1 In addition, I will use the term “Committee” in its broad sense to refer to the entire set of what are called FOMC “participants”—all 12 Federal Reserve Bank presidents and all members of the Board of Governors—despite the fact that only 5 presidents are legally voting members of the Committee at one time.
2 In August 1983, the FOMC discussed “conceptual and presentational issues” that arise from “efforts in Congress and elsewhere to have the Federal Reserve specifically declare its ‘objectives’ for nominal GDP, real GDP, and prices.” Questions posed for discussion included consideration of whether the Committee should publicly announce “a specific numerical statement of objectives (with respect to prices or nominal or real GDP) over an extended period” (Board of Governors of the Federal Reserve System, “Transcript of the Discussion Held on August 22, 1983”). The session was not considered part of the formal FOMC meeting. In 1989, in the face of rising inflation and concerns about the Fed’s credibility, Cleveland Fed president Lee Hoskins argued for choosing a specific inflation objective (see Board of Governors of the Federal Reserve System, “Transcript of the Meeting of the Federal Open Market Committee, February 7–8, 1989”: 31.) In the interest of brevity, FOMC transcripts will be referred to as Transcript followed by the date of the meeting. All FOMC transcripts in this article can be found at www.federalreserve.gov/monetarypolicy/fomc_historical.htm.
3 Marvin Goodfriend, an eyewitness on both occasions, presented an excellent account of the two discussions at the Federal Reserve Bank of Atlanta’s conference marking the 100th anniversary of the Jekyll Island gathering at which the first draft of what became the Federal Reserve Act was created (Ireland 2007; Hetzel 2008: 196–97; Goodfriend 2013).
4 Greenspan: “I will tell you that if the 2 percent inflation figure gets out of this room, it is going to create more problems for us than I think any of you might anticipate” (Transcript, July 2–3, 1996: 72).
5 Although no public statement was issued, the topic of the discussion had been leaked ahead of the FOMC meeting in an article in the Wall Street Journal (Ip 2005).
6 Interestingly, inflation targeting was not discussed at Bernanke’s 2009 reconfirmation hearing.
7 At the May 2006 meeting, Governor Kohn stated: “The Chairman has made it very clear to me that everything is on the table in terms of communication between the Committee members and the outside world” (Transcript, May 10, 2006: 107).
8 Bernanke held one-on-one conversations with governors and Reserve Bank presidents in December 2005, after his confirmation. In my talk with him—and I believe he shared this in all his conversations—he said that one of his main goals as chairman was to make Fed communications with the public more open and transparent (also see Bernanke 2015).
9 The Committee had long been on a gradual path toward fuller internal and external communications (see Lindsey 2003).
10 Six participants favored announcing an inflation target (Kohn, Lacker, Pianalto, Plosser, Poole, and Stern) and another 10 were lukewarm or wanted to go slow (Transcript, October 24–25, 2006: 124–91).
11 The semi-annual Monetary Policy Report to Congress had been reporting the range and “central tendency” of the forecasts of Federal Reserve Governors and Reserve Bank presidents for nominal and real GDP growth, the core PCE inflation rate, and the unemployment rate. The July report included forecasts for the year in which the report was submitted and the subsequent year. The February report included forecasts for the current year only, until 2005 when it began including forecasts for the subsequent year as well.
12 The overall CPI inflation rate was added for the June round of projections, but that was changed to the total PCE inflation rate for the August round.
13 “A very important question is what is conveyed by the third-year projections, and I think that they are at the heart of the innovation created by this step. Assuming that we’re not too far from the steady state initially, which I think characterizes our current situation, it is evident that the third-year projections—or, alternatively, the third through fifth or however we decide to do it—reveal a lot of information about our views on sustainable long-run growth; our views on sustainable unemployment; and, of course, our views of what price stability is” (Bernanke, Transcript, June 27–28, 2007: 141–42).
14 Projections of the longer-run unemployment rate in January 2009 ranged from 4.5 to 5.5 percent.
15 Governor Kohn: “I think a lack of clarity on this question has increasingly muddied discussions in this Committee and communication with the public. Within the Committee, it has sometimes been difficult to discern whether differing viewpoints reflect diverse perceptions of the course of inflation and economic growth or of the desirable end point or path for inflation. The public does not know whether the comfort zones enunciated by various Committee members reflect the views of the Committee or only those of the individuals. Coming to an agreement on an end point and on the role that end point should play in policy and announcing that agreement should help our discussions and enhance the public’s understanding of our intentions” (Transcript, October 24–25, 2006: 159).
16 One of the policy alternatives circulated prior to the December 2008 FOMC meeting—Alternative A—included as an option a sentence announcing a 2 percent inflation target: “In support of its dual mandate, the Committee will seek to achieve a rate of inflation, as measured by the price index for personal consumption expenditures, of about 2 percent in the medium term” (Staff of the Board of Governors 2008: 35).
17 Tim Geithner, Larry Summers, and Christy Romer (Bernanke 2015: 526).
18 The meeting with Frank took place after the January 28–29, 2009, FOMC meeting: see the transcript for that meeting, p. 213.
19 Mishkin had published papers advocating inflation targeting, including some coauthored with Bernanke (see Bernanke and Mishkin 1997; Bernanke et al. 1999; Bernanke, Mishkin, and Posen 2000).
20 See the Tealbook for the September meeting (Staff of the Board of Governors 2010a: 89).
21 Expectations regarding inflation rates from 5 to 10 years ahead, however, had not fallen since 2008 (Staff of the Board of Governors 2010a: 56–57).
22 Market participants were speculating about such a program as well (Transcript, August 10, 2010: 5–6). The Wall Street Journal published an article prior to the August meeting reporting the leaked information that the FOMC would consider the reinvestment policy at its upcoming meeting (Hilsenrath 2010).
23 See the Tealbook for the September 2010 meeting (Staff of the Board of Governors 2010b: 11). In a speech the following month, Chairman Bernanke highlighted that the “longer-run inflation projections in the SEP indicate that FOMC participants generally judge the mandate-consistent inflation rate to be about 2 percent or a bit below” (Bernanke 2010: 11).
24 Author’s conversation with Charles Plosser, October 25, 2019; Transcript, January 25–26, 2011: 156.
25 Narayana Kocherlakota (Minneapolis), Charles Evans (Chicago), and Eric Rosengren (Boston). Author’s conversation with James Bullard, November 15, 2019.
26 The Committee ultimately adopted a version of threshold guidance in December 2012 with a threshold of 6.5 percent: “In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6–1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored” (FOMC Statement, December 12, 2012).
27 One policy alternative the staff provided at the meeting included language articulating an explicit inflation target.
28 Eleven participants spoke in favor of adopting an inflation target (Bullard, Duke, Evans, Fisher, Lacker, Lockhart, Pianalto, Plosser, Raskin, Williams, and Yellen). Three were skeptical (Dudley, Kocherlakota, and Tarullo). (Transcript, November 1–2, 2011: 31–92).
29 Governor Tarullo said: “I’m having difficulty putting together your characterization of the statement, Mr. Chairman, with Governor Yellen’s characterization of the statement. You seem to indicate that it was basically setting down as best we could what we think we currently do within this Committee. I think Governor Yellen used the term ‘momentous’ and indicated a broad agenda that would follow from this statement, and I’m wondering if you could comment in a little more detail on how you see the significance of this statement.” Bernanke replied: “Sure. I view this basically as a communication device. That being said, while not representing a change in our policy, it will be a vehicle by which we can continue the conversation and make sure we clarify among ourselves what we agree on and what we don’t agree on.… It will be a vehicle for discussions in the future about how best to conduct policy” (Transcript, January 24–25, 2012: 48–49).
30 Indeed, in dynamic stochastic general equilibrium models with nominal frictions, calibrated to approximate modern economies, the natural rate is quite variable (Edge, Kiley, and Laforte 2008).
31 When Chairman Bernanke polled participants in January 2012, Governor Tarullo abstained from supporting the document (Transcript, January 24–25, 2012: 50–51).
32 Compare the comments of Lacker and Williams during the December 2011 discussion of the consensus statement (Transcript, December 13, 2011: 136–37 and 141).
33 “I view the explicit statement of a long-run inflation objective as fully consistent with the Federal Reserve’s current policy approach, including its appropriate emphasis on the role of judgment and flexibility in policymaking. Most important, this step would in no way reduce the importance of maximum employment as a policy goal” (Bernanke 2005).
34 The Fed took a deliberately opportunistic approach to achieving disinflation in the 1980s and 1990s, letting inflation fall “on its own” but then cementing gains with tighter policy during the recoveries (Orphanides and Wilcox 2002).
35 See transcripts for the FOMC meetings on February 1, 2005; October 24–25, 2006; March 21–22, 2007; and January 16, 2009.
36 “I would argue that we should define the comfort zone as the range in which core inflation should remain most of the time. Over the past ten years, it has remained between 1.5 to 2 percent most of the time” (Bernanke, Transcript, October 24–25, 2006: 190).
37 Fuhrer et al. (2018) propose that the Fed move to inflation target range, but in addition advocate movements in targeted inflation within the range to make up for past misses.
38 One is reminded of “translation by volume,” the tendency of international travelers to overcome a language barrier by simply speaking loudly.
39 President Lacker: “The Congress can put anything they want in a mandate. It’s up to us to construe it. They can ask us to pursue maximizing the postseason performance of the Boston Red Sox, but we’d have to construe what that meant” (Transcript, September 20–21, 2011: 105).