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FOMC Meeting Transcript, November 1-2, 2011

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FOMC Meeting Transcript, November 1-2, 2011 November 1–2, 2011 1 of 282 Meeting of the Federal Open Market Committee on November 1–2, 2011 A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, November 1, 2011, at 10:30 a.m. and continued on Wednesday, November 2, 2011, at 8:30 a.m. Those present were the following: Ben Bernanke, Chairman William C. Dudley, Vice Chairman Elizabeth Duke Charles L. Evans Richard W. Fisher Narayana Kocherlakota Charles I. Plosser Sarah Bloom Raskin Daniel K. Tarullo Janet L. Yellen Christine Cumming, Jeffrey M. Lacker, Dennis P. Lockhart, Sandra Pianalto, and John C. Williams, Alternate Members of the Federal Open Market Committee James Bullard, Esther L. George, and Eric Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively William B. English, Secretary and Economist Deborah J. Danker, Deputy Secretary Matthew M. Luecke, Assistant Secretary David W. Skidmore, Assistant Secretary Michelle A. Smith, Assistant Secretary Scott G. Alvarez, General Counsel David W. Wilcox, Economist James A. Clouse, Thomas A. Connors, Steven B. Kamin, Loretta J. Mester, Simon Potter, David Reifschneider, Harvey Rosenblum, Lawrence Slifman, Daniel G. Sullivan, and Kei-Mu Yi, Associate Economists Brian Sack, Manager, System Open Market Account Jennifer J. Johnson, Secretary of the Board, Office of the Secretary, Board of Governors Patrick M. Parkinson, Director, Division of Banking Supervision and Regulation, Board of Governors Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors November 1–2, 2011 2 of 282 Robert deV. Frierson, Deputy Secretary, Office of the Secretary, Board of Governors William Nelson, Deputy Director, Division of Monetary Affairs, Board of Governors Andrew T. Levin, Special Adviser to the Board, Office of Board Members, Board of Governors Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors Charles S. Struckmeyer, Deputy Staff Director, Office of the Staff Director, Board of Governors Michael P. Leahy, Senior Associate Director, Division of International Finance, Board of Governors; William Wascher, Senior Associate Director, Division of Research and Statistics, Board of Governors Ellen E. Meade, Senior Adviser, Division of Monetary Affairs, Board of Governors Daniel M. Covitz and Michael T. Kiley,¹ Associate Directors, Division of Research and Statistics, Board of Governors Christopher J. Erceg,¹ Deputy Associate Director, Division of International Finance, Board of Governors; Fabio M. Natalucci, Deputy Associate Director, Division of Monetary Affairs, Board of Governors Brian J. Gross,¹ Special Assistant to the Board, Office of Board Members, Board of Governors David Lopez-Salido,¹ Assistant Director, Division of Monetary Affairs, Board of Governors David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors Mark A. Carlson, Senior Economist, Division of Monetary Affairs, Board of Governors Penelope A. Beattie, Assistant to the Secretary, Office of the Secretary, Board of Governors Sarah G. Green, First Vice President, Federal Reserve Bank of Richmond Glenn D. Rudebusch, Executive Vice President, Federal Reserve Bank of San Francisco David Altig, Geoffrey Tootell, and Christopher J. Waller, Senior Vice Presidents, Federal Reserve Banks of Atlanta, Boston, and St. Louis, respectively __________________ ¹ Attended the portion of the meeting relating to monetary policy strategies and communication. November 1–2, 2011 3 of 282 Todd E. Clark, Edward S. Knotek II, and Nathaniel Wuerffel, Vice Presidents, Federal Reserve Banks of Cleveland, Kansas City, and New York, respectively Deborah L. Leonard, Assistant Vice President, Federal Reserve Bank of New York Robert L. Hetzel, Senior Economist, Federal Reserve Bank of Richmond November 1–2, 2011 4 of 282 Transcript of the Federal Open Market Committee Meeting on November 1–2, 2011 November 1 Session CHAIRMAN BERNANKE. Good morning, everybody. This is a joint FOMC–Board meeting. I need a motion to close the meeting. MS. YELLEN. So moved. CHAIRMAN BERNANKE. Thank you. We welcome you, Esther George, in your new capacity as President of the Federal Reserve Bank of Kansas City. Welcome again. MS. GEORGE. Thank you. CHAIRMAN BERNANKE. Before launching into our official business, President Fisher needs to describe an intra–Reserve Bank transaction. President Fisher. MR. FISHER. Yes, thank you, Mr. Chairman. Unlike some operators on Wall Street, we at the Federal Open Market Committee do pay our debts in full. [Laughter] I have a debt that I need to pay back to the gentleman on my left. [Laughter] I am tempted to claw his eyes out and scratch his legs during the meeting, but instead, being honorable, this is the bet. [Laughter] MR. BULLARD. Let the record show— MR. FISHER. This is beer. This is the elixir of working men and women, and I never resist giving some facts. Beer is the third-most consumed liquid product in the world after water and beer. It goes back to at least the Neolithic Period, 9,500 B.C. There was a goddess of beer that the Sumerians have called Ninkasi. And there is a famous prayer that is called “The Hymn to Ninkasi.” I evoked it so many times during the sixth game, but I found out that Ninkasi, whoever she was, gave way to the god of Bud. There it is, Shiner Bock, the best of Texas beers. I would have brought you a Lone Star, but real men and women don’t drink light beer. [Laughter] November 1–2, 2011 5 of 282 Mr. Chairman, thank you for giving us this opportunity. I won’t tell you how I snuck it into this room. I never want to go through that security procedure again. [Laughter] But you won, congratulations. MR. BULLARD. Thank you, sir. And a great World Series it was. MR. FISHER. It was a terrible World Series. [Laughter] MR. TARULLO. What were you going to pay up if he won? MR. BULLARD. A six-pack of the local brew. MR. WILCOX. Bud Light. [Laughter] MR. BULLARD. Bud Light, Busch. CHAIRMAN BERNANKE. Okay. Meeting is adjourned. [Laughter] Let’s turn to item 1 on the agenda. The retirement of Dave Stockton opens up a vacancy. We propose to select David Wilcox as economist for the FOMC, and Larry Slifman as associate economist, effective until the organizational meeting in January 2012. No objections? [No response] All right. Thank you very much. Let’s turn now to item 2 on monetary policy frameworks. Let me begin the discussion by turning to Michael Kiley, who will lead the staff presentation. MR. KILEY.1 Thank you. Early last month, Committee participants received a memo on “Alternative Monetary Policy Frameworks” that I coauthored with Chris Erceg and David Lopez-Salido. The memo discussed several policy strategies that the Committee might wish to adopt that could potentially provide additional stimulus or protection against especially undesirable outcomes. As highlighted in the box at the top of your first exhibit, these commitment strategies are broadly consistent with flexible inflation targeting—that is, with a policy framework that combines commitment to a medium-run inflation objective with the flexibility to respond to economic shocks as needed to moderate deviations of employment from its “full employment” level. In our analysis, we assumed that the Committee aims to achieve an inflation rate of 2 percent, consistent with the majority of longer-run projections from the Summary of Economic Projections (SEP) 1 The materials used by Mr. Kiley are appended to this transcript (appendix 1). November 1–2, 2011 6 of 282 and other communications by the Committee. In addition, the full employment goal is interpreted as an unemployment rate in the range of 5 to 6 percent, also consistent with the majority of longer-run projections from the SEP. Given these objectives, we focused on how strategies that involve making conditional commitments about how the policy rate will be adjusted going forward can contribute to improved macroeconomic outcomes relative to the current strategy of the Committee, which might be described as one of constrained discretion. To illustrate the role of commitment, we considered two examples of optimal control simulations of the type presented in the Tealbook using the FRB/US model: One example, the “discretion” case, assumes that policymakers follow an optimal policy on a period-by-period basis and are unwilling to promise future accommodation; the second example, the “commitment” case, assumes that policymakers are willing to commit (conditional on economic outcomes) to future policies that are potentially more expansionary than would otherwise be chosen in order to stimulate activity today. As shown in the figures in the next three panels (which also include the projections in the September Tealbook, which are little different from those in the most recent projection), these different approaches result in notable differences in outcomes for inflation and unemployment. In the discretion case, policy, as measured by the federal funds rate (reported in the middle-left panel) is only slightly more accommodative than in the Tealbook baseline, whereas the commitment approach involves a plan to maintain the federal funds rate near zero until the end of 2015. In the simulation, the additional accommodation under the commitment approach brings about a persistent fall in the unemployment rate (shown in the middle-right panel) and a sustained rise in inflation (reported at the bottom left) to a little over 2 percent. Given the tight labor market and slightly above-target rate of inflation in future years under the commitment strategy, future policymakers would presumably be tempted to renege on the accommodative policy stance promised, but given their commitment, they are assumed not to do so. As highlighted in the memo and noted in the bottom-right box, several features of the optimal policy evident in the FRB/US simulations appear robust across a range of models.
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