CHAIRMAN GREENSPAN. President Broaddus.
MR. BROADDUS. Mr. Chairman, I have not yet had the opportunity to read Governor Yellen's paper, which I look forward to doing.
But not having read it, I am reluctant at this point to deemphasize what you refer to as the "old model."
It seems to me that the information we heard yesterday suggests that the economy is currently robust, with the risks dominating on the up side rather than the down side.
I think it is instructive, as was pointed out this morning, that even if the Greenbook baseline projection materializes through 1997 with no change in policy in 1996 and 1997, the Bluebook analysis still says that an upward correction of 50 basis points, maybe more, is going to be needed to contain inflation in the longer term.
Moreover, in the Bluebook discussion of short-run alternatives, the point is made that if we want to tilt inflation down, we may have to raise the federal funds rate "considerably"--I believe that is the term used--or by more than 1/4 percentage point before the end of this year.
With these considerations in mind, I think the case for a tightening of policy today is a strong one.
I personally believe that a solid case can be made for an increase of 50 basis points in the federal funds rate.
If we were to do that, I believe there would be a credibility benefit that could be substantial.
A decisive move like this would tend to reduce uncertainty in financial markets and elsewhere about the ultimate extent of the tightening we might be contemplating.
We could announce that we expected a midcourse correction like this to bring the economy back to a sustainable longer-term growth path with declining inflation, and that might help to reduce the potential reaction in financial markets.
I could support such a move, but I realize that that may not be an option today.
In any event, I think that a move of at least 1/4 point is necessary.
The key thing we need to do now is to reaffirm our disinflationary credentials by reversing the two moves we made last winter.
TO BE CONTINUED ...
MINUTES OF JULY 3, 1996 FOMC MEETING
Re: MINUTES OF JULY 3, 1996 FOMC MEETING
CHAIRMAN GREENSPAN. President Parry.
MR. PARRY. Mr. Chairman, news on the economy since our last meeting has strengthened my view that it would be wise to raise the federal funds rate at this time.
We cut the funds rate in January because an apparent moderation in growth was reducing inflationary pressures and because we wanted to guard against the risk that the expansion might weaken even further.
Since then, the economy has surprised us with its strength.
Growth in the first half of this year appears to have exceeded the trend rate by quite a bit.
Indeed, my concern now has shifted to the substantial risk of rising inflation.
In that situation, whether one is an opportunist or of the deliberate persuasion, strong action is called for.
In my view, these considerations support a 50 basis point increase in the federal funds rate.
However, given that an increase would represent a change in the direction of policy and would be a surprise to the market, it may be prudent to limit ourselves to 25 basis points at this meeting and an asymmetric directive.
Mr. Chairman, I also would like to comment on your presentation, which I found very interesting.
It highlighted many of the uncertainties about the analytical framework that we are using to deal with policy issues.
I also thought that the emphasis on the PCE chain-weighted index was quite instructive.
I would recommend that we put on for a day a principled opportunist's hat and suggest to the Board staff, and perhaps also to our own staffs at the Banks, that they look at what would be involved to keep the PCE chain-weighted index, maybe not at the 2.1 percent that it has averaged over the last year, but I would be willing to say at 2-1/2 percent.
That would be consistent in my view with containing inflation.
It might be very interesting to see what the policy implications of that would be.
TO BE CONTINUED ...
MR. PARRY. Mr. Chairman, news on the economy since our last meeting has strengthened my view that it would be wise to raise the federal funds rate at this time.
We cut the funds rate in January because an apparent moderation in growth was reducing inflationary pressures and because we wanted to guard against the risk that the expansion might weaken even further.
Since then, the economy has surprised us with its strength.
Growth in the first half of this year appears to have exceeded the trend rate by quite a bit.
Indeed, my concern now has shifted to the substantial risk of rising inflation.
In that situation, whether one is an opportunist or of the deliberate persuasion, strong action is called for.
In my view, these considerations support a 50 basis point increase in the federal funds rate.
However, given that an increase would represent a change in the direction of policy and would be a surprise to the market, it may be prudent to limit ourselves to 25 basis points at this meeting and an asymmetric directive.
Mr. Chairman, I also would like to comment on your presentation, which I found very interesting.
It highlighted many of the uncertainties about the analytical framework that we are using to deal with policy issues.
I also thought that the emphasis on the PCE chain-weighted index was quite instructive.
I would recommend that we put on for a day a principled opportunist's hat and suggest to the Board staff, and perhaps also to our own staffs at the Banks, that they look at what would be involved to keep the PCE chain-weighted index, maybe not at the 2.1 percent that it has averaged over the last year, but I would be willing to say at 2-1/2 percent.
That would be consistent in my view with containing inflation.
It might be very interesting to see what the policy implications of that would be.
TO BE CONTINUED ...
Re: MINUTES OF JULY 3, 1996 FOMC MEETING
CHAIRMAN GREENSPAN. President Minehan.
MS. MINEHAN. I have not heard anybody arguing that the risks are not on the up side.
I agree with the Greenbook and other forecasts that we are likely to see moderation in growth over the second half of the year.
But even with that, both the Greenbook and most other forecasts see an uptick in inflation.
The Greenbook sees that measured on a CPI basis and the Bluebook sees that measured on a PCE basis.
Now, it may be that we are measuring inflation inaccurately.
It may be that the trend has been down, not sideways, and that there is room to move up a bit.
But if I took anything out of yesterday's discussion, it was a desire to hold the line at where inflation has been, however that is measured.
Our forecast in Boston, like many others, is based on standard analytical techniques that look at relationships between overall capacity and pressures on inflation as measured by the CPI.
Our forecast assumes, as do all model forecasts, that the past is a guide to the future.
I do not know how these models work with other measures of inflation, but I must say that I continue to be uncomfortable with the assumption that things have changed in a major way and that, while rising inflation occurred under similar circumstances in the late 1980s, it will not happen now.
I am attracted to the analytical framework that you set up in your discussion about moving down in a sense to a different curve and then starting from there.
I find that interesting in the context of all the discussion about job uncertainty, but I am still a little uncomfortable with it.
I know we have not seen many signs of rising inflation yet, and one could argue that, as measured by the PCE, there may have been a decline in inflation.
However, I do not think that we should wait to see it rise before acting, given the backward-looking nature of any inflation statistic.
Moreover, the feel of the economy, the availability of credit, the resilience of the housing and auto markets so far, the possibility that the economies of some of our major trading partners may be healthier than we thought earlier, and the ebullience of the stock market even with the modest downturns of late, all suggest to me that to be appropriately forward-looking we should move now.
That said, I do recognize the special circumstances surrounding an increase in the federal funds rate when it would be a turning point.
Inflation is not a major concern to the public.
In fact, the concern lies in the opposite direction, as you have so clearly pointed out, Mr. Chairman.
We are at a watershed, as others have said, and we need to be careful as we were in 1994 in laying the proper groundwork for the move that I think we all recognize we probably will have to make during the latter part of this year.
I hope that we can start conveying to the market and to the public in general that there are risks and we perceive them to be on the up side.
We could make this communication in the Humphrey-Hawkins testimony and in that way lay the groundwork for what I assume will be a necessary move at the August meeting.
I could be wrong, but as I think you indicated in your comments, I believe we will have to move at the August meeting.
I accept your recommendation for today.
I have had misgivings about not taking action, as I have said in the past, but I am okay with it at this time.
I would like to see us set the groundwork for a move in August.
Therefore, I would be in favor of an asymmetric directive, which to me means that if there were a need to move before the next meeting, there would be a phone call and we would talk about it.
My definition of asymmetry at this point is that it reflects the direction the Committee sees the economy moving.
It is not a commitment by any means, but it indicates a direction and it will send a signal when the directive is released to the public.
So, I am okay with your recommendation.
I would vote for asymmetry if I had a vote.
TO BE CONTINUED ...
MS. MINEHAN. I have not heard anybody arguing that the risks are not on the up side.
I agree with the Greenbook and other forecasts that we are likely to see moderation in growth over the second half of the year.
But even with that, both the Greenbook and most other forecasts see an uptick in inflation.
The Greenbook sees that measured on a CPI basis and the Bluebook sees that measured on a PCE basis.
Now, it may be that we are measuring inflation inaccurately.
It may be that the trend has been down, not sideways, and that there is room to move up a bit.
But if I took anything out of yesterday's discussion, it was a desire to hold the line at where inflation has been, however that is measured.
Our forecast in Boston, like many others, is based on standard analytical techniques that look at relationships between overall capacity and pressures on inflation as measured by the CPI.
Our forecast assumes, as do all model forecasts, that the past is a guide to the future.
I do not know how these models work with other measures of inflation, but I must say that I continue to be uncomfortable with the assumption that things have changed in a major way and that, while rising inflation occurred under similar circumstances in the late 1980s, it will not happen now.
I am attracted to the analytical framework that you set up in your discussion about moving down in a sense to a different curve and then starting from there.
I find that interesting in the context of all the discussion about job uncertainty, but I am still a little uncomfortable with it.
I know we have not seen many signs of rising inflation yet, and one could argue that, as measured by the PCE, there may have been a decline in inflation.
However, I do not think that we should wait to see it rise before acting, given the backward-looking nature of any inflation statistic.
Moreover, the feel of the economy, the availability of credit, the resilience of the housing and auto markets so far, the possibility that the economies of some of our major trading partners may be healthier than we thought earlier, and the ebullience of the stock market even with the modest downturns of late, all suggest to me that to be appropriately forward-looking we should move now.
That said, I do recognize the special circumstances surrounding an increase in the federal funds rate when it would be a turning point.
Inflation is not a major concern to the public.
In fact, the concern lies in the opposite direction, as you have so clearly pointed out, Mr. Chairman.
We are at a watershed, as others have said, and we need to be careful as we were in 1994 in laying the proper groundwork for the move that I think we all recognize we probably will have to make during the latter part of this year.
I hope that we can start conveying to the market and to the public in general that there are risks and we perceive them to be on the up side.
We could make this communication in the Humphrey-Hawkins testimony and in that way lay the groundwork for what I assume will be a necessary move at the August meeting.
I could be wrong, but as I think you indicated in your comments, I believe we will have to move at the August meeting.
I accept your recommendation for today.
I have had misgivings about not taking action, as I have said in the past, but I am okay with it at this time.
I would like to see us set the groundwork for a move in August.
Therefore, I would be in favor of an asymmetric directive, which to me means that if there were a need to move before the next meeting, there would be a phone call and we would talk about it.
My definition of asymmetry at this point is that it reflects the direction the Committee sees the economy moving.
It is not a commitment by any means, but it indicates a direction and it will send a signal when the directive is released to the public.
So, I am okay with your recommendation.
I would vote for asymmetry if I had a vote.
TO BE CONTINUED ...
Re: MINUTES OF JULY 3, 1996 FOMC MEETING
CHAIRMAN GREENSPAN. President Hoenig.
MR. HOENIG. Mr. Chairman, after listening to you, I have a better sense of the difficulties in this process--the uncertainty about the model or analytical framework that we use to assess the incoming data.
I also appreciate Bill McDonough's comment that we need to have the public's confidence and support.
I think, though, that we ought to be careful before we abandon the model we have been using, as some members have said already.
I would be reluctant to abandon such a model given our past experience.
Our projections suggest that there will be increases in inflation, although the change in our inflation measures introduces a confusing element.
Given the upside risks that are associated with the projections and weighing that against the downside risk of a small tightening move, I think there is a very good case for moving now.
If I were voting, I would put it in that context.
But I probably would say that the asymmetric directive toward tightening that we have on the table gives us an appropriate direction for policy and we can wait for increasing evidence at least until August.
I would be willing to wait that long, but I really think that a small move now would have tremendous benefits in the long term.
TO BE CONTINUED ...
MR. HOENIG. Mr. Chairman, after listening to you, I have a better sense of the difficulties in this process--the uncertainty about the model or analytical framework that we use to assess the incoming data.
I also appreciate Bill McDonough's comment that we need to have the public's confidence and support.
I think, though, that we ought to be careful before we abandon the model we have been using, as some members have said already.
I would be reluctant to abandon such a model given our past experience.
Our projections suggest that there will be increases in inflation, although the change in our inflation measures introduces a confusing element.
Given the upside risks that are associated with the projections and weighing that against the downside risk of a small tightening move, I think there is a very good case for moving now.
If I were voting, I would put it in that context.
But I probably would say that the asymmetric directive toward tightening that we have on the table gives us an appropriate direction for policy and we can wait for increasing evidence at least until August.
I would be willing to wait that long, but I really think that a small move now would have tremendous benefits in the long term.
TO BE CONTINUED ...
Re: MINUTES OF JULY 3, 1996 FOMC MEETING
CHAIRMAN GREENSPAN. Governor Lindsey.
MR. LINDSEY. Mr. Chairman, yesterday I thought Governor Meyer laid out two issues very well.
One of them is how GDP will grow relative to trend.
Your analysis showed exactly how we would respond.
If we saw a rise in inventory accumulation, to use your example, that suggested a sustained, above-trend rate of economic growth, we would move right away.
That is in fact why you are recommending an asymmetric directive.
I do not think there is any disagreement about that.
The other issue, to simplify it in terms of the labor market, is where the existing unemployment rate is relative to the natural rate, the NAIRU.
I also have not read Governor Yellen's paper, which probably has had about the best press so far of any paper in history for a paper that may not yet be finished.
[Laughter]
MS. YELLEN. It is just a little note.
MS. MINEHAN. You mean it is short.
MR. LINDSEY. With both religion and economics, we tend to be schismatic.
The Episcopalians can't sing from the Presbyterian hymnbook, and that is always a problem.
But let me see if I can put what has been said before in an ecumenical sense.
Jim Stock had a very interesting paper earlier this year on the NAIRU in the last three decades.
He observed that it has been highly variable.
Yes, if one had to pick a number and bet on it for 30 years, one would pick something like 6 percent.
But it has been as low as 5-1/2 percent and as high as 8 percent.
Let me talk about the 8 percent number, for example.
It came during an adverse oil shock.
What exactly does the term NAIRU mean?
It means the level of unemployment we have to attain to stop inflation from accelerating.
An oil shock produces a lot of inflationary impetus in the economic system.
To prevent an acceleration of inflation, the unemployment rate has to rise sharply and put downward pressure on wages to overcome the oil shock and hold inflation in place.
The lesson is that the NAIRU is variable, but changes in it due to supply shocks are temporary.
The NAIRU in his story came back down again after the oil shock ended.
Mr. Chairman, when I heard you mention the numbers 4-1/4 and 5 percent for the NAIRU, that set off alarm bells.
The way I interpreted what you just said is that given the rate of disinflation we recently experienced, the current level of unemployment, and the usual relationship between the amount of disinflation and the difference between the rate of unemployment and the NAIRU, you backed out an implied NAIRU.
But that is a temporary NAIRU.
I do not think we would gamble policy on the presumption that we have permanently reduced the natural rate to 4-1/4 or 5 percent.
A backlog of fear--this is my word for it--generated by the layoffs and the downsizings and whatever else in the early 1990s, created what we could think of as a positive supply shock, and the labor markets temporarily pushed the natural rate that low.
It will not stay that low, and we should not bet that it will.
What does that mean for short-run policy?
I think you have it exactly right.
You told us how we are going to respond to a demand-side shock or surprise, and I think the natural rate probably is much lower right now than it has been historically.
But it is there only temporarily.
The stock of fear that pushed the natural rate down will wear off.
We do not know how fast that will occur, but we had better be prepared to respond when it does.
I think we have reached the right solution in whatever New Age church [laughter] it may be that you are describing.
TO BE CONTINUED ...
MR. LINDSEY. Mr. Chairman, yesterday I thought Governor Meyer laid out two issues very well.
One of them is how GDP will grow relative to trend.
Your analysis showed exactly how we would respond.
If we saw a rise in inventory accumulation, to use your example, that suggested a sustained, above-trend rate of economic growth, we would move right away.
That is in fact why you are recommending an asymmetric directive.
I do not think there is any disagreement about that.
The other issue, to simplify it in terms of the labor market, is where the existing unemployment rate is relative to the natural rate, the NAIRU.
I also have not read Governor Yellen's paper, which probably has had about the best press so far of any paper in history for a paper that may not yet be finished.
[Laughter]
MS. YELLEN. It is just a little note.
MS. MINEHAN. You mean it is short.
MR. LINDSEY. With both religion and economics, we tend to be schismatic.
The Episcopalians can't sing from the Presbyterian hymnbook, and that is always a problem.
But let me see if I can put what has been said before in an ecumenical sense.
Jim Stock had a very interesting paper earlier this year on the NAIRU in the last three decades.
He observed that it has been highly variable.
Yes, if one had to pick a number and bet on it for 30 years, one would pick something like 6 percent.
But it has been as low as 5-1/2 percent and as high as 8 percent.
Let me talk about the 8 percent number, for example.
It came during an adverse oil shock.
What exactly does the term NAIRU mean?
It means the level of unemployment we have to attain to stop inflation from accelerating.
An oil shock produces a lot of inflationary impetus in the economic system.
To prevent an acceleration of inflation, the unemployment rate has to rise sharply and put downward pressure on wages to overcome the oil shock and hold inflation in place.
The lesson is that the NAIRU is variable, but changes in it due to supply shocks are temporary.
The NAIRU in his story came back down again after the oil shock ended.
Mr. Chairman, when I heard you mention the numbers 4-1/4 and 5 percent for the NAIRU, that set off alarm bells.
The way I interpreted what you just said is that given the rate of disinflation we recently experienced, the current level of unemployment, and the usual relationship between the amount of disinflation and the difference between the rate of unemployment and the NAIRU, you backed out an implied NAIRU.
But that is a temporary NAIRU.
I do not think we would gamble policy on the presumption that we have permanently reduced the natural rate to 4-1/4 or 5 percent.
A backlog of fear--this is my word for it--generated by the layoffs and the downsizings and whatever else in the early 1990s, created what we could think of as a positive supply shock, and the labor markets temporarily pushed the natural rate that low.
It will not stay that low, and we should not bet that it will.
What does that mean for short-run policy?
I think you have it exactly right.
You told us how we are going to respond to a demand-side shock or surprise, and I think the natural rate probably is much lower right now than it has been historically.
But it is there only temporarily.
The stock of fear that pushed the natural rate down will wear off.
We do not know how fast that will occur, but we had better be prepared to respond when it does.
I think we have reached the right solution in whatever New Age church [laughter] it may be that you are describing.
TO BE CONTINUED ...
Re: MINUTES OF JULY 3, 1996 FOMC MEETING
CHAIRMAN GREENSPAN. Governor Meyer.
MR. MEYER. Mr. Chairman, while I recognize that I arrived at an interesting moment for monetary policy, I must admit nevertheless that I did not agonize over my position for the monetary policy directive for this meeting.
Although it may still turn out to be a close call as to whether or not we tighten going forward and as early as August, I am very comfortable with your recommendation for no change in policy at this meeting and an asymmetric policy directive.
There are four good reasons for no change in policy at this time.
First, if you accept the staff forecast and take an opportunistic approach to future disinflation, then I think there are no strong grounds for tightening today.
The staff forecast suggests that, with the current monetary policy settings, we can sustain an expansion at a trend near capacity with nearly stable core inflation through 1997.
I fully support an effort to achieve this outcome.
Second, and I think quite importantly, my own perspective on the outlook reinforces this desire to the very minor extent that my outlook differs from the staff projections.
While the staff simulations provide a plausible picture of the acceleration of inflation if the unemployment rate is slightly below the NAIRU, my normal high confidence in this gap story is undermined by the extraordinarily well-contained state of core inflation across virtually all measures.
I for one would need to see either a decline in the unemployment rate below its recent range or an acceleration in core inflation measures to justify a tightening.
My third argument is a little different, Mr. Chairman.
In recent testimony you presented a compelling discussion of the Federal Reserve's position vis-a-vis growth.
I have, as you might suspect, a heightened awareness of the political sensitivity of this issue as I spent several months with little else to think about.
[Laughter]
As I understand your position, the Federal Reserve does not have a growth objective per se.
Once we achieve acceptable resource utilization rates and acceptable inflation readings, at least on a near-term basis, we will happily accept all the growth the economy will produce.
I accept this logic.
Tightening today would contradict that position.
We should not tighten solely on the basis of one quarter of above trend growth when utilization rates are not definitively signaling overheating and when inflation readings suggest inflation remains in check.
This is perfectly consistent with a transition to price stability over the longer run, albeit by the opportunistic camp's time schedule.
Fourth, we will have a wealth of additional information at the August meeting.
At that time, we will be in a much better position to assess the potential that growth will remain above trend.
As we enter the second half we will be better able to determine whether the strong growth over the first half has depressed the unemployment rate below its recent range and to judge the degree to which wage pressures may indeed have intensified and whether or not there is any pass-through to prices.
I am referring here specifically to the advance report on second-quarter GDP, where the mix will be very interesting; the next two employment reports; a second-quarter employment cost report; and a whole variety of monthly data that will condition our understanding of the economy's momentum heading into the second half.
My first two points make clear that there is little danger in waiting, and my last point indicates there is great benefit from doing so.
Now, a word about symmetry versus asymmetry.
I had a quite interesting time reading the transcript of the last FOMC meeting, and I am somewhat acquainted with the various meanings of the words.
But it really is interesting how symmetry means so many different things to different people.
We are all asymmetric in our policy posture, deciding here whether we are going to hold or increase the federal funds rate.
Nobody envisions a decline in the rate between this meeting and the next.
Most of us can envision situations where we would have to raise the rate.
All of us recognize that it will be a tough call at the next meeting, so I would have thought that the tilt in the directive for this meeting would be an easy call.
Personally, I am asymmetric and would feel more comfortable with an asymmetric directive.
From my reading of the last transcript, it does appear that some members of this Committee read into the distinction between symmetry and asymmetry differing degrees of permissiveness with respect to a move between meetings initiated by the Chairman.
This may be a fair interpretation also.
I am confident, Mr. Chairman, that you would consult with the members of this Committee in the intermeeting period before initiating a reversal of the direction of monetary policy.
With that caveat, I fully support an asymmetric directive.
TO BE CONTINUED ...
MR. MEYER. Mr. Chairman, while I recognize that I arrived at an interesting moment for monetary policy, I must admit nevertheless that I did not agonize over my position for the monetary policy directive for this meeting.
Although it may still turn out to be a close call as to whether or not we tighten going forward and as early as August, I am very comfortable with your recommendation for no change in policy at this meeting and an asymmetric policy directive.
There are four good reasons for no change in policy at this time.
First, if you accept the staff forecast and take an opportunistic approach to future disinflation, then I think there are no strong grounds for tightening today.
The staff forecast suggests that, with the current monetary policy settings, we can sustain an expansion at a trend near capacity with nearly stable core inflation through 1997.
I fully support an effort to achieve this outcome.
Second, and I think quite importantly, my own perspective on the outlook reinforces this desire to the very minor extent that my outlook differs from the staff projections.
While the staff simulations provide a plausible picture of the acceleration of inflation if the unemployment rate is slightly below the NAIRU, my normal high confidence in this gap story is undermined by the extraordinarily well-contained state of core inflation across virtually all measures.
I for one would need to see either a decline in the unemployment rate below its recent range or an acceleration in core inflation measures to justify a tightening.
My third argument is a little different, Mr. Chairman.
In recent testimony you presented a compelling discussion of the Federal Reserve's position vis-a-vis growth.
I have, as you might suspect, a heightened awareness of the political sensitivity of this issue as I spent several months with little else to think about.
[Laughter]
As I understand your position, the Federal Reserve does not have a growth objective per se.
Once we achieve acceptable resource utilization rates and acceptable inflation readings, at least on a near-term basis, we will happily accept all the growth the economy will produce.
I accept this logic.
Tightening today would contradict that position.
We should not tighten solely on the basis of one quarter of above trend growth when utilization rates are not definitively signaling overheating and when inflation readings suggest inflation remains in check.
This is perfectly consistent with a transition to price stability over the longer run, albeit by the opportunistic camp's time schedule.
Fourth, we will have a wealth of additional information at the August meeting.
At that time, we will be in a much better position to assess the potential that growth will remain above trend.
As we enter the second half we will be better able to determine whether the strong growth over the first half has depressed the unemployment rate below its recent range and to judge the degree to which wage pressures may indeed have intensified and whether or not there is any pass-through to prices.
I am referring here specifically to the advance report on second-quarter GDP, where the mix will be very interesting; the next two employment reports; a second-quarter employment cost report; and a whole variety of monthly data that will condition our understanding of the economy's momentum heading into the second half.
My first two points make clear that there is little danger in waiting, and my last point indicates there is great benefit from doing so.
Now, a word about symmetry versus asymmetry.
I had a quite interesting time reading the transcript of the last FOMC meeting, and I am somewhat acquainted with the various meanings of the words.
But it really is interesting how symmetry means so many different things to different people.
We are all asymmetric in our policy posture, deciding here whether we are going to hold or increase the federal funds rate.
Nobody envisions a decline in the rate between this meeting and the next.
Most of us can envision situations where we would have to raise the rate.
All of us recognize that it will be a tough call at the next meeting, so I would have thought that the tilt in the directive for this meeting would be an easy call.
Personally, I am asymmetric and would feel more comfortable with an asymmetric directive.
From my reading of the last transcript, it does appear that some members of this Committee read into the distinction between symmetry and asymmetry differing degrees of permissiveness with respect to a move between meetings initiated by the Chairman.
This may be a fair interpretation also.
I am confident, Mr. Chairman, that you would consult with the members of this Committee in the intermeeting period before initiating a reversal of the direction of monetary policy.
With that caveat, I fully support an asymmetric directive.
TO BE CONTINUED ...
Re: MINUTES OF JULY 3, 1996 FOMC MEETING
CHAIRMAN GREENSPAN. Governor Phillips.
MS. PHILLIPS. Thank you, Mr. Chairman.
Based on the increased upside risks, I think that a tightening of policy is going to be needed in the next several months, but I am a bit more optimistic than the Greenbook on inflation.
I am not convinced that a large increase--or a series of increases--in the federal funds rate is necessary.
In that vein, a tightening move could be delayed.
I am generally ambivalent on asymmetric directives, but based on the upside potential for the economy and the attendant inflation risks, it does seem to me that the case for tightening has strengthened.
Asymmetry would allow for an intermeeting move.
It seems to me that measures of price inflation and the ECI are particularly important information.
In that regard, I would still urge a phone call.
TO BE CONTINUED ...
MS. PHILLIPS. Thank you, Mr. Chairman.
Based on the increased upside risks, I think that a tightening of policy is going to be needed in the next several months, but I am a bit more optimistic than the Greenbook on inflation.
I am not convinced that a large increase--or a series of increases--in the federal funds rate is necessary.
In that vein, a tightening move could be delayed.
I am generally ambivalent on asymmetric directives, but based on the upside potential for the economy and the attendant inflation risks, it does seem to me that the case for tightening has strengthened.
Asymmetry would allow for an intermeeting move.
It seems to me that measures of price inflation and the ECI are particularly important information.
In that regard, I would still urge a phone call.
TO BE CONTINUED ...
Re: MINUTES OF JULY 3, 1996 FOMC MEETING
CHAIRMAN GREENSPAN. President Boehne.
MR. BOEHNE. The future usually bears some resemblance to the past, but the future is almost always different from the past.
I think we are in one of those situations now where we do not know how much different the future will be.
I believe most of us feel as we talk to people in our Districts that it may be more different, at least for a while, than we have become accustomed to.
That higher degree of uncertainty ought to make us more cautious about taking steps at this meeting, and I feel very comfortable about keeping policy the same.
Looking ahead, clearly the case for tightening and the probability that we will have to tighten in the coming months would be fairly high under the old model.
That may indeed turn out to be the case.
On the other hand, it may not turn out to be the case because we may be able to remain on an unchanged policy course longer than we now anticipate under these conditions without accelerating inflation.
So, while I am prepared to support an asymmetric directive, it does not automatically mean in my mind that we are setting ourselves up for a tightening.
That may indeed be necessary, and I think we need to be watchful.
Should conditions arise where we have to tighten, I think we ought to do so and we ought to be decisive about it.
But I do not know when that tightening will need to occur, whether it will be next month, the month after, or six months down the line.
For today, I agree that we should make no change in policy, be very watchful, and keep an open mind as to what we ought to do at the next and subsequent meetings.
TO BE CONTINUED ...
MR. BOEHNE. The future usually bears some resemblance to the past, but the future is almost always different from the past.
I think we are in one of those situations now where we do not know how much different the future will be.
I believe most of us feel as we talk to people in our Districts that it may be more different, at least for a while, than we have become accustomed to.
That higher degree of uncertainty ought to make us more cautious about taking steps at this meeting, and I feel very comfortable about keeping policy the same.
Looking ahead, clearly the case for tightening and the probability that we will have to tighten in the coming months would be fairly high under the old model.
That may indeed turn out to be the case.
On the other hand, it may not turn out to be the case because we may be able to remain on an unchanged policy course longer than we now anticipate under these conditions without accelerating inflation.
So, while I am prepared to support an asymmetric directive, it does not automatically mean in my mind that we are setting ourselves up for a tightening.
That may indeed be necessary, and I think we need to be watchful.
Should conditions arise where we have to tighten, I think we ought to do so and we ought to be decisive about it.
But I do not know when that tightening will need to occur, whether it will be next month, the month after, or six months down the line.
For today, I agree that we should make no change in policy, be very watchful, and keep an open mind as to what we ought to do at the next and subsequent meetings.
TO BE CONTINUED ...
Re: MINUTES OF JULY 3, 1996 FOMC MEETING
CHAIRMAN GREENSPAN. Governor Rivlin.
MS. RIVLIN. I am very comfortable with your recommendation, Mr. Chairman.
It is extremely hard for us to explain the current set of facts to ourselves with the models that all of us have been using, implicitly or explicitly.
I am intrigued by your construct, but very frankly none of us really knows what is happening.
It seems to me that moving now to tighten policy would demonstrate that the Federal Reserve has a knee-jerk reaction to growth even when we have not seen any clear evidence of increases in compensation, let alone in prices.
I think it would be a mistake if we were to tighten because the economy is stronger.
It is unclear to me what an asymmetric directive conveys.
I asked several people, including you, and I got very different and confusing answers and now I do not want to know exactly!
[Laughter]
My personal guess is that we will be in the same quandary in August.
We will have more information, but we will still be unsure about exactly what is happening.
But I see no reason not to admit to ourselves that we could have a shock that would occur in the intermeeting period that would cause you to do what I assume you would do anyway, namely get on the phone and say, what do we do now?
So, I would go along happily with your recommendation.
TO BE CONTINUED ...
MS. RIVLIN. I am very comfortable with your recommendation, Mr. Chairman.
It is extremely hard for us to explain the current set of facts to ourselves with the models that all of us have been using, implicitly or explicitly.
I am intrigued by your construct, but very frankly none of us really knows what is happening.
It seems to me that moving now to tighten policy would demonstrate that the Federal Reserve has a knee-jerk reaction to growth even when we have not seen any clear evidence of increases in compensation, let alone in prices.
I think it would be a mistake if we were to tighten because the economy is stronger.
It is unclear to me what an asymmetric directive conveys.
I asked several people, including you, and I got very different and confusing answers and now I do not want to know exactly!
[Laughter]
My personal guess is that we will be in the same quandary in August.
We will have more information, but we will still be unsure about exactly what is happening.
But I see no reason not to admit to ourselves that we could have a shock that would occur in the intermeeting period that would cause you to do what I assume you would do anyway, namely get on the phone and say, what do we do now?
So, I would go along happily with your recommendation.
TO BE CONTINUED ...
Re: MINUTES OF JULY 3, 1996 FOMC MEETING
CHAIRMAN GREENSPAN. President Stern.
MR. STERN. Thank you, Mr. Chairman.
I think you focused the discussion appropriately on the underlying inflationary process and on the questions of what we know or do not know about it.
I certainly would admit that I do not know as much about it as I would like.
The world may indeed have changed, but even so, if I understood you correctly, the change involves a transition having to do with concerns about job security and so on.
Some other things that strike me about the economic environment at the moment are that financial conditions seem to be what I would describe as generally permissive.
Credit is readily available on attractive terms.
Wealth effects stemming from the run-up in stock prices ought to be sizable.
I guess we have been cautious in terms of how we have built that into our model as have some other models as well.
It seems to me that bond market participants clearly are not convinced at this point that inflation is dead or even dying.
I think there is still a significant inflation premium in long-term interest rates.
Having said all that and having looked at the available information, my judgment is that the economy and its momentum are likely to be relatively strong.
My preference would be to raise the funds rate 1/4 percentage point now.
I view that in part as taking out a little insurance that the old model will reassert itself more quickly than we expect.
Certainly, a 1/4 point move is not going to trigger any tailspin in economic activity.
It also seems to me that under all the circumstances at the moment, such a move could be at least a start of a policy to bend inflation down a bit further, and it may be just the right thing to do.
TO BE CONTINUED ...
MR. STERN. Thank you, Mr. Chairman.
I think you focused the discussion appropriately on the underlying inflationary process and on the questions of what we know or do not know about it.
I certainly would admit that I do not know as much about it as I would like.
The world may indeed have changed, but even so, if I understood you correctly, the change involves a transition having to do with concerns about job security and so on.
Some other things that strike me about the economic environment at the moment are that financial conditions seem to be what I would describe as generally permissive.
Credit is readily available on attractive terms.
Wealth effects stemming from the run-up in stock prices ought to be sizable.
I guess we have been cautious in terms of how we have built that into our model as have some other models as well.
It seems to me that bond market participants clearly are not convinced at this point that inflation is dead or even dying.
I think there is still a significant inflation premium in long-term interest rates.
Having said all that and having looked at the available information, my judgment is that the economy and its momentum are likely to be relatively strong.
My preference would be to raise the funds rate 1/4 percentage point now.
I view that in part as taking out a little insurance that the old model will reassert itself more quickly than we expect.
Certainly, a 1/4 point move is not going to trigger any tailspin in economic activity.
It also seems to me that under all the circumstances at the moment, such a move could be at least a start of a policy to bend inflation down a bit further, and it may be just the right thing to do.
TO BE CONTINUED ...