J. Alfred Broaddus

The best story I know is the one about an economic forecaster who was sitting in front of his computer one night, and all of a sudden, a genie came out of the tube and told him that he was his personal genie. He could have anything he wanted, but he had one wish, only one wish. But that wish could be anything he wanted.

So the economist, who had been in the business for about 25 years, the forecaster had, and he wasn't doing as well as he would like financially. He thought for a while and he said. Tell you what I'd like to have as my one wish. I'd like to have $10 billion. That'll make me the richest, certainly the richest economic forecaster in the world.

 Well, when he said, the genie got a very frightened look on his face, and said, you know, I'm a genie and I've got a lot of magic.

But that's a lot of money; that's a tall order. Just in case I can't pull it off how about giving me a backup wish? So the forecaster thought long and hard finally he said, you know, I'll tell you what, my backup wish is I've forecasting now for 25 years and my backup wish is that this year, in '96, I get my economic forecast right. The genie just looked at him and said I'll have the money for you in the morning!

It is the most natural thing in the world to respond to a request for our good offices in a situation like this. But this kind of action does create expectations with respect to what we might do going forward that in turn create expectations about monetary policy.

I would suggest one other change. One of the key parts in the report is the summary of the individual projections we provide, which are encapsulated in the central tendency projections in the report. To clarify those, it would be helpful if we all made them contingent on a uniform assumption of no change in policy. That would in a sense put us all on the same page and eliminate any ambiguity or confusion or lack of clarity that might result from the fact that different members of the Committee may be using different policy assumptions in generating their own individual forecasts. It seems to me one of the advantages of that would be that it would help to signal the undesirable consequences of not taking policy actions in one direction or the other that we need to take. It might put us in a position to be more proactive in presenting our policy stance and perhaps less defensive in public discussions of monetary policy. I believe that is the procedure the Bank of England uses in its current reporting approach. That is another suggestion I think we ought to look at.

In short, creditors probably considered the prospects for Fed assistance {to NBW} to be uncertain. Maybe the Fed would lend; maybe it would not.

Some observers might view this uncertainty positively as 'constructive ambiguity.' In their view, because a troubled bank’s uninsured depositors and other uninsured creditors are not certain Fed assistance will be forthcoming, they have reason to monitor bank risk-taking.

But if these depositors and creditors are unsure about the prospects for Fed lending, the implication is that they see at least some chance of assistance, which would reduce the incentive to monitor risk. This might just as reasonably be called 'destructive ambiguity.' Beyond its impact on uninsured creditor behavior, such ambiguity may expose the Fed to political pressure in problem bank situations, since it implies the lack of a firm and consistent rule on procedure when these situations arise. Indeed, ambiguity may invite creditors who stand to lose money to try to bring political pressure to bear on the Fed.

I'm not unduly concerned about either {inflation or growth} yet.  It is certainly true that we are seeing now quite clear signs of moderation in demand in the economy.  Demand growth really seemed to be excessive a year ago.  A slowing is a healthy development.  We don't want it to proceed too far, but my view, I'm not not unduly concerned about what has happened, although I am watching incoming data as closely as I can.

I'm not unduly concerns about what I can see {on inflation}, but I would have to tell you, it's moving in the wrong direction, especially in the service sector.  I'm certainly not panicked yet, none of us are unduly alarmed, but this is our main job.

[A neutral real fed funds target rate] is something in the vicinity of 2.5 to 3.5 percent.  But many things can affect what 'neutral is--it is always difficult to answer with precision. [Reuters]