Prior discussion:
speaker: MR. FERGUSON.
text: But to me the incoming data and the forecast, at least at this stage, do not suggest that we should change our approach to policy. The data at the next meeting may suggest that a more hurried pace is warranted; they may not. I think that judgment waits for the next meeting. At this stage I believe we should continue to validate market expectations. 
speaker: CHAIRMAN GREENSPAN.
text: Governor Meyer. 

MR. MEYER. "Slowing the economy to trend may, therefore, be just the first step."

Full utterance: Thank you, Mr. Chairman. In my judgment little has changed in the outlook and hence the appropriate course for monetary policy since we last met. Let me emphasize the three features of the outlook that, in my judgment, support an increase in the federal funds rate target today and suggest that further increases will be warranted over the course of the next several months. First, the growth in aggregate demand continues to outpace the growth of aggregate supply even allowing for the recent upward revisions to the productivity trend. Many apparently have had difficulty with the story that the productivity shock itself could generate an increase in demand that outpaces the increase in supply. But this link only provides a possible explanation for why demand growth is exceeding supply growth. I believe this link is plausible. But all that really matters for monetary policy is that the growth in demand is exceeding the growth in supply at a time when labor markets are already very tight. Perhaps the more important point is that whether or not demand grows faster than supply following a productivity shock depends critically on the monetary policy response to the productivity shock, a point that President Jordan made very effectively earlier. I find it very plausible that holding nominal rates constant in the face of a productivity shock that raises the real equilibrium interest rate will result in an excess of demand relative to supply. The test of whether or not demand growth is in fact exceeding supply growth is what happens to resource utilization rates. The unemployment rate has been declining by an average of almost 0.4 percentage point a year since the end of 1995 and has declined at least 0.3 percentage point each year, confirming that demand growth has been exceeding supply growth. The Greenbook projects a decline of about 1/2 percentage point by the end of next year to 3.6 percent in the absence of further increases in the federal funds rate. Second, while core inflation remains well contained, I agree with the Greenbook forecast that it will soon begin to rise, reflecting the secondary effects of the recent rise in oil prices, the dissipation or possible reversal of various favorable price shocks that restrained inflation earlier, and the effects of very tight labor markets. Monetary policy tightening today would clearly be preemptive and appropriately so. Third, slowing the economy to trend is unlikely to contain the risk of higher inflation. I very much doubt that stable inflation is compatible with a 4 percent unemployment rate. Slowing the economy to trend may, therefore, be just the first step. It is an important step, but it may not be--indeed, it is unlikely to be--enough. We should therefore be especially determined to slow the economy at least to trend quickly and to be aggressively reactive to increases in core inflation.

Opinion: yes
About monetary policy: yes
Stance toward easing (NLI): entailment