Mr. Brash reviews inflation targeting: an alternative way of achieving price stability
Keynote address by the Governor of the Reserve Bank of New Zealand, Dr Donald T. Brash, on
the occasion of the 50th anniversary of central banking in Manila on 5/1/99.
Introduction
Mr Governor, I am deeply honoured to have been invited to give one of the two keynote
addresses at this Symposium, convened to mark a very important milestone in the history of the
Philippines, the 50th anniversary of central banking in this country. In these turbulent times,
marking the 50th anniversary of anything sometimes seems like a considerable achievement. I
congratulate the Bangko Sentral ng Pilipinas, and my good friend, Governor Gabriel Singson.
Indeed, I should take this occasion to congratulate you on more than the 50th anniversary of
central banking. In a region where there has in recent times been a huge amount of economic
turmoil and banking sector distress - indeed, in a world where in recent times there has been a
huge amount of turmoil and distress - the Philippines has weathered the storm a good deal better
than most, with its economy and its banks in relatively good shape. Central bankers are modest
of course, and I am sure you would not claim all the credit for that happy outcome, but I am
equally sure that Gabriel Singson and his colleagues have played a vital role in steering the
Philippines to this position.
Mr Governor, you have invited me to speak on the subject "Inflation targeting: an alternative way
of achieving price stability", and in particular to speak of New Zealand's experience in achieving
nearly a decade of very low inflation. I am delighted to do that. But let me say at the very
beginning that, while New Zealand's experience with inflation targeting has, I believe, been a
positive one, I do not want to lecture you or anybody else about what is best for your country.
Every country has circumstances and traditions which are a little different and, while I believe
that inflation targeting is an approach to monetary policy formulation which deserves serious
consideration, the ultimate decision about what is best for the Philippines must obviously be
yours.
The background to New Zealand's move to explicit inflation targeting
To understand why we in New Zealand moved to inflation targeting, it is worth recalling some of
the history. It has some similarities to the experiences of other countries recently.
Prior to the mid-1980s, the Reserve Bank of New Zealand was closely modelled on the Bank of
England. We provided advice to the Minister of Finance, but the day-to-day decisions on
monetary policy were made by him. The legislation under which we operated required us, in
formulating our advice, to have regard for the inflation rate, employment, growth, motherhood,
and a range of other good things.
And the result? We never experienced hyper-inflation, but we did have one of the worst inflation
rates among OECD countries (above 10 per cent per annum for more than a decade). Importantly
for the subsequent political recognition that such inflation did not enable us to grow any faster,
our growth rate was the lowest in the OECD. Monetary policy followed a cycle which looked
suspiciously like the three-yearly election cycle. And in 1984, the whole business culminated in a
foreign exchange crisis which looks in retrospect remarkably like some of those experienced in
this region in recent times - where the previously-pegged exchange rate came under huge
pressure and eventually gave way. The economic damage inflicted by that crisis on the balance
sheets of banks and corporates was relatively mild compared with the damage which has been
sustained in, say, Thailand or Indonesia, but that was partly because the Government itself had,
through the Reserve Bank, sold a lot of forward exchange contracts. Honouring those contracts
was very expensive for New Zealand taxpayers.
So what to do then? Initially, we devalued and began freeing up the financial sector. In March
1985, we floated the New Zealand dollar with the explicit objective of enabling monetary policy
to focus on the single objective of reducing inflation, without having that objective complicated
by concerns for maintaining a fixed exchange rate. While still formally simply advisers to the
Minister of Finance, the Reserve Bank was given clear instructions by the Minister that we now
had the single objective of achieving price stability, and that he had no interest in knowing the
mechanics of how we achieved it. We were given de facto independence.
Not long afterwards, the Minister asked the Bank to suggest ways in which it might be possible
to change the legislative framework in order to prevent the cynical manipulation of monetary
policy for short-term political objectives by any future government. So we set about studying the
literature on central banking, and examining the relationship between governments and central
banks in other parts of the world.
The 1989 Act
What emerged from this study was the Reserve Bank of New Zealand Act 1989, which became
law on 1 February 1990. It was based on six principles:
Monetary policy does affect the inflation rate, but can not successfully be used to engineer a
•
sustainably higher rate of economic growth or a sustainably higher level of employment. This
principle was fundamental, and of course was totally at variance with the assumption
underlying previous legislation. It was at variance also with much of the post-war orthodoxy,
which assumed that there was an enduring trade-off between inflation on the one hand and
employment and growth on the other, that countries could choose to have low inflation with
high unemployment or, more likely, could choose to have a bit more inflation in the interests
of getting a bit more growth. (This view had been deeply entrenched in New Zealand,
perhaps because the economist whose name is often, unfairly, associated with this belief, Bill
Phillips, was New Zealand's best known economist.) But it was clear well before our
legislation was passed that there is no such enduring trade-off, that, in the jargon, the
longrun Phillips curve is vertical. Our own experience prior to 1984 - of high inflation and very
poor growth - demonstrated the point conclusively.
• Secondly, in these circumstances, where there is no enduring trade-off between inflation and
growth, the most sensible inflation rate for monetary policy to target is price stability. By
1989, quite a lot of empirical work had already been done in a variety of countries which
suggested that high inflation was damaging to economic performance, and that low inflation,
or price stability, was beneficial. We did not have the benefit of some of the recent studies of
course, debating the relative merits of price stability and 'low but positive' inflation rates
(often associated with the names of economists such as Paul Krugman, and Akerlof, Dickens,
and Perry). But price stability in some sense seemed the appropriate goal, and the 1989 Act
makes the Bank responsible for using monetary policy for the single objective of 'achieving
and maintaining stability in the general level of prices'.
Thirdly, in a democratic society, it is appropriate that the elected government have an explicit
•
role in defining what 'price stability' means, and the speed at which it should be achieved.
This seemed to follow from the fact that, while there is no long-term trade-off between
inflation and growth, there is clearly a trade-off in the short-term. Hence, the 1989 Act
required there to be a written agreement, a Policy Targets Agreement, between the Minister
of Finance and the Governor of the Bank, signed on the appointment or re-appointment of the
Governor, giving specific content to 'stability in the general level of prices'. This gave
government an explicit role in defining the objective of monetary policy, subject to the need
to have that objective consistent with some reasonable interpretation of the statutory
objective of 'stability in the general level of prices'. Moreover, the Act provided that the
Policy Targets Agreement could be changed during the course of a Governor's term of office
by mutual agreement of the Minister and the Governor. Indeed, where Minister and Governor
can not agree, the Act provides for an 'over-ride' whereby, if the government feels
circumstances warrant the complete abandonment of the price stability objective, the Policy
Targets Agreement can be set aside, by the unilateral decision of the government, for a period
of 12 months. The first Policy Targets Agreement defined our target as inflation of between 0
and 2 per cent annually, as measured by the CPI, achieved before the end of 19921.
• The fourth principle on which the 1989 Act was built was based on the observed fact that,
internationally, central banks which are independent of political control seem to do a very
much better job of keeping inflation low than do central banks which are subject to political
direction. So the Act provides that, once the Policy Targets Agreement between Minister and
Governor has been signed, the Governor should be entirely independent in the formulation
and implementation of monetary policy. The Governor has absolutely no obligation to
consult with the Minister, with the Treasury, or indeed with the Board of the Bank. Note that
the combination of these two principles - of political involvement in the definition of the
objective of monetary policy but complete independence on how that objective is achieved
made the New Zealand approach internationally unique at that time. We were neither to enjoy
the complete independence of the Federal Reserve or the Bundesbank nor to suffer the
complete political subservience of the Bank of England (at that time) or of our own history.
A clear distinction was made between goal independence and instrument independence - we
had the latter but not the former.
• But, fifthly, it was taken as axiomatic that, with total instrument independence should go
accountability, and the 1989 Act required that in two main ways. First, the Governor was
required to provide a comprehensive report to Parliament at least six-monthly, explaining
how he saw the inflation situation and how monetary policy would be conducted to ensure
that price stability was maintained. (We now produce these so-called Monetary Policy
Statements four times a year, and I am examined on them on almost every occasion by the
Finance and Expenditure Committee of Parliament.) Secondly, the Act provided that the
Governor can be dismissed for all the usual reasons (bankruptcy, criminal conviction,
insanity, and so on) and for 'inadequate performance' in meeting the terms of the Policy
Targets Agreement. The Act does not provide that I am dismissed automatically for the
slightest breach of the inflation target, but the threat of dismissal for breaching the target
1
It is not entirely clear where our original target of 0 to 2 per cent annual inflation came from. It has been
said that its source was a capricious remark by the Minister of Finance who, when confronted by journalists
wanting to know whether he was 'finally satisfied' that price stability had been achieved when the CPI first
fell below 10 per cent, responded that 'No, I'm aiming at genuine price stability - you know, something like
0 to 2 per cent'. That may or may not be true, but it is certainly clear that well before the 1989 legislation
was passed, in early 1988, the Minister was publicly espousing a target of 0 to 2 per cent inflation as the
Reserve Bank's only monetary policy objective. By 1989, the Bank's Annual Report referred to our
objective of achieving such an inflation rate no later than the end of 1992. By then, the target was not the
capricious observation of the Minister of Finance but a well-justified definition of price stability in a
situation where we suspected measurement bias in the CPI of about 1 per cent; in other words, 0 to 2 per
cent was regarded as 'genuine price stability plus or minus 1 per cent'.
certainly focuses the mind! (Incidentally, as already mentioned, the Policy Targets
Agreement is between the Minister and the Governor, not between the Minister and the
Bank, and it is the Governor who has decision-making freedom not, technically, the Bank.
And that was quite deliberate. When I questioned the Minister on this when the legislation
was being drafted, he replied 'We can't fire the Bank. We can't even realistically fire the
whole Board. But we sure as hell can fire you!')
• Finally, the 1989 Act mandated a very high level of transparency. The Act transparently
requires that monetary policy be focused on the single objective of achieving and maintaining
stability in the general level of prices. The Act transparently requires that the Minister and
Governor agree a Policy Targets Agreement, and that that Agreement immediately be made
public. The Act transparently requires that any change to the Policy Targets Agreement be
made public immediately, whether agreed by Minister and Governor or arising from the
'over-ride provision'. The Act transparently requires the Governor to report to Parliament on
a regular basis. And it is almost impossible to overstate the importance of this transparency.
It is this above all which prevents the cynical manipulation of monetary policy for political
ends. The Act explicitly allows the inflation target to be modified provided the government is
willing to tell the public that that is being done. The obligation to tell the public about any
change in the target effectively means that monetary policy can not be used for political ends,
because monetary policy achieves short-term increases in economic activity largely by
producing surprise inflation. It is hard to see what political gain would be achieved by a
government which announced, in an election year, that the inflation target was to be
increased to, say, 5 to 8 per cent. The effect on interest rates and the exchange rate would not
be conducive to winning votes!
The results
So that was the framework established by the 1989 Act, and even looking back from the
experience of a decade I believe it has served us very well. It clearly makes sense to focus
monetary policy on delivering price stability. It clearly makes sense in my view to give the
elected government a say in defining what price stability should mean during the Governor's
term of office. It makes sense to make the Governor or the Bank independent to make the
technical judgements on how to deliver the agreed objective. It makes sense to hold the Bank or
the Governor accountable for the outcomes. And it certainly makes sense that both the objectives
and the modus operandi of policy are clearly understood by the public and financial markets.
It is not possible, of course, to be dogmatic about the contribution which this framework has
made to the reduction of inflation in New Zealand. Many other countries have also maintained
inflation at very low levels during the 1990s. Nobody can be sure how inflation would have
evolved in New Zealand without the framework established by that Act. Some academic
commentators have pointed out that inflation was already falling quite strongly before the 1989
Act was enacted.
But in my own view, the framework was of major benefit in the New Zealand context, where we
had had two decades of very poor inflation performance. Yes, inflation was falling quite strongly
prior to the 1989 Act becoming law on 1 February 1990, but of course the Bank had been acting
under instructions from the Minister to focus exclusively on reducing inflation since at least
1985, and to focus on achieving a 0 to 2 per cent target since at least early 1988. We had also
enjoyed complete operational independence since the mid-1980s. Little wonder, then, that
inflation was falling: de facto, we had had an explicit inflation-targeting regime several years
before the 1989 law was enacted.
As Figure 1 illustrates, inflation as measured by the CPI (excluding the estimated impact of our
Goods and Services Tax and of interest rates, which in New Zealand are still included in the CPI)
fell steadily in the late 1980s, and reached the inflation target by the end of 1991. The graph also
shows what until last year we referred to as 'underlying inflation', which was short-hand for the
measure of inflation consistent with the intention of the Policy Targets Agreement (which
permits us to disregard price shocks arising from certain changes in indirect taxation, significant
changes in the terms of trade, changes in mortgage rates, and so on). That measure of inflation
remained consistently within the then 0 to 2 per cent target from 1991 until June 1995, despite
economic growth in 1993-95 which, by New Zealand standards, was exceptionally high. We
exceeded the inflation target by 0.2 per cent in the year to June 1995, in part because of a very
sharp spike in the prices of fruit and vegetables, returned to the target for the next six months,
and then exceeded the target by a small margin throughout 1996. Our target was changed, by
mutual agreement, to 0 to 3 per cent in December 1996, and in the year to September 1998 actual
inflation was close to the middle of that target (at 1.7 per cent). So for the last eight years
consumer price inflation has been within a range of 0 to 3 per cent, and for most of that time it
has in fact been below 2 per cent.
Figure 1
I believe that the framework established by the 1989 Act has also played a useful role in reducing
inflationary expectations in New Zealand. Again, it is difficult to prove this point because
nobody knows how inflationary expectations would have evolved in the absence of the Act. But I
believe it helped increase the credibility of the Bank's commitment to low inflation that it was
widely understood that I ran a serious risk of losing my job if inflation fell outside the agreed and
publicly-recognised inflation target. On each of the occasions in 1995 and 1996 when inflation
slightly exceeded the 0 to 2 per cent target (and at its highest the excess was only 0.4 per cent),
the Minister of Finance formally wrote to the non-executive Directors of the Bank asking them
whether they felt my performance under the terms of the Policy Targets Agreement had been
adequate. Both the letters from the Minister and the replies from the Directors of the Bank were
made public, and everybody understood what was at stake.
In late 1990, not many months after the 1989 Act became law, the head of the New Zealand
Council of Trade Unions wrote an article which appeared in one of the major newspapers2. The
article argued that the Reserve Bank was focused on an undesirably narrow inflation objective,
but that, as long as that was the case, unions would need to moderate wage demands to avoid
increases in unemployment. In the weeks which followed, he actively, and with very
considerable courage, campaigned for moderate wage settlements as a way of reducing
unemployment. I myself have little doubt that the Reserve Bank Act played a part in encouraging
employers and unions to adjust their wage settlements to levels which were quite quickly
consistent with the inflation target.
The same sort of effect on inflationary expectations was visible in financial markets. As Figure 2
shows, in early 1986 the yield on New Zealand government New Zealand dollar 10 year bonds
was roughly 1000 basis points above the yield on US Treasuries. By early 1990, that margin had
contracted to about 400 basis points. By early 1994, the yield on the New Zealand government
securities was marginally below that on US Treasuries. In the last few years, the yield on New
Zealand 10 year bonds has typically been a little higher than on US Treasuries, but the margin
looks trivial in relation to that in the mid-1980s.
Figure 2
Another of the interesting by-products of the inflation-targeting regime has, I believe, been some
stabilisation of the New Zealand dollar exchange rate. I don't want to overstate this: the New
Zealand dollar has been through some pretty big swings in recent years. Against the US dollar,
we appreciated by nearly 40 per cent between the beginning of 1993 and the beginning of 1997;
and then we lost all of that appreciation (which means that we declined in percentage terms by
nearly 30 per cent) over the next 18 months. But on a day-to-day and week-to-week basis,
fluctuations in the New Zealand exchange rate have been rather less than those experienced by
other floating currencies - and this in a situation where the Reserve Bank has not intervened in
the foreign exchange market for almost 14 years (since we floated in March 1985).
Why is this? I think it is because financial markets understand that, with a very explicit inflation
target, there is a limit to how much movement we will accept in the exchange rate before we look
2
The Dominion, 31 October 1990.
to see some offsetting change in interest rates. No, we do not have an exchange rate target. We
have an inflation target. But in a small open economy such as ours, no central bank with a
commitment to low inflation can be indifferent to major movements in the exchange rate.
This is because the exchange rate has important direct and indirect influence over prices. Most
importantly, a change in the exchange rate alters the demand for locally-produced goods and
services, thereby altering domestic inflation pressures. Of course, the difficulty for a central bank
is to know exactly why the exchange rate changes. This has important implications for the
appropriate monetary policy response. Thus, if a sharp movement in the exchange rate seems to
be related to, say, an adverse development in our external markets, as has been the case over the
last 18 months, then we may judge that the adverse external development will have sufficient
disinflationary impact on the economy to offset the inflationary impact of an exchange rate
depreciation, so that no offsetting increase in interest rates is necessary. Conversely, if the
exchange rate change simply reflects some shift in investor preferences, with no justification in
the real economy, then inflation pressures will have changed, and some adjustment in monetary
policy is appropriate.
Since the middle of 1997, this indirect influence of the exchange rate on prices has been
encapsulated in a Monetary Conditions Index in New Zealand. This broadly indicates the relative
pressures that interest rates and the exchange rate have on aggregate demand some one to two
years ahead. The MCI makes it quite clear to financial markets that, in the absence of some 'real'
offset, the Bank expects to see some interest rate offset to any significant exchange rate
movement, to keep overall demand and inflation pressures stable.
A fourth contribution of the framework established by the 1989 Act was, I think it is fair to say,
an improvement in fiscal policy. Again, I don't want to overstate this point: there were a number
of factors driving an improvement in New Zealand's previously rather poor record of fiscal
performance, including some very determined Ministers of Finance. But the monetary policy
framework played a useful part. This first became apparent in 1990 when the then-Government
introduced an expansionary Budget not long before the general election that year. We judged that
that degree of fiscal stimulus would require us to tighten monetary policy somewhat if inflation
(then running at over 5 per cent) was to be brought down to the 0 to 2 per cent target by 1992; so
we did. Immediately, an editorial in New Zealand's largest daily paper noted that the Budget had
'rekindled inflationary expectations. The (Reserve Bank) was bound to lift interest rates....
Electors are frequently bribed to their ultimate cost. This time the independence of responsible
monetary control quickly exposes a fiscal fraud.'3 The main Opposition party campaigned in the
election on a commitment to get interest rates reduced, not by leaning on the central bank but by
'giving monetary policy some mates' through tighter fiscal policy and deregulation of the labour
market.
Five years later, with several years of fiscal surplus behind it, the Government undertook to
reduce income taxes subject to several conditions, one of which was that the Reserve Bank was
satisfied that such tax cuts would not require a significant tightening of monetary policy.
To me, this is a good illustration of the benefit of having the precise specification of the objective
of monetary policy a matter for formal and public agreement between Government and Bank.
The Government makes a public commitment to the agreed inflation objective. It implicitly
accepts that, if its fiscal policy increases inflationary pressures, the Bank will need to tighten
monetary policy to ensure that the agreed objective is met. The Bank is protected from political
pressure to ease monetary policy as long as the inflation rate is, and looks likely to remain, above
the bottom of the inflation target range.
In contrast to these positive benefits from the 1989 Act, some people have noted that in the early
1990s New Zealand also saw quite a strong increase in unemployment and a downturn in output,
and have suggested that the Reserve Bank must accept the blame for that.
I know of no cases internationally where inflation has been reduced from a relatively high level
to a very low level without some temporary adverse impact on employment and output, and New
Zealand's experience was no different. Indeed, I have often acknowledged that the process of
reducing inflation from a high level to a low level almost certainly had the effect of temporarily
reducing employment and output. But I certainly am not willing to accept that the process of
reducing inflation was the only factor in reducing employment and output in New Zealand in the
early 1990s, since a great many other policies had also been changed at about that time. While
most of those other policy changes were highly desirable in the interests of the long-term growth
of the New Zealand economy - reductions in protection against imports, reductions in subsidies
for exports, privatisation and rationalisation of many heavily over-staffed government trading
operations, for example - many of them also had adverse short-term impacts on employment and
output. For this reason, attempts to calculate the 'sacrifice ratio' involved in reducing inflation in
New Zealand are almost inevitably doomed to failure.
What we know is that employment and output both fell at the beginning of the 1990s. What we
acknowledge is that the process of reducing inflation was a part of the reason for that. What we
do not accept is that monetary policy was the only factor in that outcome. Moreover, as theory
suggested would be the case, once wage- and price-setting behaviour adjusted to the new, low,
level of inflation, employment and output both recovered quite quickly, with unemployment
declining from almost 11 per cent in 1991 to 6 per cent in 1996. In other words, the increase in
unemployment was a result of the process of reducing inflation from a high level to a low level,
not a result of maintaining inflation at a low level. While unemployment has recently increased
somewhat, it remains well below its 1992 peak, and well below that in most of the countries of
Europe, notwithstanding the impact of the Asian crisis and a severe El Nino drought on
production and exports. We are confident that, provided inflation expectations remain broadly
consistent with the inflation target, low inflation can be maintained without any ongoing cost in
terms of employment or output.
As an aside, it is perhaps worth stressing what has come as something of a surprise to some
people in New Zealand and that is that our inflation range has both a top and a bottom. One of
our central banking colleagues once said to me that he thought that any fool could get inflation
below 2 per cent by simply keeping monetary policy tight at all times. I agreed. But that is
assuredly not the way we see inflation targeting, and of course it is not the way our inflation
target is specified. Our obligation, currently, is to keep inflation below 3 per cent and above zero.
I would not expect to be dismissed the instant inflation fell below zero, any more than I was
dismissed when there was a small breach of the top of the target. Indeed, the Policy Targets
Agreement recognises that there may be quite legitimate reasons why inflation may, on
occasions, move outside the 0 to 3 per cent target range. But there would certainly be questions
asked if inflation fell below zero, and I would need to have a good explanation of that outcome.
We have been easing monetary policy since December 1996 - aggressively throughout 1998
precisely because we take the bottom of the target as seriously as we take the top.
The formulation of monetary policy
Finally, let me talk briefly about the actual achievement of the agreed inflation target, about the
formulation of monetary policy. Does the inflation-targeting framework help in the actual
delivery of price stability? I think it does, in three ways.
First, having an explicit inflation target is useful in anchoring inflation expectations and thus
affecting wage- and price-setting behaviour. I have already mentioned that in the discussion of
the results of the adoption of the new framework. We in the Reserve Bank devote a very
considerable amount of energy to explaining what we are doing and why, not just to the financial
markets but to the public more widely - groups of farmers, manufacturers, Rotarians, teachers,
lawyers, anybody who will listen. I myself do more than 100 speeches all over the country in an
average year, and my colleagues do a great many also. Perhaps six or eight of these speeches will
be on-the-record, and these we will post to an extensive mailing list of Parliamentarians, business
executives, school teachers, and so on. We produce our quarterly Monetary Policy Statements,
and a series of brochures and pamphlets, many of them written in question-and-answer format,
designed to deal with the monetary policy issues of greatest concern to the public. We have an
Internet site, quite comprehensive and regularly updated, receiving over 20,000 hits per week at
this stage. All of this communications work is designed to strengthen the credibility of the
inflation target and thus both to increase the likelihood of achieving the target and to minimise
any social cost in doing so.
Secondly, having an explicit inflation target provides a very useful discipline on the Reserve
Bank itself, and helps considerably in keeping our deliberations focused. I have been at the Bank
for little more than 10 years, during all of which time we have had an inflation target. But I am
told by those of my colleagues who remember the days before we had an explicit inflation target
that prior to the introduction of that target monetary policy discussions, and decisions, were very
much more difficult. Those making the decisions and expressing the opinions often had a range
of spoken and unspoken objectives in mind, some of them consistent and some of them
inconsistent. Dr Mervyn King, Deputy Governor of the Bank of England, has reported the same
change in discussions at the Bank of England. With a clear directive from the British
Government to keep inflation as close as possible to 2.5 per cent, the members of the Bank of
England's Monetary Policy Committee focus on that objective. It matters not whether the
Committee members are 'doves' or 'hawks'. Indeed, the terms have no meaning in the context of
an inflation target agreed with government. The central bank decision-makers are being asked to
use their expertise and judgement to deliver an agreed target, not to express a view about whether
the target should be higher or lower.
Thirdly, having an explicit inflation target often goes hand in hand with public inflation
forecasting, and does so in our case. This has led Dr Lars Svensson of Sweden to suggest that
central banks which do this are effectively making their inflation forecasts into a kind of
instrument of monetary policy4. This certainly seems to be a fair characterisation of the role of
our own inflation projections. Indeed, most of the time we find that our public projections for the
economy and for inflation move monetary conditions in a manner which seems consistent with
maintaining the price stability target, without our needing to move any formal policy instrument
at all. Moreover, because financial markets know that we will, if need be, move one of the formal
policy instruments whenever we judge that monetary conditions are no longer consistent with
ma