Back in 2007 monetary policy wasn’t constrained by the zero bound. Here’s how we’d do things away from the zero bound if I ran the zoo. The staff would show a chart projecting inflation and real output if the FOMC sticks with the status quo. Then there’d be a second chart projecting inflation and real output if the FOMC cuts rates 0.25 percentage points. Then there’d be a third chart projecting inflation and real output if the FOMC cuts rates 0.25 percentage points. The FOMC members would then debate which of those scenarios they liked best. Upon request, the staff could also present a .5 percentage point hike or a 0.5 percentage point cut.
The point is you’d have a nice organized discussion.
If you read the transcripts, you’ll see that’s not how they do things at all. They spend a lot of time discussing present-day economic conditions (which are in a way irrelevant) and a lot of time discussion projected future conditions where the outcomes are conditional on assumptions about Federal Reserve policy. And then they discuss what they want to do, without doing any explicit recalculation of the scenarios. The point of this, implicitly, seems to me to be to render the whole FOMC superfluous. The chairman and the staff, by rigging up projections that are already conditional on FOMC policy decisions, are assuming in advance what will happen and then just holding the meeting as a consensus-building exercise. That has some merits as a procedure (the chairman and the staff are generally better-informed than the regional presidents) but as I think we’ll see in 2008 it does have a serious downside, namely that when things get really bad “maybe we should set policy such that the projected outcome is good” doesn’t seem to be on the table as an option. There’s no solving for the desired result. There’s just a presentation of a scenario and then a bunch of chit chat and discussion of operational details.