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To: Cynic 2005 who wrote (22184)	2/26/1999 4:17:00 PM
From: bill meehan	Read Replies (2) \| Respond to of 86076

Fed Gov Laurence Meyer (London 2/25): "The first question is whether the degree of easing implemented in response to financial market turbulence and the abrupt downward revision in the forecast should be reassessed in light of the subsequent improvement in financial conditions and the continued robustness of domestic demand. Such a reassessment would, of course, also have to take into account both the incoming data on inflation and the downside risks to the U.S. economy, including those related to the continuing stresses in the global economy. The second question is how to position policy, given uncertainty about the relative roles of supply shocks and structural change. One way to rationalize the current policy setting is that the movement away from the Taylor Rule prescription reflects a lack of confidence in the assumption about NAIRU that underpins the typical specification of that rule. After all, the precise specification of the Taylor Rule requires an estimate of the level of potential output or NAIRU. In effect, uncertainty about NAIRU can be interpreted as having made monetary policy reluctant to move on the basis of declines in the unemployment rate relative to some given estimate of NAIRU. While this could be rationalized as an appropriate response to uncertainty about the level of NAIRU, such a strategy positions monetary policy to accommodate continued above-trend growth and further increases in labor market tightness with faster money growth, in order to preserve the prevailing level of nominal federal funds rate. This would result in a monetary policy that reinforced rather than leaned against the cyclical winds, at least until actual price data confirmed that NAIRU had been passed. Given that the unemployment rate is now so low relative to the range of estimates of NAIRU, and given the long lags between policy actions and the effect on inflation, continuing such an accommodative strategy would run a substantial risk of unleashing inflation pressures that would be disruptive to reverse. This may not be an issue going forward, however, given that both the consensus and FOMC forecasts project a slowing to or below trend growth and therefore no further tightening in labor markets." Consensus and FOMC have been forecasting slowing to or below trend growth for how many quarters??? I'd say it is a big issue going forward. bog.frb.fed.us