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fomc
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Governor Bernanke.
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Thank you, Mr. Chairman. I was interested in the likely evolution of the federal funds rate over the next two years. So I asked the staff to use their best fitting estimated Taylor rules together with both Greenbook and private sector forecasts to project some sample interest rate paths. The rules the staff chose were ...
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Thank you very much. We now go to Vincent Reinhart.
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2 Thank you, Mr. Chairman. I will be referring to the materials that Carol Low handed out during the coffee break. As shown in the top left panel of your first exhibit, investors seem to have raised the path expected for the federal funds rate over the course of 2004. They are still counting on cumulative tightening to...
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Thank you. Questions for Vincent?
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Vincent, in the top panel of exhibit 4, there is a column labeled "unwelcome fall." One thing we've learned in the last two quarters is that productivity has been extraordinarily strong. Certainly the probability of a decline in inflation from, let's say, the level in the forecast may be reasonably remote, but the prop...
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Well, I would say that, on one level, rapid growth in aggregate supply only raises the bar for the growth of aggregate demand that the Committee should desire to get the outcomes it wants. So in that sense, there still could be unwelcome declines in inflation.
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Of course.
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But they would not be associated with problems relating to the economic expansion. In general the linking of "unwelcome" and "disinflation" or "a pickup in inflation" may pose a problem in the current structure of this language. It's a problem that President Stern also referred to in his discussion of disinflation as n...
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But it appears as though it would be less unwelcome than we may have thought before we knew what was happening to productivity.
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In that regard, you do have your other assessment to separate the distinction between less unwelcome and more unwelcome. An unwelcome decline in inflation that was associated with a growing resource gap would presumably be closer to those pernicious deflations that members have expressed concern about in the past. A de...
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Well, in my effort to communicate better with you, I feel better. [Laughter]
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Just remember, if you want to parse words, "unwelcome disinflation" is part of disinflation. You can size it however you so choose. That's what our communication problem is getting us into. Further questions for Vincent? President Santomero.
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In regard to President Parry's comment, perhaps the problem here is that we're trying to combine two different issues regarding inflation in this chart--namely, the probability of inflation moving up or down as currently forecast and a qualitative evaluation of that. Maybe we should separate the two--define the risk of...
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I view that as a serious problem with the current structure of the language. In the proposals discussed in the two memos that I circulated, I separated out the first two statements as being declarative statements about your forecast couched in probability terms--the probability of inflation rising or falling and the pr...
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Essentially I'm agreeing with that approach, given the difficulty of communicating the alternative, which blends the two together.
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President Minehan.
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The more we go into how to slice and dice and stress-test all of these various formulations--whether it's the current one or the one Vincent proposed in his October 17 memo--the more difficult and complicated this whole process becomes. It is fraught with untoward circumstances or unintended consequences. I think we ne...
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Further questions for Vincent? If not, let me just say that Cathy is raising a general concern that I think we all share. One can see it by trying to use language to calibrate mechanisms that are digital. Every technician will tell you that that leads you nowhere. In any event, we're going to get a clarification of the...
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That's another reason for not using the term, by the way. [Laughter]
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If it turns out that the economy, after going through this recent surge, simmers down very dramatically and indeed exhibits weakness, then from a policy point of view we're obviously well positioned at this stage. I think a weakening in economic activity is unlikely. I believe it's more likely that evidence of an old-f...
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Mr. Chairman, I support you completely. Since we're into metaphors today, here's mine. With regard to the communication part of your recommendation, with the second paragraph I think we have dug ourselves into a hole and we're trying very hard to get out of it but all we're doing is getting in deeper. Let's put the sho...
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President Poole, what do we do about the shovel? [Laughter]
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I was going to comment that I think the minutes that will come out on Thursday are going to help a lot. On page 14 there's some important language that emphasizes that the "considerable period" has to be interpreted in the context of the evolution of the economy, not in the context of calendar time. I believe that lang...
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I meant to say that, and I don't think I said it explicitly. We really ought to have the simulated exit strategy spelled out in full detail before we take the first step. We have to know where we want to end up under various conditions so that we don't find ourselves as perpetual ditch diggers. President Broaddus.
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I concur with your recommendation, Mr. Chairman, and I like Tom's metaphor.
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Governor Ferguson.
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I concur with the recommendation.
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President Santomero.
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I concur with your recommendation, Mr. Chairman. One thing I will say is that this exercise has convinced me that trying to write down every single contingent response in a group of nineteen people is extraordinarily challenging. These memos and various options may be worth reading but not necessarily worth doing.
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President Minehan.
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I very much agree with your suggestion, Mr. Chairman, and I also like Tom's metaphor.
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Governor Kohn.
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I agree with your recommendations, Mr. Chairman.
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President Parry.
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I agree with your recommendations.
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President Guynn.
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I agree with your recommendation, Mr. Chairman.
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President Stern.
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I'm comfortable with your recommendation.
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First Vice President Stewart.
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I concur.
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Governor Bernanke.
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I concur with both parts of your recommendation, Mr. Chairman.
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Governor Bies.
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I support your recommendation.
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Governor Olson.
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I support the recommendation.
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President Moskow.
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I agree with the recommendation, with the understanding that we'll have a thorough discussion of this issue in the future.
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President Pianalto.
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I agree with your recommendation, Mr. Chairman.
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So do I.
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I concur.
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Would the Secretary read the appropriate language?
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The wording is on page 10 of the Bluebook continuing onto page 11: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee in the immediate future seeks conditions in reserve m...
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Call the roll please.
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Chairman Greenspan Yes Governor Bernanke Yes Governor Bies Yes President Broaddus Yes Governor Ferguson Yes Governor Gramlich Yes President Guynn Yes Governor Kohn Yes President Moskow Yes Governor Olson Yes President Parry Yes First Vice President Stewart Yes
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Our next meeting is Tuesday, December 9. Excuse me, I forgot to mention that there's essentially no change in the press statement. Now, what's your pleasure with regard to the discussion on communications? Do you want to talk over lunch or do you want to recess and come back?
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What I propose, Mr. Chairman, is for everybody to go get lunch and come back to the table. When everyone settles down, I can read some brief remarks, and then we can proceed with the discussion.
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Okay, that sounds good. Is that satisfactory to everybody? Good, let's go to lunch. [Lunch break]
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Let's turn to Vincent Reinhart.
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3 Thank you, Mr. Chairman. I'll be referring to the material called "Briefing on FOMC Communications Policy" that Carol Low handed out while you were getting lunch. One of my favorite quotes, which offers some perspective on my work on the Committee=s communication policy over the past few months, comes from William of...
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Why don't you put each question on the table and ask for comments.
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The first question is, Is there any clear preference as to the basic structure of the assessment of the outlook?
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Mr. Chairman, before we talk about that, could I say a word about my draft wording?
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Certainly.
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As I've said before, I've not fancied myself a communications expert, so I do this a bit reluctantly. But the thing I'm increasingly having trouble with in our statements is that our assessments of the economy are not benchmarked. As I said in my memo, the phrase "sustainable growth" sometimes seems to mean that the ec...
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I think we have to be a little careful here because there is a prerequisite to this discussion that we don't talk about, namely how much can we rationally expect monetary policy to do. If we believe that monetary policy has the capability of affecting the economy incrementally in all sorts of ways--to create whatever l...
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May I respond to that? I think the issue is not whether we get to full employment in some reasonable period but how our policy is structured given the way we see output relative to some objective. I see the issue as how best to say that we are trying to work in a direction of expansion or contraction, whichever the cas...
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Indeed, I think everyone does that because we all have our own objectives and hence when we vote we make policy decisions based on those objectives. Implicitly we all do that, or else we would not be able to come to a conclusion. What I'm arguing against is the capacity of the members of this Committee to have a simila...
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First, I want to start with a quote, go on to make some points, and then answer Vincent's question. Vincent opened with a quote from William of Orange, and I'll start with one from Winston Churchill, who said that in matters of communication "victory is never final, and defeat is never fatal." So I want to encourage us...
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President Guynn.
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Mr. Chairman, I don't have a quote, but I am reminded of a life experience, which was the first time I ate a raw oyster. Somebody forgot to tell me to let it slide down. Instead, I began to chew on the darn thing, and the more you chew on an oyster the tougher it gets to swallow. I might have been closer to being ready...
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President Hoenig.
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Mr. Chairman, I more or less share the view that President Guynn expressed. One of the things I did in preparation for this discussion was to go back to the press release that we used in January 2000. After some considerable thought, the Committee--rightly or wrongly--put that wording together. It worked very well as f...
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President Parry.
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At the last meeting I came away with the impression that what we seemed to agree on was that the directive wording and the risk assessment we voted on should be what we communicated to the public. It was important to many of us--maybe to all of us--that the communication directly reflect our vote. Is it naive, Vincent,...
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Although what you agreed on formally were instructions to the drafters of the statement. I think in the proposal--
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What we agreed on is what is going to appear in the minutes.
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What Normand read was from the page in the Bluebook.
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Yes.
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That isn't identical to what is in today's press release for the following reason--
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Oh, I know that.
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This is a minor issue because we can readily do what Bob is saying in that context.
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The proposal was that, when you decide on a risk assessment, what you vote on would be what appears in the directive. I think everyone agreed to that. The problem for this meeting operationally was that, if you decided to adopt language that differs from what you used at the last meeting, we would not have known what t...
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Okay. Isn't the goal to get the language in the vote and the press release the same? Why should that be so difficult? Based on what I've read in the last couple of weeks, it's extremely difficult. I don't understand why. Maybe we need an English teacher or grammarian.
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No maybe about that!
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The trouble is that, when you run into a problem, you tend to add adjectives and adverbs to any statement.
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Yes, I noticed.
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And it becomes the oyster that Jack's been chewing on! [Laughter] President Poole.
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I agree with Jack that we need to do some hard background work and have an extended session in January to review where we want to go on this. One dimension of this on the table is the issue that Ned raised at the outset having to do with objectives and whether we can usefully sharpen that language. I think another very...
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May I ask President Poole a question?
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Sure.
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I agree with you, but do you not foresee a period where the risks could be unbalanced but not so unbalanced that the Committee felt it had to move immediately? In such a situation the tilt is not a hint about policy, but a sense--and this is what I think we've been doing for two years--that the risks are weighted in a ...
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Obviously there's a whole continuum here.
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Right.
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I understand that, of course. My concern is that making a statement that the risks are unbalanced and yet not wanting that to be interpreted as a hint about the probable direction of policy is a very difficult language act to pull off. I think the market routinely views the unbalanced risk assessment as a hint about or...
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I think that's true.
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I'm uncomfortable doing that because my view is that the policy adjustments are primarily driven by surprises or by the new information that we can't predict. That's why I believe that providing these hints causes problems more than it helps. I'm just saying that that's something we need to discuss.
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