The FOMC: A Look Back

Today's (06-23-09) Wall Street Journal editorial page, of which I'm a fan, contains a fascinating look back at the monetary policy debate in December 2003. During the FOMC meeting on December 9, 2003, then Governor Bernanke referred to a WSJ editorial of that same day (Speed Demons at the Fed) that wondered if the FOMC was paying adequate attention to "yellow-flashing" price signals such as the $406 price of gold, higher commodity prices, and a weak dollar.

In referring to the WSJ editorial and similar arguments, Mr. Bernanke said he believed such critics are "not particularly well informed" and that "as a Committee, we should continue to remain patient and not choke off growth unnecessarily."

Mr. Bernanke continued: "In particular, though of course we have to be vigilant to detect any change in the inflation trend, the odds of inflation rising significantly any time soon from its current very low level seem small." He went on to support his case.

These bones were dug up by the WSJ because its editors believe there are lessons to be learned that are relevant to the current debate on when the Fed should begin shifting its stance away from monetary ease.

Of course, in reading Mr. Bernanke's remarks at that FOMC meeting in December 2003, I was overwhelmed by curiosity about what I said at that meeting. "Enough about him; lets talk about me." (Coincidentally, the December 9 FOMC meeting in 2003 was Tim Geithner's first meeting as President of the New York Fed.)

I looked my remarks up in the transcript, and I wasn't embarrassed. My statement during the first go-around discussed the economy from the viewpoint of the Dallas Fed and its territory (Texas and part of New Mexico and Louisiana).

My remarks relevant to the policy decision in this part of the meeting are quoted below:

"The two issues that this Committee needs to address are (1) when and if this improved economic outlook might translate into higher inflationary pressures, and (2) when monetary policy will need to shift into a less easy posture. A third issue involves how to manage that policy shift without unduly disrupting financial markets and thereby the recovery.

As I look at the balance or risks going forward, it seems to me that the risks on both growth and inflation have become much more evenly balanced or are approaching balance."

                                         ……

"I don't think it is unreasonable to expect that services inflation could end up a lot closer to goods inflation as a result of these developments. That is just one more reason that I'm reluctantly thinking about raising interest rates at this time."

"Rapid GDP growth is not our enemy, though I'm willing to concede that rapid growth sustained primarily by substantially negative real interest rates may prove to be a problem. But that problem is not imminent given the degree of productivity growth and the slack in the economy and our ability to capitalize on the slack in the economies of other countries. I believe that the outlook for growth in real GDP is either balanced or biased toward more growth, and I think the outlook for inflation is now balanced."

["Balanced" represented an increase in the outlook for inflation from previously.]

"With regard to the "considerable period" of accommodative policy that we've mentioned in our press statement, I think we have to honor that promise when it comes to policy changes in the next little while. But I believe it's time to withdraw that phrase, even though the initial market reaction will likely be negative. The clock doesn't even start until that phrase has been removed from our statement. That phrase has become a liability to our credibility."

Chairman Greenspan proposed no change in the target fed funds rate at this meeting, along with a statement to be released with the decision. Not being a voting member in 2003, instead of voting, I gave a statement of support as follows:

"I support your recommendation. I would have preferred to eliminate the ‘considerable period' phrase, get it over with, and start the New Year out with a clean slate; but I support your recommendation."

Following the policy meeting, we discussed the FOMC's communication practices. I made the following remarks during that discussion:

"I agree with Cathy [Cathy Minehan, President of the Boston Fed] that the statement should be shorter and simpler-very much so. As I've long argued, I don't think we did ourselves a favor when we started announcing a bias vote. I would recommend not having a bias vote. If we don't have it, then we're not being nontransparent by not releasing it. If it's fairly obvious which way policy ought to be going at a meeting, I think we ought to just go there rather than do nothing and promise, through a bias vote, that we will likely do it next time. Whenever we act, people on the outside know pretty much the same information we do; they don't really need that much of an explanation of why we voted the way we did. So I think we leave ourselves much more flexibility if our announcements have fewer moving parts, and we have fewer ways to make a mistake if we just leave out the bias. If doing that requires releasing the minutes earlier, fine. That's all right with me. But I don't think we even have to do that. I'd just say that we've found recently that the lengthy press releases and announcements of various biases have not served us very well and we preferred to go back to the old system."