all be happy that I am going to scrap my prepared comments. I will just address a couple of issues that both Al Broaddus and Janet Yellen raised because I am in complete agreement with two things on which I think they agreed. That is, we should at a minimum hold the line on inflation where it is and go ... | 430 |
fomc | 1,996 | Vice Chairman. | 3 |
fomc | 1,996 | Mr. Chairman, I think price stability is a means to an end, and the end is sustained economic growth, which is how I resolve what appears to be the conflict in the Humphrey-Hawkins legislation and the Federal Reserve Act. I define price stability exactly the way you do. First of all, it is a very good working definitio... | 973 |
fomc | 1,996 | Thomas Aquinas would be impressed! Governor Lindsey. | 10 |
fomc | 1,996 | I am very impressed with the Vice Chairman's Jesuit training, and I think I agree with him completely. I also agreed with what I thought Janet Yellen said, which is that we should reduce inflation to a lower rate and we should proceed gradually from there as we gain experience. Having agreed with her, I got very nervou... | 139 |
fomc | 1,996 | That was not "taxes;" that was "tactics." [Laughter] | 17 |
fomc | 1,996 | No, she said the word "taxes." I heard it and she is not going to get away with this! Let me start off with some calculations very quickly. The presence of retirement vehicles does not solve the problem, and here are some examples. Let us do an IRA-type calculation versus a permanent savings account that is taxed every... | 205 |
fomc | 1,996 | I merely meant that the existence of IRAs cuts the welfare gains from lowering inflation. | 17 |
fomc | 1,996 | It cuts the gains, but by this calculation it would reduce the gains by 40 percent, not by 90 percent. | 25 |
fomc | 1,996 | I did not say what the quantitative impact was. | 10 |
fomc | 1,996 | Okay, I just wanted to put that in. The economics profession has for 30 years gone through the functional equivalent of CRA reform by arguing that we should change the tax code for inflation indexing. We have tried, we have tried, we have tried, we have tried; we have failed, we have failed, we have failed, we have fai... | 464 |
fomc | 1,996 | I have a solution to your political problem regarding depreciation that we can solve. We just have to make our dollar bills smaller and smaller to reflect the loss of purchasing power. The total amount of paper would be the same. | 44 |
fomc | 1,996 | The ecological effects would be the same, and we would be all set. | 15 |
fomc | 1,996 | The real value of the currency and the value of the paper would be invariant to the purchasing power of the original outlay. I better call on Tom Hoenig! [Laughter] | 37 |
fomc | 1,996 | You have lost me, Mr. Chairman; I don't know where to go from there! To address the question as you framed it in your discussion with Janet Yellen and Al Broaddus, I would like to observe that from my perspective the evidence as presented in Dave Stockton's paper and others is that high inflation is bad. Everyone agree... | 289 |
fomc | 1,996 | President Stern. | 3 |
fomc | 1,996 | Thank you, Mr. Chairman. I have a few random, hopefully not inconsistent, observations about all this. For me, the issues that we have been discussing are largely empirical issues. Janet knows the literature better than I do, and I certainly am willing to take her estimates. If she believes there are net benefits in go... | 94 |
fomc | 1,996 | Janet said "probably." | 6 |
fomc | 1,996 | Right. Go slowly to 2 percent, probably. I would add that Bob Lucas currently has a paper that also estimates significant gains from bringing down the rate of inflation. So, I would throw that into the thinking here. I would not do this with the hope or expectation that we are going to get a lot of benefits from credib... | 314 |
fomc | 1,996 | I think that is an interesting point to apply to what we have been saying. There is another side to this issue, namely whether there is a tendency for inflation to go in the other direction if we do not move toward price stability, That is an opportunity cost that has to be addressed. If Gary is right, and I suspect he... | 81 |
fomc | 1,996 | Thank you. What I want to do is to sort out a little of the evolution of the debate on the costs and benefits of inflation and emphasize what is really novel in the points that Governor Yellen was making. What she has introduced with a much stronger theoretical basis is the notion of a permanent tradeoff. That is what ... | 1,314 |
fomc | 1,996 | Tomorrow morning I am going to argue that we are already at 2 percent inflation. [Laughter] | 21 |
fomc | 1,996 | Hold the line at 2 percent then! | 9 |
fomc | 1,996 | Let me tell you why I think Feldstein is wrong. The issue here is the existence of inflation non-neutralities in the tax system, for example, tax depreciation based on original cost. Inflation essentially raises the cost of capital to firms. Think of these inflation nonneutralities as being like an excise tax that is i... | 337 |
fomc | 1,996 | You are assuming that savings are not responsive to interest rates? | 12 |
fomc | 1,996 | Yes. | 2 |
fomc | 1,996 | You assume zero responsiveness? | 5 |
fomc | 1,996 | Yes. That might be as extreme as Feldstein, but I want to say it is no more extreme than Feldstein because the interest elasticities he has picked are so wildly out of sight from any empirical evidence, whereas mine are quite reasonably based relatively. [Laughter] | 55 |
fomc | 1,996 | President Boehne. | 5 |
fomc | 1,996 | This has already been a long day. I must say I have a lot of sympathy with the sentiments expressed by Bill McDonough. I did not have the benefit of a Jesuit training, but I have had a lot of economics, as did a lot of people around the table, and that is both a blessing and curse. As economists we like things to be cl... | 316 |
fomc | 1,996 | Hear, hear. President Melzer. | 8 |
fomc | 1,996 | Thanks, Alan. First of all, consistent with what I have said before, I think our focus ought to be on prices. In my view, that is the only thing we really influence in the long run, and that is what our policy ought to be aimed at. I agree with what Ed Boehne said; we really are talking about a means to an end. Low and... | 860 |
fomc | 1,996 | Governor Rivlin. | 4 |
fomc | 1,996 | Very quickly. It seems to me that we have made a lot of progress despite the fact that we started with the wrong question. [Laughter] With all due respect, the question, should price stability be THE goal of the Federal Reserve--meaning the only goal--is not the right question, as President Boehne and others have said.... | 352 |
fomc | 1,996 | Let me say before we go further, I need a consensus from this group as to how much time you are going to need to pack up and get to the British Embassy. It is now 6:08 p.m. We should be there at 7:30 p.m. | 57 |
fomc | 1,996 | The cars will be at the Watergate and downstairs here at 7:15 p.m. | 19 |
fomc | 1,996 | It takes about 10 to 12 minutes at that hour to go from the Watergate to the British Embassy. Would somebody suggest a time? | 29 |
fomc | 1,996 | I think we need to be at the hotel by 7:00 p.m. just to check in and put our bags away. SEVERAL. 6:30 to 6:45 p.m. | 43 |
fomc | 1,996 | Are you all saying that we can continue until at least 6:30 p.m.? SEVERAL. Yes. | 24 |
fomc | 1,996 | Governor Phillips. | 3 |
fomc | 1,996 | I think I've lost my train of thought here! [Laughter] I am going to be very brief. I agree with Ed Boehne that it would be useful to state our goal in terms of maximum sustainable growth and the notion of trying to achieve price stability. It seems to me that while we can set 2 percent or maybe something else as an in... | 218 |
fomc | 1,996 | Governor Lindsey, you have a question? | 8 |
fomc | 1,996 | No, I heard the word tax again. [Laughter] You have the right to tell me to shut up, but I will otherwise persist. | 30 |
fomc | 1,996 | You did not hear the word taxes coming from me, Larry. | 13 |
fomc | 1,996 | No. It is true that the economics literature does not show a correlation between the real after-tax return on savings and the rate of savings. However, in the example I gave before, 3 percent inflation and a 2 percent real return converts a 30 percent tax rate on savings to an 80 percent tax rate on savings. No sensibl... | 227 |
fomc | 1,996 | Even if there is no change, it is still unfair if savers are forced to accept that lower rate of return. | 24 |
fomc | 1,996 | It is still unfair. | 5 |
fomc | 1,996 | Can I switch the subject? Since we have now all agreed on 2 percent, my question is, what 2 percent? Let me present the issue more specifically. You can ask the question, what is the inflation rate as appropriately measured, which implies that we can measure it. Or you can ask what is the appropriate inflation indicato... | 447 |
fomc | 1,996 | It seems to me that when Janet and Al were talking, they had implicit in their minds something like a CPI or core CPI. They were able to generate some consensus or agreement about the desirability of reducing the rate of CPI inflation from its current level of about 3 percent down to 2 percent. That is the critical poi... | 125 |
fomc | 1,996 | Hold the line where we are. | 7 |
fomc | 1,996 | Hold the line and come down one percentage point. That is the critical issue. | 16 |
fomc | 1,996 | And be explicit about it. | 6 |
fomc | 1,996 | What do you think the PCE deflator is now? | 12 |
fomc | 1,996 | I don't know. | 4 |
fomc | 1,996 | It is 2 percent. | 6 |
fomc | 1,996 | Okay. | 2 |
fomc | 1,996 | So we are there. Congratulations. | 7 |
fomc | 1,996 | No, you miss the point. | 7 |
fomc | 1,996 | I came too late to take credit for it but I am an instant winner. [Laughter] | 20 |
fomc | 1,996 | I think you have missed the point. They were not talking about that. | 15 |
fomc | 1,996 | But the PCE is clearly a superior measure. | 10 |
fomc | 1,996 | That's fine. Then we will start with 2 percent inflation and go to 1 percent. | 19 |
fomc | 1,996 | We know that there is a measurement issue. Let us say that the PCE has less of a measurement bias but not a zero measurement bias. It may be 1/2 percentage point; it may be a percentage point, and you still have the issues of the permanent tradeoff that Governor Yellen talked about. I do not know that you can say that ... | 103 |
fomc | 1,996 | If you want to change the measure, you have to change the numbers. | 15 |
fomc | 1,996 | We also are not talking about going from 2 percent to 1 percent overnight or in the context of the next few months. We are talking about making a change toward lower inflation, however we are measuring it, using whatever measure. We are moving in the direction of lower inflation over a period of time to the extent that... | 79 |
fomc | 1,996 | But we get back to the issue of whether inflation can be too low as well as too high. We have to take up that point. What are the benefits of a percentage point reduction in inflation, given that it is already 2 percent? Those are the things we have to weigh. | 58 |
fomc | 1,996 | So, you did not agree with the consensus that they reached? | 13 |
fomc | 1,996 | I am sorry. I agree with Governor Meyer and would support the statements he has made. I regret that I have not thought through this measurement issue carefully, and so you should not take my 3 percent and 2 percent inflation numbers as necessarily focusing on the CPI. | 54 |
fomc | 1,996 | I submit that we do not really need to until we get to the question of whether our goal is 2 percent. Two percent of what? It is a perfectly credible argument to say, whatever the inflation rate is now, that it should be lower. That is an unambiguous statement. Members can have their own particular measure and say, I t... | 104 |
fomc | 1,996 | Instead of choosing, let's use all of them. | 10 |
fomc | 1,996 | If you put a number down, the question inevitably is raised as to what you are talking about unless you want a Jesuitical solution that bypasses the whole question. | 34 |
fomc | 1,996 | My view is that we could make a contribution to the societal debate by figuring out what the best inflation measurement is. If it is not the CPI, we should decide what we think it is. It will not be perfect, but if we can determine what is the best one, then we ought to sell that as the inflation rate people ought to b... | 73 |
fomc | 1,996 | There is another element that has not been raised and that is the question, what is the real federal funds rate? In principle, we should be deflating the federal funds rate, to the extent that we think of it in real terms, by the same price index we would want to use to determine when we are getting to stable prices. T... | 125 |
fomc | 1,996 | Another big deal would seem to be, though, that if we want to calculate the real funds rate or something like that with a different price variable, we need a time series to put it in perspective. It is not just how it has performed over the last couple of quarters, but where it stands relative to history. | 64 |
fomc | 1,996 | Absolutely. We need a time series. | 8 |
fomc | 1,996 | Exactly. It seems to me that there is another issue we have to think a little about, and this is not a defense of the CPI. My guess is that to the extent that labor contracts, government pensions, and the like are actually indexed to something, they are indexed to the CPI or some variant of the CPI. | 65 |
fomc | 1,996 | The cost-of-living escalator in labor contracts is rapidly becoming obsolescent. | 18 |
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