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The Federal Reserve Board meets Tuesday and Wednesday to decide what its next steps should be in navigating the shoals of this confusing economy. Here is the statement the Fed should issue:
“Today we are confident in our decision to raise the discount rate and the federal funds rate by one-half of one percent each. We do this not, and we emphasize and repeat not, to indicate an overblown fear of inflation, nor to signal any coming series of rate hikes, but instead to return those rates to being closer to the low end of the historical averages (rather than substantially below average, as they have been for several months) while making good on our determination to protect, strengthen, and stabilize the dollar. We emphasize that dollar stability is our long-term goal. We believe that dollar stability will be best served by this one-time rate hike. The hike will serve to encourage private saving and hobble any incipient inflation. It returns rates to a place where they should be able to reach equilibrium: like the third bear’s porridge, neither too hot nor too cold but just right.
“Moving forward, we think that the rates we set today should leave us well poised to respond to any market changes, but less likely to need to make any response. We think they will allow us to be equally vigilant against inflationary pressures and against pressures against economic growth. Based on our analyses, we do not expect to be forced to change our rates again any time soon; we hope and expect that this move will allow us to take a nice pause in rate adjustments. We will, of course, move in either direction if needed, and have shown in recent months that we do not hesitate to move when movement is necessary. But again, we do not think further movement in either direction will be called for, not in the near future.
“Ordinarily, our comments would end here, but clarity demands that we explain ourselves further. We want the world to understand that we take very seriously our charge to maintain a strong and steady dollar. We have made statements in support of the dollar in recent weeks, and those statements needed to be backed by observable action. Fortunately, because we had lowered rates so much in recent months, we found ourselves this week in a good position to take such actions to strengthen the dollar while still keeping rates overall at the very low end of historical averages, and thus quite conducive to steady, job-creating economic growth. A strong dollar in the long run will encourage, not discourage, economic growth. And a strong dollar ought to help reduce the price of various commodities that might have risen too high through speculative ventures. If those commodity prices drop, the whole economy will be more easily able to grow, inflation-free.
“We have confidence that the economy is plateauing, and even perhaps emerging, from its rough patch. We have confidence that the worst of the housing crisis is now working its way through the markets. We have confidence that with the fear of inflation abating, as it should abate once our determination to protect the dollar is understood, mortgage rates can actually edge down again.
“But we also recognize that a new economy may require new approaches by the Federal Reserve. It might be that, long-term, it will be less in our interests to make small, minute adjustments in the interest rates we set, and more important to protect a stable dollar value through open-market activity or through some other mechanism. We think that the pause in interest rate adjustments, which we expect will occur after today’s actions, will give us time to study such new approaches. We hereby announce the formation of a study committee, charged not with recommending major changes in our approach to monetary policy, but instead with taking an open mind to see if any changes are necessary. This committee is a sign of an openness to new data and new approaches, not an announcement that new data and new approaches are definitely necessary. This committee should be understood as a sign of flexibility, but not necessarily of change. We will announce the makeup of the committee in the coming days. Again, though, we stress that a stable dollar is an essential goal of the Federal Reserve, and we are merely exploring various options to maintain such stability, at a time that is propitious for us to do so.
“We also note that with the consideration of new regulatory mechanisms, in conjunction with the Securities and Exchange Commission and the U.S. Treasury, this is a particularly good time for us to form such a study committee so as to coordinate monetary policy approaches with any new regulatory approaches. We also take the opportunity to note that it was only through strong and coordinated efforts with the Treasury and the SEC that we were able to avert the rocky patch earlier this year. The high degree of cooperation that was evident then should give confidence to all Americans that our financial system works. In the case of Bear Stearns, for instance, at no time were Bear’s customers at risk of losing their cash, due largely to the strong and able oversight of the SEC. The financial markets ought to be reassured by the steady leadership of the SEC, and that confidence is another reason why we believe the roughest patch is behind us.
“We therefore conclude by repeating — with no opacity — that our current moves of raising both the discount rate and the funds rate by half a point are moves borne of confidence, not of fear. We have a firm hand on the tiller, and the waters are less choppy.”