The Honorable Alan Greenspan
Chairman
Board of Governors of the Federal Reserve System

   Dear Chairman Greenspan:

   As you are probably aware, I have monitored with interest recent monetary policy developments. Over the course of much of our current record-breaking economic expansion, I have been generous with my praise of the Federal Reserve's performance. During much of our current expansion, the Federal Reserve has managed to reduce inflation in a gradual manner so as to foster economic growth and sustain the momentum of the expansion. Such a policy promoted growth and resulted in unemployment and core inflation measures trending down together for most of the last eight years. Federal Reserve policy proved to be a key reason of the sustainability of the current expansion. I have repeatedly voiced general agreement with the thrust of that policy approach. At several Joint Economic Committee (JEC) hearings at which you testified, we shared views on the benefits of such an "informal inflation targeting approach" that apparently guided Federal Reserve action.

   The Fed's recent policy moves, however, have raised several concerns. One of these relates to the inherent uncertainties associated with the implementation of monetary policy. We all know that monetary policy moves impact the economy with lags that are "long and variable." Given the five interest rate increases in recent months, there appear to be risks of adding further to a tightening "already in the pipeline," thereby bringing about an unanticipated and undesirable slowdown. It would seem that caution would be the prudent guide for policy at this time.

   In addition, as I have continued to watch the Fed's performance, it has become obvious to me that while we have little disagreement on policy objectives, there are alternative policy guides (or intermediate indicators) that can be used to advance these objectives. The choice of these guides can make a significant difference in economic results. Recently, the Federal Reserve seems to be increasingly emphasizing real economic variables such as labor market variables or real economic growth (relative to estimates of potential growth) as policy guides. Recent explanations of policy action seem less and less to be price or inflation based. Frankly, explanations of policy moves seem to be reminiscent of Phillips curve explanations that you agreed no longer appeared valid at several JEC hearings. Use of these guides also appears to have encouraged expectations of a series of additional rate increases. Yet it is not clear that such increases actually will be needed. Certainly, alternative price-based approaches do not seem to justify the expectations of several more rate hikes that currently appear to be built into the markets. Should these expected policy moves prove to be unnecessary, unneeded market volatility will likely result. A price-based approach would appear to be more appropriate in our current low inflation environment.

   I remain convinced that market price indicators continue to provide the most useful monetary policy guides. If these guides are unheeded, given the above-cited risks, we could find ourselves in an unanticipated, unnecessary and costly slowdown.

Sincerely,

Jim Saxton
Vice Chairman

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