Statement on Dissenting Vote at December 17, 2014 Meeting of the FOMC
Published December 19, 2014
I dissented from the decision at the Federal Open Market Committee meeting earlier this week. After that meeting, the FOMC communicated its intention to continue gradually removing accommodation. In my view, this communication creates an unacceptable downside risk to inflation and inflation expectations.
Three key facts led to my decision.
- Past inflation: Year-over-year inflation has run below the FOMC’s 2 percent target for over 30 months.
- Medium-term future inflation: The minutes of the FOMC’s October meeting state that the FOMC’s staff projects that inflation will remain below target over the next few years.
- Longer-term expected inflation: From November 2010 through July 2014—31 consecutive meetings—the FOMC was in a position to state that longer-term inflation expectations remain stable. Because of the decline in market-based measures of longer-term inflation expectations in the past few months, the Committee has not been able to make this assertion in the past three FOMC statements.
Despite these facts, the FOMC communicated its intention after this week’s meeting to continue gradually removing monetary accommodation. In my assessment, the FOMC’s failure to respond to weak inflation runs the risk of creating a harmful downward slide in inflation and longer-term inflation expectations of the kind that we have seen in Japan and Europe. I see this risk to the credibility of the inflation target as unacceptable, given how hard it would be for the FOMC to respond successfully if this eventuality did indeed materialize.
I would have preferred for the FOMC to communicate that it will keep the target range for the fed funds rate unchanged as long as the one-to-two-year-ahead outlook for the inflation rate remains below its target of 2 percent. The FOMC should also make clear that, if this forward guidance were to prove inadequate, it would be willing to use additional tools, such as asset purchases, to bring inflation back to its target.
* I thank David Fettig, Terry Fitzgerald and Sam Schulhofer-Wohl for their comments.