It would be worthwhile if present FOMC members, given the upcoming change in command, were required to read the transcripts of the December 1992 FOMC meeting, in particular pages 24-27. An excerpt:

MR. JORDAN. This question of when the time is going to come to change the [funds] rate–especially in an upward direction–and the criteria for doing so has been on my mind a lot, and I’m sure it has been in everybody’s thinking. This is my seventh meeting, and I thought it was time to go back and review the last year and to look at what actually has happened in terms of all kinds of economic indicators–monetary as well as economic indicators, nominal and real indicators–and Committee actions to see if I could deduce an implicit model. I read the newsletters, as I’m sure everybody does; and [unintelligible] and I don’t see it in the numbers, it’s certainly not inflation. It’s not the various money measures: Ml, M2, the base, or bank reserves. I don’t even think it’s real GDP. I put together a table–a big matrix of every forecast for as many quarters out as the Greenbook does it–for every meeting for the last year. What struck me was that it looked as if we were on a de facto nominal GNP target. When nominal GNP is at or above expectations, the funds rate is held stable; but when nominal GNP comes in below what has been expected, we cut the funds rate. Do you want to comment?

MR. PRELL. I’d like to establish that in the past the Federal Reserve has shied away from enunciating a view about potential GDP growth, remaining agnostic and being prepared presumably to accommodate any positive surprise. If the positive surprise on nominal GDP could be discerned to be a favorable supply shock, then accommodating it would be a more natural thing to do than if you felt it was a demand shock which tightened up markets and had inflationary consequences down the road. But viewing nominal GDP targeting as your basic approach takes some things as given, as being relatively stable. You may view this [approach] as a way of having an automatic stabilizer over time so that it would be natural to react if you’re overshooting, with the thought that you would end up with some price pressures later [if you don’t react].

MR. PARRY. Jerry, in the discussion about nominal income targeting it’s clear to me that there are some problems associated with it. But what is perhaps more relevant is whether the problems associated with nominal income targeting are greater or lesser than those associated with interest rate targeting. I’m afraid a lot of the academic literature would suggest that we probably would reduce the chance of making the kinds of mistakes that we make with interest rate targeting if we followed a nominal income target.

MR. ANGELL. Well, nominal GDP targeting is really not as bad as it might seem in that it does have a heavy price level direction to it. That is, the advantage of using nominal GDP as a target versus using real GDP is that we are saying to other policymakers that if they in some sense gear up activities that tend to cause wage rate pressures or other price pressures to take place, then they are voting for lower real GDP. So, nominal GDP targeting is not that far away from what I think is price level targeting. I think price level targeting is better, but we’ll see.

MR. KOHN. But in the case of a supply shock, a lot of people have advocated nominal GDP targeting. We discussed this actually in August of 1990 in the face of supply shocks. It is supportive, as Governor Angell said, because it has some of these automatic stabilizer-type properties that Mike was talking about; you can’t overshoot too badly on one side or another and you bring about corrective actions, particularly when you’re unsure with prices going one way and quantities going the other way.

At that same moment, Greenspan was already musing about the economy experiencing a productivity shock:

The second possibility here is that the norm of long-term productivity growth, which is implicit in this concept of a range, has tilted upward. In that case, we’re not looking at 1 percent or slightly more than 1 percent [as the norm], but conceivably all of a sudden something has occurred which has changed the longer-term productivity growth [trend].

It´s interesting to watch how the economy evolved over the next several years.

Note that as soon as the FOMC reacted to the Russian financial debacle (LTCM) it imparted instability to nominal spending with negative effects. Note also that only when the FOMC adopted ‘forward guidance’ in August 2003 the economy reacted.

It seems Governor Parry was right when he said:” I’m afraid a lot of the academic literature would suggest that we probably would reduce the chance of making the kinds of mistakes that we make with interest rate targeting if we followed a nominal income target”

Useful: From 1992 to 1998, every year the St Louis Fed had a chapter on “The Fomc in…” in one of its Review issues:

1992, 1993-4, 1995, 1996, 1997, 1998

Update: Scott Sumner says present day Fomc members are “not smart enough”. It´s never late to learn something!