“I’m a little confused”

It really sucks not having a transcript of the press conference, which I think contained some rather stunning remarks.  I tried to write down notes, but these won’t be exact quotations.

Early on someone asked a very apt and pointed question (almost Svenssonian), which went something like this:

I’m a little confused.  The reports seems to show at the end of 2014 the unemployment rate at or above 7% and inflation at or below 2%.  And yet 11 out of 17 members of the committee wanted to raise rates by that time.  If unemployment and inflation are in fact symmetrical objectives, how can that be the case?  And is there any tolerance to catchup inflation in the service of catch-up growth?

Bernanke seemed to ignore the catch-up inflation question.  The he started talking about the fact that they had done a lot already, listing some of the policy moves.  Then he talked about the complexity of the problem, and that they weren’t going to mechanically make any decision based on these interest rate forecast, but rather consider how the economy evolved, blah, blah, blah.  So he was downplaying the implication of some tightening in 2014.  Then things got more interesting:

Yes, if inflation is going to remain below target for an extended period and unemployment progress is very slow then I think your implicit question is right.   There is a case for additional policy action.  We’ll continue to observe the situation and we’re certainly prepared to look for additional ways to provide support if we continue to have this unsatisfactory situation.  (italics added)

I found this interesting, because the reporters “implicit question” wasn’t a question at all, but an implied critique of Fed policy.  I read Bernanke as agreeing with that critique.  But that’s just one question, and long rambling answers can be misinterpreted.  Fortunately, the question was asked again about 30 minutes later, and once again in a quite pointed way:

Why shouldn’t someone looking at these numbers from the outside say that as aggressive as you say you’ve been, and as aggressive as you have been, it doesn’t look like you’re meeting any of your goals for the next 3 years on the economy.  So why isn’t the Fed doing more now?

Again Bernanke began by emphasizing how much they had done, and that they hadn’t been passive.  Then he took a shot at inflation hawks, pointing out that they’d been continually wrong in predicting that the massive balance sheet increases would lead to inflation.  Then things got interesting:

If the situation continues with inflation below target and unemployment declining at a rate which is very, very slow, then more [sic] our framework, the logic of our framework says, we should be looking for ways to do more. It’s not completely straightforward because we are working with a variety of nonstandard policy tools.  We can’t just lower the fed funds rate by 25 basis points like in the good old days.  But your basic point is right. We need to adopt policies that will both achieve our inflation objectives and help the economy recover as quickly as feasible. I would say that your question, actually and the earlier question, shows the benefit of explaining this framework, because the framework makes very clear that we need to be thinking about ways to provide further stimulus if we don’t get improvement in the pace of recovery and a normalization of inflation.  (italics added)

This post took a long time to put together, so I won’t have time to say more tonight.  But two different reporters asked questions that sharply critiqued monetary policy, pointing out that the logic of Bernanke’s emphasis on the dual mandate suggested that the Fed should be doing more right now, and should not be thinking of raising rates in 2014 if economic conditions were as currently forecast by the Fed.  In both cases Bernanke made the required pro-forma statements that they had already done a lot, but then instead of defending the honor of the Fed he basically agreed with the reporters:

I think your implicit question is right.   There is a case for additional policy action.

But your basic point is right. We need to adopt policies that will both achieve our inflation objectives and help the economy recover as quickly as feasible.

As I watched the press conference I found myself agreeing with Bernanke over and over again, on all sorts of points.  I don’t think his views are all that far from mine.  So why isn’t the Fed doing more?  All Bernanke can say is that they’ve done a lot.  And that it’s a complicated problem.  And yes, “your implicit question is right”—there is a case for doing more under current and future expected conditions.  I’d expect QE3 this year.  And I’d also expect Bernanke’s memoirs to say he was occasionally frustrated by both the committee and outside pressure from politicians, and that the Fed should have moved at an even more aggressive pace.

There is more of interest from the press conference.  But no time tonight–maybe tomorrow.



37 Responses to ““I’m a little confused””

  1. Gravatar of Jon Jon
    25. January 2012 at 20:16

    Do we really need a higher inflation-rate to catchup? Or do we need a one-time adjustment to bring us back to the old trend-line?

  2. Gravatar of Integral Integral
    25. January 2012 at 20:34

    Possibly relevant: who is the median voter on the FOMC?

  3. Gravatar of Manny C Manny C
    25. January 2012 at 21:02

    Scott, I agree that Bernanke isn’t too far from your position. I don’t think he’s going level NGDP futures targeting, but there’s an echo of that in what he said in the Q&A. However, one of my good mates (a market economist) thinks Bernanke gave NGDP targeting a-kicking:

    My thoughts on Bernankes Q&A are over in the comments of that blog post, but I’ll repost some here:

    I think one of the most interesting Q&A came from a question from Zac of WaPo. In his response, Bernanke indicated that he thinks there is some cause for concern that the transmission mechanism supporting QE hasn’t been as effective as they expected. I would add the effect they have had on collateral markets has been quite negative. Bernanke also stated that there are other tools (i.e. not asset purchases) the Fed can use (aka “we’re not out of ammo”) but didn’t specify this as they were still being discussed, debated and considered.

    I read that as meaning: don’t bet on QE3. We are worried it isn’t working as we thought it should. We might try something different. But that something different is still up in the air. We’ll get back to. I think that is why he didn’t engage re contradiction between FFR projection & inflation & employment not being near targets. There might be something else coming.

  4. Gravatar of Steve Steve
    25. January 2012 at 21:34

    Maybe the Fed is forecasting that Richard Fisher’s return in 2014 will trigger a tightening of monetary policy?

    I actually think that the three year commitments on the part of the Fed could be a stroke of brilliance on Bernanke’s part. Not for the monetary policy, but for the political economy. The regional fed voters are also on a three year cycle, which allows the Fed to pre-commit to policy through the hawks reign of terror.

  5. Gravatar of Benjamin Cole Benjamin Cole
    25. January 2012 at 21:44

    As usual, I agree with everything about this post. Why is Bernanke dragging his feet when we have inflation at zip three months in a row, unit labor costs falling, GDP 13 percent below trend and unemployed people? And Bernanke knows it!

    Is Bernanke trying to do as little as possible before 2012 (and a Romney victory?) Is he just naturally timid? Trying to build consensus with an increasingly rabid right-wing sentiment at the FOMC, that is moving to gold worship?

    What is so sacred about a 2 percent inflation target? What if 3 percent works better? What if 4 to 6 percent works better for emerging from recession?

    We are genuflecting to hoary, entrusted macroeconomic shibboleths, erected and defended by partisan sappers, chanting econo-shamans and monetary theologians.

    Can’t we just print more money?

  6. Gravatar of Steve Steve
    25. January 2012 at 21:47

    2008, 2011, 2014 are “Years of the Hawk” according to the Central Banking astrology tables. We get Fisher and Plosser, and even Trichet got pulled in by the gravitational ether both times.

    Remember in December 2007, Boston’s Rosengren dissented, preferring FASTER interest rate CUTS. But then the Year of the Hawk began in January.

    This was written about Rosengren in December 2007:

    “Analysts said Rosengren’s dissent was likely informed by research done at the Boston Fed that showed falling home prices, rather than rising interest rates, drive the surge in foreclosures. Falling home prices make it impossible for people with unaffordable loans to sell their homes, the research says, forcing them into foreclosure. It also broadens the pool of people who view their payments as unaffordable, because of the diminished prospect for a return on the investment ”


  7. Gravatar of Vivian Darkbloom Vivian Darkbloom
    26. January 2012 at 01:08

    “And yet 11 out of 17 members of the committee wanted to raise rates by that time.”

    The reporter appears to know quite a bit indeed. He suggested 6 members did not want to raise rates. Just how did he manage to persuade or even devine the views of members who were not even present because their positions were left un-filled? Is this Svenssonian or Svengalian?

  8. Gravatar of Sindre Sindre
    26. January 2012 at 01:48

    “Why not just print money” ??

    Maybe because it doesn’t work ? Maybe because it destroys the dollar ? Maybe because the US already has 15 trillion in debt + roughly 100 trillion in unfunded welfare expenses ? Maybe because printing money is stealth taxation on the middle class / poor who have no access to leverage ? Maybe because printing money is subsidizing the banks who learn nothing ?


  9. Gravatar of Dave Orzag Dave Orzag
    26. January 2012 at 03:16

    The problem with initiating another round of QE is the latency period for QE2. 6-9 months is a very short period of time in monetary policy terms. It would be imprudent of the Fed to literally throw more money at the problem when the money already circulating (or not circulating, as the case may be) has not had time to be the panacea everyone wants it to be… not to mention the pressure inflationary monetary policy puts on final demand. Consumer discretionary spending is expected to weaken with the end of fiscal stimulus; reducing an already collapsing savings rate (with a concomittant rise in unsustainable revolving credit) would hardly be conducive to a robust recovery.

  10. Gravatar of dwb dwb
    26. January 2012 at 05:05

    i completely agree. baby steps though: the framework now allows reporters to ask questions like this and bring some accountability to the FOMC. before, they did not have a specific target (so one really could not say definitively off). Now, at least they can frame the actual question: why are you forecasting policy failure. Before, the fear of allowing inflation expectations so spiral out of control was paramount. Bernanke has stated that the FOMC will allow “temporary” deivations from the target.

    It pretty clear te market is expecting another round of QE sooner than later.

    Also, there was another biggie: he refered to the employment mandate as on equal footing as the the inflation target. The full employment estimate is in the statement now (5.2 – 6%)… from which i infer the Fed really prefers a soft taylor rule with 50-50 weights.

  11. Gravatar of dwb dwb
    26. January 2012 at 05:33

    … sorry for the typos my fingers are faster than my brain this morning.

  12. Gravatar of ssumner ssumner
    26. January 2012 at 05:38

    Jon, A one time adjustment.

    Integral, I hope to discuss that issue later today (time permitting.)

    Manny, I hope something else is coming, but I think he was wrong about QE. At least he still believes they’re not out of ammo.

    I certainly agree that Bernanke doesn’t support NGDP targeting, I meant that his thought process on why we need easier money is very similar to mine.

    Steve, Yes, and he also pointed out that they have the votes to outvote the hawks.

    Ben, The other Ben is very cautious.

    Steve, Excellent observation about “The Year of the Hawk”

    Vivian, No, all 17 were present and stated their views, only 10 voted on the report.

    Sindre, The tight money since 2008 has made our public debt far worse, by causing ultra-slow NGDP growth.

    Dave, I don’t agree about lags in monetary policy–and the end of fiscal stimulus is an excellent time for more monetary stimulus.

    dwb, I agree, this is a significant step forward.

  13. Gravatar of TravisA TravisA
    26. January 2012 at 06:23

    Scott, what do you make of the fact that 10 year yields dropped and the stock market rallied?

    I suppose that the obvious reading is that liquidity conditions are tight enough that it overwhelmed the increased growth implications of Bernanke’s talk for the Treasury market. On the other hand, yields are so low already and Bernanke is pretty wedded to at least 1.5% inflation, I wonder if there are some free $100 bills on the ground to be picked up by shorting T’s 🙂

  14. Gravatar of dwb dwb
    26. January 2012 at 06:36

    I certainly agree that Bernanke doesn’t support NGDP targeting, I meant that his thought process on why we need easier money is very similar to mine.

    maybe I’m an optimist – but from everything I’ve read the practical considerations have outweighed the principal. Basically he’s steered the Fed towards formally adopting an equal weight taylor rule (he emphasized several times the FOMC is not an inflation targeter and that they were a dual mandate central bank). The FOMC has shied away from a strict UE target because (as he notes) there is a lot of uncertainty as to what that is and its a function of labor market flexibility, technological growth, and population growth(following the logic of the framework, had there been a point estimate for UE, there is a point estimate for rates). Monthly GDP data is unreliable, and inflation and UE are viewed as having different lags (not saying I agree- much of the lag is endogenous to policy), plus there are likely 17 different views of the phillips curve on the FOMC. I believe they have decided to add nominal gdp to the forecast variables to watch.

    So, maybe I am an optimist, but I do not think his views are all that different than yours, and my read is that the committee has not ruled out ngdp targeting on principal. IMO if there were clarity as to what the ngdp target should be (which will be a function of labor market flexibility and so on), and a reliable set of monthly data to track the economy, ngdp targeting would be in a far stronger position than a symmetric taylor rule. Which is to say, lots of work ahead to move it forward.

  15. Gravatar of Morgan Warstler Morgan Warstler
    26. January 2012 at 06:41

    “Asked about the Fed’s track record at yesterday’s news conference, Bernanke said the ability to forecast several years out was “limited.” The Fed’s projections are “not unconditional pledges” and are “subject to revision,” he said.

    Two policy makers — no names were attached to the forecasts — expect the funds rate to first begin rising in 2016. (My money is on New York Fed President Bill Dudley and Governor Janet Yellen.) That would mean eight years of 0 percent interest rates. There will be a revolution in this country before then if the economy is lousy enough to warrant 0 percent interest rates for that long. Even the fool in the shower knows that.”


    Inflation runs over 3% and all bets are off.

    That’s the real assumption here and everyone knows it.

  16. Gravatar of JimP JimP
    26. January 2012 at 07:31

    It seems to me that Bernanke is trying out a very important part of NGDP targeting – namely that communication and expectations matter – a lot.

    He directly said that they will do more, by saying the following (quote from Scott):

    “If the situation continues with inflation below target and unemployment declining at a rate which is very, very slow, then more [sic] our framework, the logic of our framework says, we should be looking for ways to do more.”

    The framework that the Fed is now officially committed to demands that they do more. He is fully aware of this and he is telling us that he is fully aware of it.

    By saying this but not yet doing it he is looking to see if the market will do it for him. There are, after all, lots of excess reserves. The Fed does not have to buy stuff to create more of them if the market will believe him when he says that if those excess reserves are not lent out soon then he WILL CREATE MORE OF THEM till they are lent out.

    And the market has responded pretty decently to this. Not as much as one might expect if participants had fully believed this – but still…….we shall see.

  17. Gravatar of Benjamin Cole Benjamin Cole
    26. January 2012 at 07:32


    Worshipping the dollar is not a monetary policy. Indeed, a lower exchange rate for the dollar would help exports, boost tourism to the US, and relatively deleverage our economy.

    Econo-shamans chant verse about the sacred status of the dollar—myself, I prefer prosperity. The material kind. I am a secularist.

  18. Gravatar of Cthorm Cthorm
    26. January 2012 at 07:49

    What do you think will be the next lever the Fed pulls? Ending the IOR policy? QE3? More maturity extensions?

    I think the case is strongest for ending IOR, but if that is the first trigger to be pulled it could give the hawks more cover to hide behind (long lags). If it’s not ending IOR next, I expect a new round of QE, but I expect a 0% chance of it being sufficiently large to boost growth enough.

  19. Gravatar of JimP JimP
    26. January 2012 at 07:49

    However – I also think what I have often said – that this is basically a political matter. Bernanke once called for Rooseveltian resolve from the Japanese central bank – but there was (is) no Roosevelt in Japan – and that resolve has not appeared in Japan.

    And Obama is no Roosevelt either. I continue to believe that if the Fed is going to risk apparently directly asking for higher inflation – which is the way NGDP targeting will be described by the ever charming Newt and Mitt, then he is going to need Presidential support to do so. And Obama apparently remains committed to the Keynesian model of deficit spending. Someone really ought to introduce him to Christina Romer.

  20. Gravatar of JimP JimP
    26. January 2012 at 08:18

    And I take it to be the case that RA is saying something like what I was saying.


    I think that press conference was a big deal.

  21. Gravatar of Scott N Scott N
    26. January 2012 at 09:00

    Scott, my big take away from yesterday is that the Fed will NOT do QE3 unless PCE prints significantly under 2.0% for at least a couple of months. The last three PCE numbers are (annually, which is what the Fed says it is targeting):

    Sep 2011 – 2.94%
    Oct 2011 – 2.66%
    Nov 2011 – 2.54%

    QE3 is unlikely until these numbers go lower.

    Consider what happened in 2010 in the run up to QE2. The PCE inflation rate is given below

    Apr 2010 – 2.34%
    May 2010 – 2.16%
    Jun 2010 – 1.46%
    Jul 2010 – 1.60%
    Aug 2010 – 1.45%
    Sep 2010 – 1.39%

    Note that these numbers are published about three to four weeks later so there is a lag in how quickly this data is reported (e.g., Aug 2010 PCE was published in late September 2010). What this means is that by the September 2010 Fed meeting, PCE had come in significantly below 2% in June and July (the Fed didn’t have the number for August by then) thereby paving the way for QE2.

    After the September 2010 Fed meeting, FOMC members began giving speeches that strongly hinted at QE2. On 4 October 2010, Bernanke gave a speech which left little doubt the Fed would implement some form of QE2.

    My theory is that the Fed realized QE2 was inevitable in the September 2010 meeting and spent the time between then and the November 2010 meeting when it was formally announced building support for it and letting the markets know it was going to happen.

    One more thing to note is that the Fed’s own forecast for PCE shows it falling below 2% by the fourth quarter of 2012 and leveling off in 2013. There is no forecasted uptick like what would take place if QE3 was implemented. This further supports my view that the FOMC currently thinks QE3 will never be implemented, but it is open to changing its mind if PCE prints below 2% for a couple of months.

  22. Gravatar of StatsGuy StatsGuy
    26. January 2012 at 09:19

    Here is my six month forecast:

    If Gingrich wins the Republican nomination, we’ll see easing. If Romney wins, we won’t see easing until the end of 2012.

    Note that I agree with Scott N above – Bernanke is basically saying they are inflation targeting. That is the framework. I’m not sure how he could be more clear in the new “communication framework”, and this is entirely consistent with their record.

  23. Gravatar of Vivian Darkbloom Vivian Darkbloom
    26. January 2012 at 10:52


    Section 12A of the Federal Reserve Act provides:

    “There is hereby created a Federal Open Market Committee (hereinafter referred to as the “Committee”), which shall consist of the members of the Board of Governors of the Federal Reserve System and five representatives of the Federal Reserve banks to be selected as hereinafter provided.”

    The Board of Governors of the Federal Reserve currently has five members (Bernanke, Duke, Yellen, Raskin, Tarullo) due to the fact that two positions are currently open.

    If you add to that the Federal Reserve President of NY (Dudley) and the four rotating members of the Federal Reserve Banks who vote, that makes 10 voting members. Officially, that is “the Federal Open Market Committee”.

    But, OK, in addition to these 10 members there are also five “alternative members” who attend meetings but who do not vote. That currently makes 15, including alternative members. There are, of course, in total, 12 Federal Reserve Board Presidents, but this does not mean all of them are “members of the Board” or, at any given time, even “alternative members of the board”. Many other persons attend these meetings but do not vote and are not considered “members of the committee”, even as current alternates. My question is, therefore, where do you get the other two “members of the Committee” so that the total is 17?

  24. Gravatar of Vivian Darkbloom Vivian Darkbloom
    26. January 2012 at 11:21

    In a couple of places in the last para of the prior post I meant to refer to “Federal Reserve *Bank* presidents and “members of the *Committee*” and “alternative members of the *Committee*” in each case in place of *Board”.

  25. Gravatar of Bababooey Bababooey
    26. January 2012 at 11:34

    As I watched the press conference I found myself agreeing with Bernanke over and over again, on all sorts of points. I don’t think his views are all that far from mine. So why isn’t the Fed doing more?

    I think the other Fed members don’t agree with his personal strategy. Maybe he’s already on board with Money Marketism and you all need to start hammering the other FOMC members.

    It makes sense for The Bernanke to have kept shining the light on action already taken, which reflects committee consensus. He kept past inaction in the shadow to hide committee disagreement. Anyone speaking on behalf of committee sublimates disputed/unresolved issues and highlights committee agreement. The speakers individual positions are irrelevant to the message. So he did his job, with some subtle hints to his personal feelings.

  26. Gravatar of John Bennett John Bennett
    26. January 2012 at 11:34

    One has to give Bernanke credit; he is dealing with an FOMC that is very conservative, composed as it is of big bankers who I believe have never been comfortable with the dual mandate. Life is so easy when you only have to pay attention to the right side of the road. I suspect Bernanke also has to deal with very conservative bankers outside the Board and with Congressmen of a similar persuasion.

  27. Gravatar of marcus nunes marcus nunes
    26. January 2012 at 12:35

    Amid the “confusion” it seems Ryan Avent had a couple of Johnnie Walkers too many!

  28. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    26. January 2012 at 12:43

    ‘If Gingrich wins the Republican nomination, we’ll see easing.’

    To the moon, Stats Guy!

  29. Gravatar of John John
    26. January 2012 at 12:51

    If the Fed manages to stimulate by delivering higher than expected inflation, they’d lock themselves into continuing to have to deliver higher than expected inflation in order for monetary measures to continue to have a stimulative effect. If deliver lower than expected inflation after this, the economy will suffer from the symptoms of deflation. This is how you produce stagflation

    I personally think that an economy is better at say 9% unemployment and 1% inflation than 7-8% unemployment and 10% inflation. At least in the lower inflation place it would be easier for businesses to calculate with more stable money and capital accumulation wouldn’t be punished as badly.

    What the economy needs right now is for the government to step back and let the market deliver three yards and a cloud of dust instead of trying fiscal and monetary Hail Marys. Time and leaving the markets alone is the quickest road to recovery.

  30. Gravatar of Let the Fed target a Quasi-Real PCE Price Index (QRPCE) « The Market Monetarist Let the Fed target a Quasi-Real PCE Price Index (QRPCE) « The Market Monetarist
    26. January 2012 at 13:39

    […] target of 2%. Some of my blogging Market Monetarist friends are not too happy about this – See Scott Sumner and Marcus Nunes. But I have an idea that might bring the Fed very close to the Market Monetarist […]

  31. Gravatar of StatsGuy StatsGuy
    26. January 2012 at 14:53

    @ Patrick –

    It seems the financial sector is backing us up here!

    Their order of preference is: Romney > Obama > Gingrich

    Hence, if monetary policy is really run by the banks for the banks, we will see the Fed sabotage the economy before the election if Romney is in then kickstart it, but if Gingrich is the nominee then they will kickstart the economy early to make sure Gingrich doesn’t take the oval office.


    “Faced with a choice between the Democratic incumbent and Republican Gingrich, 68, on who would be better for the world economy, global respondents back Obama 52 percent to 25 percent. Those in the U.S. give Gingrich a 44 percent plurality against 35 percent for Obama with 21 percent unable to tell how they would resolve the dilemma.

    Poll participants are divided over whether Romney’s private equity experience better equips him to manage the U.S. economy from the Oval Office. Forty-five percent say it would, compared with 41 percent who say it wouldn’t. U.S. respondents place greater weight on Romney’s investment background, with almost two-thirds of them considering it an asset.”

  32. Gravatar of ssumner ssumner
    26. January 2012 at 17:35

    TravisA, That was exactly my thought too.

    dwb, Good analysis. It seem odd that in such a high tech economy our real time data on real output is much WORSE than in 1929. Doesn’t Walmart keep track of how much they sell every single day? Indeed that might be worth a post.

    Morgan, Yes, the 2016 prediction is weird. If the Fed really thought that, they should be doing massive QE right now.

    JimP, When evaluating the market response you need to keep in mind that this was somewhat expected. I see at as a modest positive, which probably boosted asset prices a bit even before the formal announcement. But it’s not the level targeting they really need.

    I agree he hopes the markets will do part of the work.

    Ben, I agree, fortunately the dollar fell a bit.

    Cthorm, I really don’t know, but I’d guess QE3.

    JimP, Excellent Avent post, as usual.

    Scott, Very good analysis, but I think things are slightly different this time. Inflation is likely to fall fast, and I think the Fed knows this. So it wouldn’t surprise me if they moved on 6 months of data, not 12.

    Statsguy, I think he clearly said he wasn’t inflation targeting, but following the dual mandate. But perhaps it’s just a question of terminology.

    Vivian, Perhaps “committee” is the wrong term. But the point is that all 17 vote on an interest rate prediction.

    Bababooey, That sounds right, and I have a new post on this topic.

    John Bennett, Maybe, but most of the members seem close to Bernanke in ideological terms.

    Marcus, Yes, that does seem different from his earlier comment.

    John, You said;

    “I personally think that an economy is better at say 9% unemployment and 1% inflation than 7-8% unemployment and 10% inflation.”

    Yes, but there are much better choices available. How about 6% unemployment and 3% inflation?

    Better yet, they should target NGDP and let markets determine RGDP.

  33. Gravatar of Vivian Darkbloom Vivian Darkbloom
    27. January 2012 at 01:47


    You responded:

    “Vivian, Perhaps “committee” is the wrong term. But the point is that all 17 vote on an interest rate prediction.”

    I’m glad we agree that there are not 17 members of the FOMC. (This reminds me of the “smoothing” argument—in fact, the members of the FOMC are established by law, so that the number is fixed at any given point in time. In other words, it is not only a legal but also an “accounting identity”).

    That said, your additional remark is also not correct. You seem to be suggesting that 17 persons (presumably the Fed Board Members and regional bank presidents ) “vote” on an interest rate predictions. The only “voting” going on within the FOMC is with respect to its members (excluding “alternate members” for which I am willing to give at least linguistic liberty to get to 15 “members”).

    That gets us back to your original summary of Bernanke’s interview. Bernanke talked about the “Overview of FOMC participants’ assessments of appropriate monetary policy” (Figure 2 of the Summary of Economic Projections). This was what the journalist referred to in asking his question, which you summarized as follows:

    “I’m a little confused. The report seems to show at the end of 2014 the unemployment rate at or above 7% and inflation at or below 2%. And yet 11 out of 17 members of the committee wanted to raise rates by that time.”

    In fact, what the journalist said was this:

    “I’m a little confused by these forecasts and I was hoping you could help me understand what we’re looking at. It seems to say that you expect that at the end of 2014 the unemployment rate will be at or above 7% and inflation at or below 2%. And yet 11 out of 17 members of the committee tended to think that will be a good moment to raise interest rates again.

    Of course, he was wrong about the “members of the committee”, but was more or less correct about what *participants* “tended to think”.

    And yet, you have transcribed this into 11 of 17 “members” *wanting* (and lin your last remark “voting”?) to increase interest rates before the end of 2014. “Wanting” is a charged word and particularly inaccurate in this context. “Wanting” something and predicting what might, in future, be appropriate, are entirely different things.

    Is this a trivial point I am making? Bernanke, the Fed and the FOMC (as well as those who follow them) are notoriously obsessive about the language they use. And yet, what use is this if language over Fed and FOMC policy is lost in successive translations?

    The journalist was trying to make a point that the consensus forecast for inflation seemed to contradict the forecast for firming of interest rates. In fact, there may be an explanation for his confusion: the two need not be inconsistent because the consensus inflation forecast by participants (which is essentially an average) is compared with how a numerical breakdown of participants forecasted expected (not wanted) future interest rates. Outliers in the former might make a specific tally in the latter seem inconsistent and there is no way to tie the former individual forecasts to the latter by specific participant.

    If I were to actually know how each participant and therefore *potential member* of the FOMC “voted”, even if those “votes” did not count, I would be in a better position to judge how the future change in musical chairs among actual FOMC voters might affect monetary policy and therefore the markets. The FOMC statement and related documents do not easily allow this correlation, precisely because they are not “voting”.

  34. Gravatar of Vivian Darkbloom Vivian Darkbloom
    27. January 2012 at 02:26

    As a postscript to me comment above, it may be useful to listen to the Bernanke conference at minute 36 (approximately) and following in respect of Bernanke’s answer to a question from a journalist from the Financial Times. It strikes me that Bernanke’s comments are quite similar to those I have made regarding the relationship between participant *forecasts* (not *wants*) and actual *decisions* the FOMC makes that are based on *voting*.

  35. Gravatar of ssumner ssumner
    28. January 2012 at 06:17

    Vivian, I don’t agree, my understanding is that the participants were asked what interest rates would be appropriate, given economic conditions. That’s certainly the way Bernanke interpreted them in most of his answers. He once said these number give an indication of where Fed policy was likely to be if he was no longer on the committee.

    I think you’re being picky about a slight mistranslation of a reporter’s question that has no importance. “Wanting” and “a good moment to raise rates” mean essentially the same thing.

  36. Gravatar of Vivian Darkbloom Vivian Darkbloom
    30. January 2012 at 05:45

    Jon Hilsentrath of the Wall Street Journal picks up the theme today on “forecasting” inputs by FOMC “participants” and “voting” by FOMC “members”:

    “The policy statement approved by the 10 who voted suggested the Fed expected rates to be near zero “at least through late 2014,” a bit more dovish about the outlook for interest rates than the forecasts implied. Mr. Bernanke said in a news conference later that the view of the formal voters would always “trump” the larger group. Fed votes are required by law.”


  37. Gravatar of ssumner ssumner
    31. January 2012 at 14:01

    Vivian, I agree with that, but those other forecasters will be on the FOMC in 2013 and 2014, so their views certainly matter to investors.

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