We are very pleased to have with us today. Dr. Alan Blinder Vice chairman of the board of governors of the Federal Reserve System a position. He's he assumed one year ago this month before becoming a member of the board Allen served on President Clinton's Council of economic advisers. Allen is on leave from Princeton University where he is the Gordon s Rentschler Memorial professor of Economics. He is taught at Princeton since 1971 chaired the department of Economics from 1988 to 1990 and founded Princeton Center for economic policy studies.Allen has written extensively on economic issues including numerous articles on fiscal policy monetary policy and the distribution of income from 1985 until joining the Clinton Administration. He wrote a monthly column in Business Week Magazine, Alain Durand his a be at Princeton of has a masters from the London School of economics and a PhD from the Massachusetts Institute of Technology all in economics following his presentation questions will be addressed from the audience genma Rasik and Ken darling of the Minnesota meeting will move among you to take questions. You may use the slips of paper on your table to jot down ideas. It is now my pleasure to present Alan Blinder.I was going to say it's a pleasure to be here until Gary said the thing about slips of paper to write down ideas for questions. I don't know if I should say that but this is this being Minnesota and not Washington DC. I hope it's a bit safer than the environment in which I've become accustomed. Seriously. It is good to be here. I think it's good for people like me to get out of Washington now and then we probably don't do it enough and I'm happy to be with you at lunch today.Probably won't surprise you. I'm going to talk about monetary policy monetary policy is much in the news these days. It seems in fact that it always has been much in the news as long as I've been on the Federal Reserve board, which is Gary said is only a year. But lately it's not because of anything we've done at the FED monetary policy. In fact has done nothing since the 1st of February rather what's changed and changed quite dramatically is the market chatter and the speculation about what the FED either should do or might do in the near term future. I'm afraid that it's a fact of life. That's the speculation changes much more often and much more dramatically than the policy does. So today. I'd like to turn away from the fixation on the feds short run tactics and talk more generally about the strategy that underlies monetary policy decisions specifically, I'd like to address three questions first, what are the goals and objectives of monetary policy? What does it trying to accomplish and why? Second what are the instruments at our disposal in working toward those goals? And why do we choose the ones that we choose and finally but importantly how and when do we use those instruments in pursuit of the goals? That's the issue of the timing of monetary policy actions, which to me is something a bit bigger than tactics, but certainly smaller than the broad strategy. In the process of talking about those three issues, I'll touch upon several controversial questions about monetary policy questions that are still with us today. This not decent not historical questions, but live current questions. Let me start with the goals. The Federal Reserve is often said to be a quote independent agency unquote and we are an independent agency. This is very important to our Effectiveness in conducting monetary policy. But I think people frequently misunderstand what Independence means to me the independence of the Federal Reserve means to principal things first that we have very broad latitude to pursue our goals as we see fit we decide what to do in pursuit of the goals second. It means that once our monetary policy decisions are made they cannot be reversed by anybody in the United States government except except under extreme circumstances as a technical matter Congress has the power to pass any law at wishes and so can override the Federal Reserve any time. It's chooses. It is most unlikely that Congress is going to do that and it certainly would require an act of Congress passing both houses. Not being vetoed by the president. So in a practical sense our decisions are not reversible, but and this is important to me. Although we are free to choose the means by which we achieve our goals or pursue our goals. The goals themselves are given to us by Statute that is to say by the United States Congress. And that's how it should be in a democracy Congress writes the goals into the Federal Reserve Act and then directs us to pursue those goals giving us. However, quite broad latitude in How We Do It? So what are those goals? If you read the Federal Reserve Act, you'll see that it tells us to pursue both quote maximum employment and quote stable prices. Now, there's been considerable controversy and it's flaring up again. Now over the Dual objectives of Maximum employment and stable prices on the one hand. Some people have been criticizing the Federal Reserve over the last year and a half almost for tightening monetary policy to fight an inflation that some people say doesn't exist waving swords a dragon so to speak On the other hand, there are those who would like us to focus our attention entirely on only one single objective fighting inflation and forget about the employment objective all together to do that. Of course, we would have to have a change in the law because the law to as currently written directs us to keep one eye on each This is I said as a controversial issue my personal view is that a dual objective for monetary policy is not only feasible, but genuinely desirable the Federal Reserve is the ultimate determinant of the average level of prices in our economy. And so that is our proper overriding and I do mean overriding long-term goal, but monetary policy does affect employment in the short run that's a very important qualifying phrase and there can be little doubt that Americans do care about gyrations short-run gyrations in employment for if they didn't nobody would fret very much about recessions which are after all transitory events. They don't last forever. So to me the conclusion follows quite directly. We at the Federal Reserve control an instrument that influences employment in the short run the American people care deeply about employment in the short run and it is therefore quite appropriate for Congress to order the Federal Reserve to pay attention to employment as well as to inflation and Congress has in fact so directed us. Furthermore and very importantly the two goals employment and inflation do not conflict in the long run because the long-run effects of monetary policy unemployment are negligible in the long run the very nature of how our economy Works means that only the price stability goal can be operative for the Federal Reserve in the long run. But in the short run both objectives can be and in my view should be However, I want to caution you again that this is a controversial issue and you can find people that would argue the other side. Now taking these two objectives when you think about the phrases maximum employment and stable prices you immediately see those are what not precisely defined goals. They are not the equivalent of telling a truck driver to go out in the truck and drive from Minneapolis to Chicago at an average speed of fifty Seven point five miles per hour the instructions we get from Congress are much much vaguer than that. So question is how do we make them more concrete? And in answering that question you encounter another important aspect of the independence of the FED because it's we at the Federal Reserve and particularly at the on the Federal Open Market Committee that must interpret what those phrases in the law mean. I personally interpret the phrase maximum employment to mean that we should try to hold the unemployment rate as low as is possible without pushing it below what economists call the natural rate or the full employment rate. Now you might ask why stop there. Why not push unemployment lower still after all it's quite evident that if you're pursuing maximum employment, you haven't gotten there at an unemployment rate in the five-and-a-half to six percent range, which is where most economists believe the natural rate is that certainly is not maximum employment. My answer is that pushing unemployment below that level while possible would cause inflation to rise and thereby run directly afoul of our other objective stable prices, which as I said a moment ago is our only objective for the long run. Now that second objective stable prices is also not precisely defined in law Congress has not told us to hold the Consumer Price Index at a zero point zero percent annual growth rate nor has it directed us to Target the producer price index or the GDP deflator or any other index nor to pursue any other particular number other than zero point zero. So what in fact does the phrase in the law stable prices mean? Well, I think first of all there's a strong consensus that does not literally mean hitting zero in the measured CPI inflation rate for a variety of reasons including prominently the fact that there are well-known biases in the index biases that convinced most observers that increases in the true cost of living would be smaller than measured increases in the CPI. How much smaller is extremely controversial and no one has a really good fix on it? But virtually everyone who has thought about the matter at all deeply believes. There is at least some upward bias in the CPI. The consequence of that is that in interpreting the meaning of stable prices. We should almost certainly not be shooting for a literal zero inflation rate as measured by the CPI, but something closer to zero true inflation, whatever that means numerically. The definition I've used for a long time for Price stability is a situation where ordinary people in their ordinary course of doing business are not thinking and worrying about inflation. As I'm sure I don't have to remind me most of you here. If you go back to the United States in the late 70s in the beginning of the 80s everybody in business in America was thinking a great deal about inflation. Now people are clearly thinking about inflation much less some still are largely in financial markets, but I think a fair assessment must be that we as a nation are now pretty close to but not quite at functional price stability. The point of the Federal Reserve Act and assigning us the goal of price stability is that until we reach that objective whatever it is inflation should be kept on a long run downward track and to me that is the operational meaning of the goal of price stability right now in 1995. Now that does not mean that inflation every single year must be lower than the year before. I don't think that's a proper interpretation of the ACT given that there are Cycles in inflation as in everything else, but it does mean that the trend should be toward lower inflation not higher inflation in that regard if I can call your attention to this transparency. Let me apologize to those people over here, but I assure you I don't expect you to be able to read the legend. This graph is a is shows you the rate of change of the Consumer Price Index in the United States from 1960, which If You Could Read The Legend you'd see as the left hand end of the graph of through the end of last year 1994. Those who are close enough can see they're actually two lines there. The solid line is the change in the Consumer Price Index stripped of its food and energy components. The so-called core CPI inflation rate The Thin Line is the change in the overall CPI, leaving the food and energy components in I think in the back of the room, you can't tell that there's a thick line in the thin line, but that's part of the point over long periods of time. They look just alike for those of you were close enough to see you. It's apparent that in short periods of time there occasionally quite large deviations between core CPI and measured CPI due to rapid changes in food and energy prices changes that can cause confusion in the inflation picture and that is why most economists focus on the core. But nothing nothing I want to say about this picture hinges at all on which of these two you look like the message of this chart is simple. That's why I didn't worry about showing it in a room this large what you see there looks like a mountain. It has an upside as you start in 1960 and move towards its highest peak which comes in early 1980 and then it has a downside since then. So for about 14 years from 1966, which is where it starts climbing to 1980 inflation was trending upward there were plenty of gyrations in this upward March of inflation with a peak in the Vietnam War period than a fall during the Nixon price controls of the early 1970s then a surge in late 1973 when OPEC hit for the first time and so on but it's quite obvious that the broad historical story about US inflation from 1966 to 1980 was one of rising inflation, which is to say that the Federal Reserve was failing to meet its mandated goal of promoting price stability. Now in the fence of the Federal Reserve, I'd like to point out that that was not the only thing that was going wrong in society during that period and nobody should put the entire blame on the Federal Reserve. I would have I would say that even if I didn't work for the Federal Reserve nonetheless part of the blame must be on the Federal Reserve because it was our statutory responsibility to promote price stability and that was not accomplished in that 14-year period That's the bad news. But now if we look at the down side of the mountain which by the way looks so strikingly symmetrical if you're not too fussy about concepts of symmetry, the you see a very clear success story over an identity over time period of 14 years identical e equal in length of time from 1980 to 1994 in particular inflation started at that highest peak above 13% and then Down excluding an aberration in 1983 to about four and a half percent where it lingered from about 1984 to about 1990 before Rising a little that's that little bit of a hillock towards the right and then Falling Again. But the capsule history of the period from 1980 to now is clearly one of falling inflation that signifies the success of the federal reserve's anti-inflation policy since 1980 and constitutes almost a complete reversal of the previous periods failure as this picture shows you we are now almost but not quite back to the inflation rates of the early to mid-1960s. So those are the goals of Federal Reserve policy maximize employment, which I interpret as holding the unemployment rate as low as you can without going beyond the natural rate and keep inflation on a downward track until you achieve price stability. So, how do we try to do this? What are our instruments? Well fundamentally the Federal Reserve controls only one thing that's really a sobering thought when you think about how much attention is paid to the Federal Reserve throughout the financial world not just in the United States, but all around the globe, but the truth is that we control only one thing the volume of Bank Reserves held by US Banks now, we do have a few other small weapons, but Bank Reserves, the only important one we have when it comes to monetary policy. To control Bank Reserves is of course many of you know, we either buy or sell treasury bills in the open market there by either taking reserves away from the banks are giving Banks additional reserves on that issue. There's basically no choice as long as the Central Bank in the u.s. Is organized the way it is. Where we do have a choice is in the following how to use that one instrument. If we want to we can use this instrument to control some measure of the money supply M1 M2 or any other em that we can invent and as some of you know over its history the Federal Reserve has invented many concepts of M. We can control any measure of the money supply that we wished although frankly somewhat and maybe a lot in precisely for there is no meaningful definition of money that we can control with perfect Precision. Nonetheless. If you're not too fussy and are willing to tolerate some errors we could control any monetary aggregate we chose except in some rare occasions when things go badly wrong alternatively we on the Open Market Committee can control short-term interest rates with a great deal of precision, especially the federal funds rate the rate that Banks pay to borrow in the market overnight. So that's our choice. We can Target Bank Reserves. We can Target some definition of the money stock any definition or we can Target short-term interest rates in principle any short-term interest rate, but the easiest one to control by far is the federal funds rate, but whatever we do. We have only one instrument at our disposal. Now that leads me to a short digression because there is a common error that you hear repeated time and time again, even by people who are presumably knowledgeable about the subject and should therefore know better. That is the error that starts from observing that the Federal Reserve has only one instrument at its disposal and incorrectly deduces that it can therefore pursue only a single goal one instrument one goal sounds right is perfectly and completely wrong. Why is it wrong? Let me offer you a simple analogy very familiar analogy suppose someone told you that you had a budget of $100 a week and assigned you to goals clothe yourself and feed yourself. Is there anyone among us who would say I can't do both? I can either close myself or I can feed myself, of course not everybody knows that you would take your hundred dollars and divide them using some of it to pursue the clothing goal and some of it to pursue the feeding goal. The actual choice you made would depend on the terms of the trade-off that is the relative prices of food and clothing and on how you personally value the two goods. Now what is true? Of course, you can't spend your whole hundred dollars on food and then spend it all again on clothing, but anybody anyone would divide this hundred dollars. By analogy the Federal Reserve has one instrument and to short-term goals and we have to trade off one goal against the other the terms of the short-run trade-off between furthering the employment goal and furthering the price stability goal is what we call the Phillips curve. Together with the Phillips curve judgments about the relative importance of the two goals in the short run lead to decisions about whether to be worrying more about the employment goal or the inflation goal in any particular point in time the one place where the feds problem does differ from the analogy of food and clothing that I was speaking about a moment ago. Is that its nature changes in the long run in the long run. We don't face this trade-off where as a consumer thinking about food and clothing presumably faces the trade-off all the time in the long run. We at the FED can only affect affect inflation not employment and that's an important aspect of the problem but it does not mean that we can't pursue two goals in the short run which is the only place the issue actually arises. Okay, having made that aggression. Let me go back now to the main theme. I've said that the FED has one instrument be it reserves money or a short-term interest rate. A long-standing question over which there's been controversy for years and years is Which choice is best which of those three choices so to speak? At various times in the last 30 years or so. The Federal Reserve has done each of those targeted Bank Reserves targeted some definition of money. In fact several definitions and targeted short-term interest rates that already suggests. Well, I guess that she is one of two things either the Federal Reserve can't make up its mind when it should or more likely I think that there is not one obviously correct answer to this question for all times and places and I think that's the correct message in the not very recent past as you know, the Federal Reserve has targeted money growth rates. And I think that if a strategy like that were workable, they would be real advantages to it. I see to First it is often said that the money supply being tied to the price level in the long run provides the economy with a with what's often called a nominal anchor that is the assurance that the price level will not will not simply run away from us either up or down. Although the usual concern is up inflation rather than down deflation money potentially gives us a long run anchor on the price level in a way that interest rates simply do not and that's an advantage of money as a Target. Second and getting just a bit ahead of a point. I want to make at some length later about the lags in monetary policy. If a money targeting strategy would actually work we at the Federal Reserve we get a preview of the subsequent effects of our monetary policy pretty quickly because not long after the Federal Reserve moves Bank Reserves. We see the impact on Bank lending and deposits and therefore on the money supply and if that were a reliable Guide to the ultimate effects on the economy, it would provide a valuable preview of where we are going. It would be like seeing the ninth inning of a baseball game while you're still in the 3rd inning or something like that. Unfortunately in recent years the relationship between the various measures of the money supply and you can pick any one of them you like and the things that really matter to us like inflation and unemployment has pretty much disappeared. As a result of that the Federal Reserve has essentially abandoned any focus at all on any of the monetary Aggregates and moved instead to targeting short-term interest rates. I want to emphasize that that was really by necessity not by choice. The money targeting rule was simply not going to work and it really was no alternative. That left us with short-term interest rates and specifically as I said the federal funds rate. So that brings me to the last and quite important aspect of strategy that I outlined at the beginning the timing of monetary policy the lags and monetary policy which has to do with the legs of monetary policy. The simplest short statement to make about the lags and monetary policy and something that is valuable to remember if you remember nothing else about it is three words. They are long the lags and monetary policy along. It's amazing how hard that is for people to remember and keeping their heads and I think if you do remember that you go, you've already gone a long way towards understanding the tactics of monetary policy if we could look at the second figure. I'm I know you can't read the legend here. I will tell you what these say. This figure shows one estimate of the lags in monetary policy before telling you exactly what it says. I want to emphasize very strongly that this is just one estimate at of many models. We maintained at the federal reserve's you're not seeing the deep dark secret one model that governs monetary policy of the Federal Reserve. There is no such thing. This is one of many In addition to that if you look in the private sector if you look in the universities, you can find many many more such models. They don't all give the same answer but qualitatively almost all of them look pretty much like this chart. Now. What are we showing on this chart? The chart shows the estimated response of the economy to a specific tightening of monetary policy, which is just an example. The specific example is a one percentage Point increase in the federal funds rate maintained for two years and then taken away. There are two panels on the chart the upper panel shows the effect on the level of gross domestic product real GDP and the lower panel shows the effect on the rate of inflation as measured by the Consumer Price Index. If I can turn your attention to the top panel first what you see is that the tighter monetary policy starts to have some effect on GDP right away, but it's extremely small. Then the effect bills with the peak effect. In this case. It's a trough effect. We're going down the the bottom of the valley occurring here's where I'm going to read the legend for you can't tell the bottom occurs between 8 and 12 quarters after the monetary tightening between two years and three years. The maximum effect comes then after that the effect starts to dissipate and again, you can't read the legend but the far right-hand side of that chart is 20 quarters out five years after 20 quarters the effect of the monetary tightening has essentially disappeared and there's no Trace left on GDP or virtually. No Trace left. That's exactly what I meant the few minutes ago. When I said that we in conducting monetary policy do not have any long run permanent effect on employment. Again, I want to emphasize that this result comes from one particular model and other models will give you answers that are quantitatively different but they're all qualitatively similar to this picture. So it goes down and then it comes up and it takes a long time to hit bottom. That's really all I want you to get out of this picture. Now if you look at the bottom panel, which shows the effect of a monetary tightening on inflation. If there were no effect at all on inflation, of course the Federal Reserve would never tighten policy. That's why we do it. For about six quarters or so according to this graph there is essentially no effect on inflation that line looks pretty flat for six quarters, but then the anti-inflation effect begins and starts to build peaking in this model after about 14 or 15 quarters. That's where the bottom comes on this particular graph. So that's three and a half to four years. Think about it after the FED began tightening money. That's a very long time. In particular notice and that's why I align these figures a one on top of the other notice that the peak effect on inflation comes after the peak effect on GDP. So what we learn from this graph, which is General. I want to emphasize again that the specific numbers here are extremely particular to one model, but the general lesson that you learn here is true of almost every model of the effects of monetary policy, which is the effects on GDP take a long time to build and the effects on inflation take even longer and that's all we really get need to get out of this these graphs. Now a question, you may be wondering about which which is a good question is why should this process takes so long in a flexible market economy, like ours after all we communicate our actions to the money market immediately and short-term interest rates move within minutes indeed within seconds. So why should the effects of monetary policy take two three and even four years to reach the economy? Well part of the answer is that some of the effects do hit right away, but these graphs show you very little the long leg start to make sense. If you think about the main channels through which federal reserve actions are passed into the economy. Higher interest rates have their biggest effects on housing on consumer durables, like Automobiles and on business investment in equipment and factories. Now think about the channels that will have to be followed after the federal funds rate moves. First of all, no one except Banks cares about the federal funds rate per se it's an irrelevant rate by itself to everybody else in society that rate the FED funds rate has to affect interest rates that matter to people or to businesses like rates on home mortgages automobile loans Consumer loans corporate bonds Etc that reaction from fed funds to these other rates. Can't take a while. Although sometimes it happens very promptly as it did in 1994. Secondly people in their roles as consumers or as business people must react to these changes in interest rates and much as we often forget about this at the Federal Reserve. And in the financial, press most people on most days have other things to do than think about interest rates consumers have other things to do with their lives like shopping and taking care of their children and the minding their own household Affairs and business people have other things to do with their businesses, like Personnel decisions things to buy things to sell making sure the factory is working and so on but at some point interest rates get to be front and center in the minds of decision makers and they began to contemplate changing their plans in response to the change in interest rates. They may think about that for a short time or a long time. Third if they do decide that because of the change in interest rates, they wish to change their plans. They have to give instructions and then those instructions have to be executed now in a small business that will happen extremely quickly. But in a big business, it may take a long time. There may be layers of management the committee's that have to give concrete content to the phrase We want to change our plans that's not a sufficient instruction. You have to tell people what to do and finally in many cases there's yet another lag between the time of the execution of the plan and actual expenditures that affect economic activity the simplest example to think of is suppose an interest rate increase or decrease. Let's say a decrease induces a company to the side it would like to build a new Factory because the cost of capital is now lower. Well that could take two years to build and for the first six months of that two-year period very little money would be spent because virtually nothing would be happening at the construction site. So for all of these reasons, there were long lags in monetary policy and the strongest effects on the economy may not be felt until one two, or even three years after the monetary policy action. Now I've dwelt on these long legs because they have very important implications for the strategy of monetary policy, which is the subject for this talk. Most obviously to make any kind of an intelligent decision today. We need some sort of picture of the state of the economy. One two, and three years ahead no matter how indistinct that picture maybe how do you get such a picture? Well, first of all, you need forecasts of where the economy would be under unchanged policies one two, and three years into the future. Secondly, you need some sort of a theory of cause and effect a theory that says If the Fed does this then these things will happen in the economy. Third you need some statistical evidence to fill that theory with numbers. It is not enough to say if we raise the federal funds rate GDP growth will slow you have to come to grips with questions like how much how fast a theory by itself doesn't answer questions like that. Unfortunately hazards lurk in each of these three things the forecast the theory and the statistical evidence. Forecasts are frankly not very good. They are mediocre at best when you look one year ahead and they're not very good at all looking further ahead than that. So we really don't have the kind of forecasting accuracy that we at the central bank would like secondly the theories of how monetary policy works are not that strong and are much in dispute economics is not physics. And I don't even mean the sophisticated branches of physics where they argue about esoteric technicalities of theories. I mean simple Newtonian physics about what happens when billiard balls Collide we simply don't have theories as tight as the physicists do And finally, the statistical evidence is far weaker than we would like. There are lots of people who might dispute the graphs that are up here on the screen right now and many would produce a model could produce a model I gave you different numbers. Nobody really knows whose numbers are correct. Furthermore monetary policy is not like pressing a fixed sequence of keys on your computer keyboard, which if your computer is working properly will always give you the same outcome every single time the graphs that I show you up on the screen now represents statistical averages over a long period of US History post-war US history, but their statistical averages some monetary policy episodes have bigger effects than shown here and some had smaller and there is no reliable way of knowing before the fact whether the less F the next episode of monetary tightening or he's will have a larger or smaller effect than the historical average. So what's a poor Central Banker to do? When you look about look at and think about this set of difficulties forecasts are not very good. Theories are in dispute and statistical evidence is dubious at best. It's tempting to say why not forget all about that and just wait and see what happens. If inflation starts to rise we can then hit the economy with higher interest rates if unemployment starts to rise we can do the reverse and lower interest rates. I call that the Bunker Hill strategy. It's a strategy that says wait until you see the whites of their eyes and then fire. Why don't we do that? Why don't we pursue the Bunker Hill strategy? Well, the answer is very simple The Bunker Hill strategy is certain to fail. I'll remind you that the commanders of Bunker Hill only did that because they were too desperate situation. It will surely lead you into era Because by the time you see the whites of their eyes, they've already shot you straight through the heart. The graphs that we just saw show that it takes one or two years until policy has a large effect on GDP and two or three years until it has a larger effect on inflation. So if the whites of their eyes are flashing inflation, you're about two and a half years too late when you start shooting. And if the whites of their eyes are showing unemployment your about one and a half years too late to have any hope whatever for success in monetary policy. You need to act preemptively against either a rise in inflation or a rise in unemployment. So instead of using the Bunker Hill strategy we must use what I like to call the Stitch in Time Strategy. I like that metaphor better than preemptive strike would suggest that you're hitting people over the head with baseball bats. The Stitch in Time Strategy is to try to save nine by stitching in time in either direction whether you're tightening monetary policy to fight inflation or easing monetary policy to prevent recessions. Unfortunately to actually use such a strategy and practice you must use forecasts with full knowledge that they may be wrong. You have to base your thinking on some kind of monetary theory of cause and effect even though you know that theory might be wrong and you have to attach numbers to that theory numbers such as I was showing you a moment ago on the graph. Knowing that your numbers might be wrong and that all you've got anyway is a is in hisses a statistical average over a period of History. So we at the Federal Reserve have all these fallible tools and no real choice but to use them. It's a tough world, but that's the way it is. And you play with the hand. That's dealt you. But you try to play in a sensible way. So what can we do to try to guard against failure knowing that there is no foolproof guarantee. Well to me, there are two principles that monetary policy makers should keep in mind. first of all be cautious don't over steer the ship If You Yank the steering wheel really hard a year later. You may find yourself on the Rocks not a minute later, but a year later. Secondly, you have to have a long run strategy in mind the Federal Open Market Committee meets eight times a year. You cannot be thinking only what only about what's going to happen in the next six to seven weeks much less what happened in the previous six to seven weeks. All of that is completely irrelevant to the monetary policy decision in front of the Open Market Committee at its meetings. You have to think about a long run strategy execute the first step of that strategy and then watch And while watching you have to be flexible and prepared to modify or even abandon your strategy if things look to be going wrong not playing out according to the plan. People often misunderstand and think that we can't have a long-run strategy because of all the uncertainties that I mentioned and because the world is a constantly changing place that is quite wrong. The fact is right. The world is constantly changing but the deduction is quite wrong to do monetary policy, right? You must have a long run strategy, but you must be willing to modify it as new information becomes available. Now can this so-called Stitch in Time Strategy lead you into error. Anyway, despite having a long run strategy and playing it. Cautiously you bet it can but the other strategy The Bunker Hill strategy is certain to lead you into error and that to me makes it an extremely easy Choice. Thank you very much for listening. Thank you. Dr. Blinder. We are further our radio audience. We are listening to dr. Alan Blinder the vice chair of the Federal Reserve speaking to the Minnesota meeting on the station's of Minnesota Public Radio. We now have an opportunity for a couple of questions from Minnesota meeting members and guests will take a first question here from bradstone and Brad's a bond portfolio manager at Piper capital. Thank you. Dr. Blinder. I wanted to ask you two questions or ask you to comment on two things. The first is whether or not you think the capital markets might provide a more efficient mechanism for setting the price of short-term money, which would then drive the price of goods and services subsequently and secondly whether or not you think the dollar weakness we experienced earlier this year belies the claim that the Fed Is currently in a restrictive monetary profile. Thanks. Thank you Rex one of the few questions about the dollar that I actually be willing to answer. I will answer it. Let me take your first question first. There's a strong sense in which the answer to your first question is. Yes, and that's exactly what we do the Federal Reserve. As you know, only controls the very shortest term interest rate. The rest are all determined in the capital markets by private individuals doing what they think is right. We've have a prominent example of that right now or as you know, all short-term interest rates are lower than the federal funds rate and those other rates are set by the market not by us. So in a fundamental sense, we do believe in that if you take that to the Limit though, you didn't say this, but it's almost suggested that we should forget about the shortest and also and leave the whole thing to the market that would that would meant that would amount to abdicating monetary control completely and I don't think that's a good recipe either for macroeconomic stability. Or nor by the way for low inflation, so I wouldn't if that was what implied by the question I wouldn't buy onto the suggestion. The second question was whether the weakness of the dollar is a suggestion that monetary policy has not in fact been tight which I'll translate to mean sufficiently anti-inflationary. I believe yes, I would offer as counter evidence to that the fact that everything we know about inflationary expectations and I'll admit we don't know enough as chairman Greenspan and I and others have often said we'd know more if we had index Bonds on the u.s. Capital markets that will be useful. We don't have that but given that lack everything we know about inflationary expectations suggest that there has been no acceleration no rise and inflationary expectations since 1993. Some indicators suggest has been a fall inflationary expectations. Most of them suggest inflationary expectations have been a steady as a rock for about two years which suggests to me that the federal reserve's anti-inflation policy has very high credibility in the markets. Thank you. Dr. Blinder. We have a question now from Steve Moriarty who's a systems vice president at First Bank in Minneapolis. You talked briefly about a stitch in time and talked about key information that are leading indicators. One of the questions I had is what are those indicators? What are some of the primary indicators that you look to to use your Stitch in Time Strategy? And at what point do these lead you to a change and and monetary policy? Let me give you a short answer to that that sounds cryptic, but then I'll explain what I mean. The answer is everything and nothing for short-term indicators. We look at everything. We look at every scrap of information that we can get. The truth of the matter is that none of these indicators enable you to peer very far into the future with any accuracy at all. That is if you look at them as statistical forecasters, they will do you good but only for very short periods of time much too short to conduct monetary policy given the kinds of lags that we have put it crudely. There's nothing in any of these indicators that gives us any any substantial amount of information about the state of the economy two years from now nothing. So I look much more at the fundamentals than the tea leaves. There are basic forces moving the economy up or down having to do with many things fiscal policy past monetary policy movements in markets that have already occurred. Capital markets Bond markets and stock markets but not have not yet affected the economy Trends in consumer spending investment spending all of that the fundamental forces that determine whether a year and two years and three years from now aggregate demand will be high or low relative to aggregate supply. And by the way, I didn't even mention the aggregate supply side productivity and investment that determine the capacity of the economy to produce two and three years down the road. So I personally pay vastly more attention to these sorts of fundamentals. Which tell you nothing at all about what the GDP is going to be next month. But I think tell you much more than any of these indicators can about how it's likely to look next year or two years from now. Thank you. Dr. Blinder we have time for just one more question. I'm Jim Campbell. He was a corporate Economist with northern states power gym. Dr. Blinder. You've been tagged with the business of being soft on inflation. You've told us that we're about there in terms of achieving price stability. You've shown us a graph which says if you're not too fussy about symmetry, we're back at about the price levels. We were in the early 1960s, but if you're a little more fussy weird about twice the rate of inflation that we were in the early 60s albeit on a somewhat downward bent. Now. The question is does this justify this tag, or are you saying that we really have to stay the course and get back down to those levels? I would say that I'll leave it to others to decide whether tags are Justified or not. I would say that given the legal mandate that the Federal Reserve has and given the fact That no serious. I think it back. There are a few hardly any serious students of the question believe that a 3% measured CPI inflation rate is true price stability. That is a that the biases in the index are that large that the the inflation fighting job of the Federal Reserve cannot be ended at 3% but I want to I want to qualify that but just repeating something I said before and you can decide whether it is makes me soft on inflation or not. It is not necessary that every single years inflation rate be lower than the year before the 1994 inflation rate will almost certainly be higher than the 1993. Excuse me. The 1995 inflation rate will almost certainly be higher than the 1994 inflation rate. I do not count that a failure of monetary policy as long as we keep on the long run downward path as I believe we will