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fomc | 2,000 | Of a permanent nature, certainly. If productivity growth shifted down, as in 1973, in order to achieve the Federal Reserve's goals of stable prices and maximum employment, the FOMC at that time--though those were not the goals set forth in the Federal Reserve Act at the time--should have shifted its targeted M2 growth ... | 119 |
fomc | 2,000 | In a sense the logic that is being applied here is the very logic that got you to the current targets. It's just recalibrating the targets to a new, longer-term trend. | 37 |
fomc | 2,000 | I would agree with what Don said if it were the case that we had the ability to distinguish between an adverse oil shock in 1973-1974 and something that much later on the profession came to view as a secular trend in what we call productivity. I don't know that our ability to know what we are experiencing at any given ... | 89 |
fomc | 2,000 | Not until very late, right. I think to a certain extent you can observe what is going on. You can see things like oil shocks, dollar appreciation or depreciation, excise taxes, or whatever that might change a price level more than you can see an ongoing change in productivity, which I agree takes some time to recognize... | 145 |
fomc | 2,000 | Isn't the issue here a little more limited? We are in effect, as best I can judge, assuming that long-term M2 velocity is flat. In doing that we are effectively engaged in estimating long-term nominal GDP. And the issue here is that if--and I underline the word "if"--price stability is the goal defined, then what falls... | 249 |
fomc | 2,000 | I think the issue is this: Is our goal stable money growth or stable inflation? If your goal is stable money growth, you'll take whatever inflation comes out of it depending upon the productivity shocks. | 39 |
fomc | 2,000 | That may be okay. | 5 |
fomc | 2,000 | That may be okay. But that is not the goal, as I understand it. We operate under a mandate of achieving price stability, which I think indicates not necessarily zero inflation but at least a stable inflation rate. So we have to make a choice. | 51 |
fomc | 2,000 | As the Chairman mentioned, given the midpoint of the existing range of 3 percent, if we take your estimate of potential output plus a measurement bias--implying nominal GDP of 4 percent as consistent with price stability--that means you are aiming for deflation of 1 percent per year. | 60 |
fomc | 2,000 | I agree that that's an arithmetic implication. We did not start this period with price stability. Had we started with price stability and then later found out that we had an acceleration of productivity growth, that would have been one thing. We did not do that. So to me an acceleration of productivity growth when we'v... | 211 |
fomc | 2,000 | Suppose we say explicitly that that is not the issue? We can say that we are trying to find the range for price stability and that we envisage that potential growth has risen. And, therefore, other things equal, the ranges should go up if our objective remains where it was several years ago. | 60 |
fomc | 2,000 | I am sure you have the credibility to say that and be believed; I do not. I know that people wouldn't believe me if I said that. | 30 |
fomc | 2,000 | I don't believe that! In all seriousness, I do think--and I may be wrong in this--that to the extent we raise this question, we have the capacity in the minutes and the Humphrey-Hawkins report and in speeches we make to say that essentially nothing has changed--that fundamentally our goal is price stability. But if pot... | 105 |
fomc | 2,000 | I think it is easy to attribute an adjustment in the range to productivity because nobody actually believes that our goal in setting the range is pure price stability. Nobody believes that our goal is just price stability. So, in my view, people will not think that we are accommodating higher inflation if we raise the ... | 62 |
fomc | 2,000 | President Parry. | 4 |
fomc | 2,000 | My question is related to much of the discussion that has been going on. For alternative II, I think you said that the midpoint of 4 percent on M2 is consistent with a shift in productivity and also our goal of price stability. So, potential output growth would be in that 4 percent area and price stability would be def... | 113 |
fomc | 2,000 | I'm not sure if this answers your question, but what we are suggesting is that the 3-1/2 percent potential growth that has been observed-- | 31 |
fomc | 2,000 | Oh, I see. | 5 |
fomc | 2,000 | --that plus a 1/2 percent measurement bias. In other words, the measured GDP deflator would be 1/2 percent, but the true inflation would be zero. | 37 |
fomc | 2,000 | Well, if that is what the group is happy with, I'm really happy. | 16 |
fomc | 2,000 | That's the way the ranges have been constructed for the last five years--that is, with the same reasoning and arithmetic in mind. The Committee might want to think about whether it wants to change that. But we were just being consistent with what the Committee has been doing. | 54 |
fomc | 2,000 | Okay. | 2 |
fomc | 2,000 | President Poole. | 4 |
fomc | 2,000 | I think being very explicit about the numbers involved would be a good thing for us to do. Suppose we were to say that our long-term goal is 1 percent on the deflator and that we now estimate 4 percent on real growth as potential, which adds up to 5 percent. That would be all right with me. What I fear, however, is tha... | 144 |
fomc | 2,000 | That is clearly the down side. There is no question that if people were to read that as accommodating more inflation, then the argument for moving up, I think, is unambiguous. But the point is that may not be the case, and that is the problem. | 55 |
fomc | 2,000 | Well, as I said, if we are willing to be very explicit about what our long-run inflation target is and what our estimate of potential growth is, then I think we can make the argument. And I believe we should. I've said before that I think we should be much more explicit about our inflation target. In my view, that woul... | 72 |
fomc | 2,000 | We are essentially saying that price stability is our goal. You want a numerical judgment of price stability. Is that the issue? | 25 |
fomc | 2,000 | Yes, because given what I'll call our "revealed preference" in the way we actually have been behaving, I think the market believes that we are perfectly satisfied with an inflation rate somewhere in the neighborhood of where it is right now. And that's a little above what I would regard as zero inflation, properly meas... | 155 |
fomc | 2,000 | Governor Gramlich. | 4 |
fomc | 2,000 | I have not bought into changing the ranges and I have some reluctance to do that, given the discussion we are having. But suppose we do. If we raise the ranges for M2 and M3 by a point, tell me again what we would say about debt. Would the reason for not changing the debt range be the reduced federal debt or what? | 72 |
fomc | 2,000 | We have never interpreted the debt range as being a long-run price stability range. We could move to that interpretation on debt as well, if you thought that was desirable, and make the interpretation for all three of the ranges consistent and make all of them long-run price stability ranges. If you wanted to do that, ... | 167 |
fomc | 2,000 | President Broaddus. | 5 |
fomc | 2,000 | I think you said it well, Mr. Chairman. One can make a pretty solid argument for making a change, so I don't feel that strongly about not doing so. But if we do, I believe there is going to be a significant communications issue, as Bill Poole and Jerry Jordan and others have pointed out. To me, this whole discussion is... | 221 |
fomc | 2,000 | President Guynn. | 4 |
fomc | 2,000 | I would like to join Bill Poole and Al Broaddus on the comments that you just heard. I, too, see considerable merit in moving in the direction of a more explicit inflation target. I don't know whether we are going to talk about that some more this morning or not. But particularly in the absence of such a target, I beli... | 121 |
fomc | 2,000 | President Hoenig. | 4 |
fomc | 2,000 | Mr. Chairman, changing these ranges is always a dicey issue these days because no matter what we say or what we do, there are more interpretations than there is reality. At the same time, I could be talked into it because I think there is a building consensus that the rising trend in productivity improvements is real. ... | 150 |
fomc | 2,000 | President Minehan. | 4 |
fomc | 2,000 | Thank you, Mr. Chairman. I just want to go back to the question portion of this discussion. On page 20 in the Bluebook, Don, you talk about a 2-1/4 percent trend productivity growth as opposed to something in the high-- | 54 |
fomc | 2,000 | That was trend potential output growth when the Committee first set these targets. | 14 |
fomc | 2,000 | Oh, yes, excuse me. Is 2-1/2 percent your trend productivity growth? | 20 |
fomc | 2,000 | Currently it's 3 percent. | 6 |
fomc | 2,000 | How much of that upward revision is the result of the change in the NIPA numbers? | 18 |
fomc | 2,000 | Not very much actually, in part because the staff's current estimate of potential output growth in the mid-1990s--through the second quarter of 1995--is still 2-1/4 percent. The current estimate for the last four years, by contrast, is 3-1/2 percent; and then we have 4 percent going forward. There has been a ratcheting... | 154 |
fomc | 2,000 | So in the mid-1990s you had a potential output growth of somewhere around 2-1/4 to 2-1/2 percent and now it is a full percentage point higher than that? | 43 |
fomc | 2,000 | Our estimate is still that up to the second quarter of 1995 potential output growth was 2-1/4 percent. Starting this year we have it up 1-3/4 percentage points higher to 4 percent. | 47 |
fomc | 2,000 | Yes. | 2 |
fomc | 2,000 | In each case, we've done little more than extrapolate the recent experience for a near-term period. In thinking about what you might want to do if you adjusted the ranges, one question would be your assumption about potential GDP growth. Would you want to rest your assumption on the experience of the past few years--wh... | 122 |
fomc | 2,000 | I understand exactly what you want to do. I was just trying to get a handle on the effect of the NIPA revisions. I knew there was some effect--a few tenths of a percentage point--from the NIPA revisions all by themselves. | 51 |
fomc | 2,000 | A few tenths came from the change. | 9 |
fomc | 2,000 | I'm just thinking about this communications issue. | 8 |
fomc | 2,000 | Sure. | 2 |
fomc | 2,000 | If any portion of this productivity change was really the fallout of revising numbers in a better way, presumably as a result of the NIPA changes, that is something that would help in communicating the reasons for a change. | 44 |
fomc | 2,000 | Cathy, if I could just comment very quickly on that: It doesn't change nominal. What the NIPA revisions have done is to change the split between real output and prices. So in that respect those revisions do not really bear on this issue. | 50 |
fomc | 2,000 | But they did change productivity. | 6 |
fomc | 2,000 | That's right, but there was an offsetting change in the inflation number. Essentially it changed the split of the nominal. | 24 |
fomc | 2,000 | I realize that. That isn't the point. | 9 |
fomc | 2,000 | But forward-looking, relevant to thinking about the bias adjustment in the price measure, if that were all that was going on, switching from one component to the other in nominal GDP, then there would be a wash. | 43 |
fomc | 2,000 | Back in the mid-1990s we think that perhaps the bias was closer to a percentage point, whereas now it's only about 1/2 percentage point. | 33 |
fomc | 2,000 | Now it's about 1/2 percentage point, and I was thinking in terms of looking forward, which is what these ranges are supposed to be doing. If we have a different productivity number, in part because we think it was different in the past--because of the change in the break between the price bias and underlying real growt... | 246 |
fomc | 2,000 | In terms of the communications issue, President Minehan, we did inform the public last July that a change in the ranges might be coming up because of adjustments in our assessment of productivity. | 37 |
fomc | 2,000 | I know you did. | 5 |
fomc | 2,000 | Governor Ferguson. | 3 |
fomc | 2,000 | Thank you, Mr. Chairman. I walked in here being really quite agnostic on this issue. I know it is a matter on which some people feel strongly, but I was interested in hearing both sides. I have come to the conclusion that perhaps the better course is just to leave well enough alone--not to make a change at this stage--... | 462 |
fomc | 2,000 | Vice Chair. | 3 |
fomc | 2,000 | I associate myself with Governor Ferguson's very wise remarks. | 11 |
fomc | 2,000 | Governor Meyer. | 3 |
fomc | 2,000 | Well, now for a different perspective, I suppose. I must say that this has been a very interesting discussion so far and I think we have identified two issues relevant to the target ranges. The first is whether to revise them to reflect the faster rate of growth of trend GDP. The second is what implicit inflation targe... | 1,054 |
fomc | 2,000 | President Moskow. | 4 |
fomc | 2,000 | Thank you, Mr. Chairman. This is an interesting discussion, but from a practical standpoint I come back to exactly the same place I have been the last 11 times I have been here when we have discussed this. And that is that we should not make any change in the ranges. I think it would be misleading to the public for us ... | 301 |
fomc | 2,000 | President Stern. | 3 |
fomc | 2,000 | Thank you, Mr. Chairman. Well, I don't have a lot to add. As many people have already observed, we have discussed all of this before. In my own case, unlike in previous discussions, I do think that today both arithmetically and substantively the case for raising the ranges is pretty strong. But I don't feel very strong... | 146 |
fomc | 2,000 | President Boehne. | 5 |
fomc | 2,000 | Governor Ferguson captured my views nearly completely and I would like to associate myself with his comments. | 18 |
fomc | 2,000 | Governor Kelley. | 3 |
fomc | 2,000 | Thank you, Mr. Chairman. After listening to this discussion, I have to say that I have reversed the position that I came in here with this morning. The question for me is: How permanent is this higher rate of growth that we now perceive? If it is permanent, then I think we ought to move to alternative II. But I note th... | 231 |
fomc | 2,000 | Governor Gramlich. | 4 |
fomc | 2,000 | Thank you, Mr. Chairman. This comment is going to sound a bit tired and I apologize for that. I think transparency is good. And as I've said a number of times, I think we would be well advised to move in the general direction of inflation targeting. At some point we might even try to agree on explicit targets. But I th... | 111 |
fomc | 2,000 | President Jordan. | 3 |
fomc | 2,000 | Thank you. In the earlier comment period, I was in the questioning mode, so I'll state a view on this now. We are talking about two different things back and forth at times here--about a belief in a sustained growth in productivity and potential output and what would be an appropriate stance of monetary policy, especia... | 387 |
fomc | 2,000 | President McTeer. | 5 |
fomc | 2,000 | I wish Jerry hadn't just said that! | 8 |
fomc | 2,000 | Erase that from the record and start again! [Laughter] | 13 |
fomc | 2,000 | He made me have misgivings regarding what I am about to say. I agree with Gary Stern's ambivalence; I don't feel strongly about this issue one way or the other. But since I am on record as believing that productivity gains are not a transitory phenomenon and if consistency suggests it, then I guess I would have a small... | 91 |
fomc | 2,000 | President Parry. | 4 |
fomc | 2,000 | Mr. Chairman, I liked what Governor Meyer said, although I must admit I'd probably be happier with a thinner cushion than he would. That leads me to think that a case can be made for alternative II. But I keep coming back to the idea that we really do not have much confidence in our forecast of the aggregates and what ... | 136 |
fomc | 2,000 | I came into the room, having been staunchly against doing anything with the ranges previously, at least thinking about the possibility of changing them because, unlike a lot of you around the table, I think the productivity changes are now unquestionably real and, if anything, still accelerating. But the arguments cite... | 570 |
fomc | 2,000 | I will be reading from page 28 in the Bluebook, the bottom half of the page: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. In furtherance of these objectives, the Committee at this meeting established ranges for grow... | 154 |
fomc | 2,000 | Call the roll. | 4 |
fomc | 2,000 | Chairman Greenspan Yes Vice Chairman McDonough Yes President Broaddus Yes Governor Ferguson Yes Governor Gramlich Yes President Guynn Yes President Jordan Yes Governor Kelley Yes Governor Meyer No President Parry Yes | 40 |
fomc | 2,000 | Shall we move on to Don Kohn? | 10 |
fomc | 2,000 | Thank you, Mr. Chairman. I shall first discuss the simulations in the long-run scenarios section of the Bluebook, and then consider the choices at this meeting about the stance of policy and balance of risks to announce. The results in the first set of scenarios on Chart 3 following page 8 extending the Greenbook forec... | 1,981 |
fomc | 2,000 | Questions for Don? | 4 |
fomc | 2,000 | President Parry. | 4 |
fomc | 2,000 | Don, I'd like to hear your thoughts about how the Greenbook is characterizing the current stance of monetary policy. In one part of the Greenbook there is a reference to the real equilibrium funds rate as being 5 percent. I suppose that calculation involves the PCE chain-weighted core rate less food, energy, and tobacc... | 149 |
fomc | 2,000 | The Bluebook is the extension of the Greenbook forecast, and Chart 3, immediately after page 8, is essentially saying that. It is saying in the stable inflation case--the middle line with dots and dashes--that the funds rate gets up to 7-1/2 percent in the next two years. And over that period inflation rates are rising... | 166 |
fomc | 2,000 | So with an increase of 1/4 or 1/2 or even 3/4 of a percentage point, we would still be in a position of basically stimulating the economy and providing an environment where inflationary pressures are likely to continue to rise? | 52 |
fomc | 2,000 | As I was trying to say in my briefing, that depends importantly on the weight you put on the NAIRU calculation. What you do at each meeting is important obviously, but what the market perceives you are going to do may be even more important in terms of the effects on economic activity. And it's the intermediate- and lo... | 188 |
fomc | 2,000 | So if we were to move cautiously, it would be very important to communicate clearly about the work that apparently still has to be done? | 27 |
fomc | 2,000 | That's right. And I think that is what the balance of risks sentence is designed to do. And my judgment was that a combination of a 25 basis point increase and an unbalanced risk sentence, plus potentially a discount rate change, would tend to communicate that. One can never be certain about how the markets are going t... | 67 |
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