FOMC20061212meeting--139 137,MS. PIANALTO.," As you point out, their economic forecasts are already much higher than ours. The Greenbook is one of the lowest in terms of economic outlook, even those among the Blue Chip forecasters." FOMC20070131meeting--323 321,MR. DOYLE.," As Dave has explained, policy committees at central banks may choose to produce and publish one of several different types of forecasts— centralized, coordinated, or independent—or they may choose to release a staff forecast. In the table at the top of exhibit 4, columns A, B, and C show some of the forecast publication choices of the central banks discussed in the International Finance Division background paper. Seven central banks publish a centralized forecast; one, a coordinated forecast; and one, a staff forecast. In my portion of the presentation, I will first address some factors (shown in the last four columns) that appear to be associated with these choices. By our reckoning, the first central bank shown, the Reserve Bank of New Zealand, possesses the characteristics that would most likely lead to a centralized forecast without dissent: [laughter] It has a small policy committee, composed of only the governor (which does tend to limit dissent); hence its committee is located in the same place, and its head bears sole responsibility for monetary policy. The other central banks that produce a centralized forecast without dissents (shown in rows 2 to 5 of the table) share many of these characteristics. In Canada (row 3), as in New Zealand, the central bank head has primary responsibility for monetary policy. In other cases, such as Australia and Norway (rows 4 and 5), external members, who have no executive functions, mainly participate at the monetary policy meeting, leaving the remaining members a larger role in producing the forecast. The Swedish Riksbank and the Bank of England have members who all play a more equal role in shaping monetary policy. These banks also publish a centralized forecast, but they recognize members’ dissents from the central forecast in their published minutes. The Bank of England has a larger committee than the first six banks shown. The entire committee is involved in the production of each forecast, and with the larger committee size, the process takes about four weeks, including many meetings to decide on the details of the projection. All seven central banks that publish a centralized forecast also release a single narrative of the forecast to the public. However, their choices vary about the features of the forecast, such as the presentation of uncertainty and the treatment of policy rates. Three of these central banks—the Norges Bank, the Riksbank, and the Bank of England—publish “fan” charts that convey the policymakers’ collective view on the distribution of possible outcomes. Others describe uncertainty around their central forecast through their discussion of risks or through alternative scenarios. As shown in column C, some central banks choose to publish their own forecast for the appropriate path of interest rates rather than conditioning their forecast on a specified path, such as a flat path for the policy rate or one based on market expectations. In contrast to the Bank of England, the two other central banks with relatively large committees—the Bank of Japan and the European Central Bank—do not publish centralized forecasts. To reflect the diversity of its nine policy board members’ views, the Bank of Japan publishes the range and the central tendency of their forecasts, along with the median. These forecasts are coordinated because the board members base their forecasts on a path of interest rates consistent with market quotes. These forecast statistics are published with a description of the outlook, which is drafted by the staff with board input and then voted on by the board. Board members may register (with attribution) their dissent from the description of the forecast in the minutes of the policy meeting. The ECB’s policy committee—which includes twelve members from the national central banks, who are located throughout the euro area—does not publish any forecast of its own but releases its staff forecast instead. The staff forecast is not voted on by the governing council, and its standing with respect to policy decisions is not clear. As outlined in the bullets in the bottom panel, despite the different choices of these central banks, their publication of economic forecasts is generally regarded as useful. The central banks say that publication has eased communication. Many central banks have started publishing forecasts, none of these has stopped, and most have increased the extent of detail reported. Most observers agree that published forecasts have improved communication and facilitated accountability. Many have commented favorably on the quality of forecast publications. Overall, commentary on the publication of forecasts by both producers and consumers is quite positive. However, we have found very little econometric work that specifically evaluates whether publishing forecasts has improved monetary policy communication or economic outcomes. The publication of forecasts has nearly always been part of a package. Attempts to detect major positive or negative effects of adopting such packages have met with little success. Limited evidence suggests that their adoption may have helped anchor inflation expectations, but whether the publication of forecasts has made an independent contribution is unknown. A few event studies have found that the release of forecasts has some effect on interest rates and other financial variables. On balance, existing econometric evidence does not provide a firm basis for assessing the cost and benefits of publishing forecasts. Vincent will now complete our presentation." FOMC20060808meeting--20 18,MR. WILCOX.," Again, the statistical analysis is very frustrating. It’s hard to get that variable to enter reliably, particularly with real-time data that are susceptible to the kind of revisions that we have seen. We do put a nod in our inflation forecast to the acceleration in structural productivity, which is related to unit labor costs, but unit labor costs themselves have likewise not played a prominent role in our judgmental forecast." FOMC20070131meeting--322 320,MR. REIFSCHNEIDER.,"4 Thank you, Governor Kohn. Brian Doyle, Vincent Reinhart, and I will be speaking this morning on the material labeled “Staff Presentation on Producing and Publishing Economic Forecasts.” As the top panel of your first exhibit notes, the Federal Reserve regularly provides the public with information on the outlook in the Monetary Policy Report, congressional testimony, the FOMC minutes, and the statement. You presumably undertake this effort with an eye toward advancing the goals of economic performance, public discourse, your own internal discourse, and efficient operations. A key issue in your deliberations today is whether changing your practices in this area would advance these goals further or achieve a better tradeoff. As shown in the bottom panel, this morning Brian, Vincent, and I will address three questions related to this issue. I will start with the production and publication options that are open to the Committee. Brian will then discuss what we can learn from the international experience. Finally, Vincent will consider the governance issues that would arise under alternative arrangements. Many ways of changing your current practices are possible. Exhibit 2 focuses on one fundamental choice that you confront in this regard—namely, how to produce the forecast. As noted in the top panel, you have three main options. First, you could continue to produce independent forecasts, with each of you solely responsible for your own forecast. Second, you could choose to produce a single centralized forecast, working together as the whole Committee or delegating responsibility to a subcommittee. Finally, you could adopt an intermediate position and produce 4 Material used by Mr. Reifschneider, Mr. Doyle, and Mr. Reinhart is appended to this transcript (appendix 4). coordinated forecasts, with your individual projections conditioned on common assumptions for factors such as oil prices and fiscal policy. As highlighted in the bottom panel, your choice among these three options has important implications for, among other things, your communications with the public and the operational cost of forecast-related activities. To see this, consider one important communication task, the telling of the central story of the outlook. As noted in the first row under the independent option, distilling an informative message from multiple forecasts is difficult, even if those forecasts provide a considerable amount of detail about the outlook. In fact, it is an open question as to whether it would always be possible to craft a central narrative that would command the consent of a majority of the Committee, given the diversity of your views. Moving to the right, the distillation task under the coordinated approach might be simplified a bit because your individual forecasts would share some common elements. Nevertheless, telling the central story would remain difficult if, after settling on, say, a common path for oil prices, you still disagreed markedly about its economic implications. In contrast, as the rightmost entry notes, the telling of the central story would be relatively easy under the centralized option because—abstracting from the difficulties of producing such a forecast—the single projection would provide a clear and coherent message. Your production choice has important implications for another communication task—conveying the diversity of views on the Committee about the outlook. As noted in the second row of the table, the independent option naturally reveals this diversity through your individual forecasts. To a large degree, the same is true under the coordinated option, although conditioning on common assumptions would obscure some of the possible sources of diversity. Finally, the centralized option would not reveal the diversity of your thinking unless the published outlook summary included additional comments about alternative views. Your production choice also has important implications for the operational costs of both producing and publishing the forecast. Forecast production is a relatively low-cost task under the independent option because you incur no expense in coordinating your forecasting efforts. Still, you could find yourselves devoting more resources to forecasting if you chose to publish your individual projections. Moving to the coordinated option, here preparing the forecast would be more costly because you would need to spend time choosing a common set of assumptions, but you could limit these costs if you settled on a standard process for this task. Finally, producing a centralized forecast would be very costly, especially at first, because of the wide range of economic issues on which you would need to reach consensus. Given the practical difficulties of achieving such agreement with a group as large as the FOMC, making this option feasible might require delegating the preparation of the unified projection to a subcommittee. Finally, there are the operational costs of forecast publication. This task may be burdensome under the independent option, especially if all of you wish to participate actively in the preparation of the text as you now do with the minutes. In fact, given the inherent difficulty of crafting an accurate and informative central message from multiple forecasts, negotiating the language of an outlook summary as a group would likely be even more time-consuming than preparing the minutes if the summary is to be anything more than a bare-bones listing of numbers. Publishing the forecast under the coordinated option also may be burdensome, for the same reasons. However, choosing the centralized option could make forecast publication less costly, partly because you would already have reached agreement on the economic factors influencing the outlook. You could reduce costs further if you delegated responsibility for both producing and summarizing the forecast to a subcommittee. The top panel of your next exhibit considers some of your many publication choices. If you choose to continue producing individual forecasts, you could release more information about those projections—for example, by publishing the forecasts themselves. Such a step would reveal more about the diversity of your thinking, although it might risk diverting attention from any consensus about the outlook. Another option available under all three production choices would be to provide more forecast details, either numerically or in qualitative form. Such a step would facilitate telling a more informative story about the outlook, although it would also create additional dimensions for disagreement. A third possibility would be to lengthen the forecast period. This step could reveal more fully how you expect any economic shocks and imbalances to play out and thus might enhance public understanding of the basis for your policy actions; it could also provide more information about your policy objectives and expectations for the long run. A fourth possibility would be to publish information about the outlook more frequently than you now do. Such a change might help to clarify how you see the forecast and monetary policy responding to incoming data, but it would also increase operational costs proportionately. Finally, you have the option of publishing fan charts and confidence intervals for your projections. This information could help to emphasize the inherent uncertainty of the outlook and the conditionality of monetary policy. Before you could take this step, however, you would have to settle some issues involving the empirical basis of this material. The bottom panel of the exhibit addresses two options that you have for setting the projected federal funds rate. The first option is to condition the outlook on what you see as “appropriate” monetary policy. If you produce independent forecasts, each of you would continue to make this determination on your own, but under the centralized approach and perhaps the coordinated one, you would need to do this as a group. As noted in the first bullet point, publishing details on what you see as the appropriate path of the fed funds rate could facilitate telling a more informative story about the role played by monetary policy in the outlook. Describing your policy assumptions qualitatively might achieve this objective; alternatively, you could release, say, the central tendency of your specific fed funds rate projections. One possible drawback to publishing an “appropriate” policy path is that the public might misinterpret it as a promise, especially at first; for this reason, you might wish to pair any published fed funds rate path with information on forecast uncertainty. Releasing information on the fed funds rate might also generate public criticism and political pressures. A second option for setting monetary policy is to condition the outlook on a flat fed funds rate or on the path consistent with market expectations. This approach might mitigate some of the misinterpretation and political problems associated with the release of an appropriate policy path. However, conditioning the outlook on such a path would alter the nature of the forecast and so create communication challenges. In particular, your forecasts would no longer represent your best guess for the likely evolution of the economy, to the extent that a flat fed funds rate or a market-based path differs from what you, individually or as a group, think will be necessary. For this reason, the forecast summary would require some statement about the desirability of the projected outcome to avoid misunderstanding. You might even find it necessary to provide guidance about how the policy path would have to change to bring about a more “appropriate” outcome—a step that would likely generate its own controversies. I will now turn the floor over to Brian." CHRG-110hhrg44901--101 Mr. Scott," I have two points. Your answer on the economic stimulus package, how good was it, is it good, and given the weakness of the economic forecast, wouldn't it make sense perhaps to extend another round of that economic stimulus package to get some checks more directly into the hands of the American people? " FOMC20070131meeting--324 322,MR. REINHART.," Exhibit 5 presents a decision tree outlining the possible paths you might take in incorporating an economic forecast in the policymaking process. I am including this schematic because, among other reasons, it is just what you would expect from me. [Laughter] Before we trace out some of those limbs, I want to remind you why the economic forecast is on today’s agenda. Discussion of monetary policy, both here and abroad, has increasingly focused on the forward-looking nature of setting policy. For the Federal Reserve, the structure of the current process of releasing an economic projection was set almost thirty years ago by improvisation in response to congressional prodding. Is it possible that the Committee could arrive at a more coherent way of producing and releasing a forecast that would enable policymakers to describe better what they do? The possibilities for producing and releasing a forecast are laid out at the top of the exhibit. Note that a couple of the nodes correspond to questions from the subcommittee to you in a memo I distributed on Friday. In particular, as flagged by the “1” in the decision tree and repeated in the list below, “Does the Committee want to produce a joint forecast or conduct a survey of individual forecasts?” The answer to this question is both hard—because it has considerable implications for your time and resources in the System more generally—and easy to predict—at least based on conversations I’ve had with many of you and your staff. To make it even easier to answer, let me paraphrase those conversations: “Do you want to change the basic nature of the Committee process by adding multiple rounds of meetings so as to enforce a more uniform view of the outlook than has ever existed before, or do you want to modify the status quo?” [Laughter] If you prefer to continue the practice of providing individual forecasts, you might want to reexamine the extent of coordination in that process. That is item 2 at the top and bottom, “If the forecasts are done individually, should they be based on common assumptions about some key conditioning factors?” Chief among those factors is the path of monetary policy. Do you want to continue with each taking your own view of monetary policy, settle on some joint assumption, or use market-based quotes? The individual entries in a numerical forecast have only limited usefulness in describing the economic outlook and the backdrop for setting policy. Rather, the narrative thread explaining the forecast is the most useful because it allows the reader to assess the credibility of the projection, to position his or her own view when there is a difference of opinion, and to gauge potential risks to the outlook. As posed in question 3, do you want to accompany a forecast with a minutes-style narrative description? As with the minutes—and noted in question 4—this document could be circulated for comments from meeting participants and ultimately be approved by the Committee through a notation vote. Such a procedure, however, will extend the interval between the making of the forecast and its release, raising the number of times that inconvenient data releases will render the projection moot. If you want a more timely release, drafting and releasing such a minutes-style document could be delegated to either the Chairman or the staff. The last four questions cover technical attributes of a forecast. In particular, as noted in question 5, how frequently should forecasts be made? The current semiannual reporting cycle was set by the Congress, but it means that the published forecasts become stale. Another inconvenience with the current setup is that an annual forecast made in June incorporates an implicit forecast of the second half. Would you rather be explicit and forecast half years? More generally, as in item 6, how many years should the forecast cover? Seventh, how many variables should be forecast, and which should they be? Nominal income, for example, remains on the survey by historical accident—from the days when the velocity of money was thought to be predictable and knowing your expectation about income growth would help in setting a monetary range. Are there other variables that would be more helpful? Finally, should there be some attempt to convey numerically the uncertainty surrounding the forecasts? Relaying such information would more accurately convey the balancing of risks that is an integral part in your deliberations and would remind your readers that it is a projection, not a promise. By now, we probably have your heads spinning with all the possible permutations of the many decisions that could be made. With this many moving parts, the problem is complicated. But not all the issues to be resolved are hard. First, you have the force of precedent, which is a powerful attractor within the Federal Reserve System. That is why I wouldn’t worry for a minute about whether the forecast and its description should reflect the views of the Committee or all meeting participants. The precedents of the outlook portion of the minutes and the semiannual survey of forecasts establish that any release should reflect everyone’s views. Second, for the sake of consistency, some of the decisions about the format of the forecast will be driven by other decisions you may make later. For instance, if in your deliberations about quantifying the price objective in March you indicate a preference for measuring inflation in terms of CPI or PCE, whether headline or core, the variable sampled in your survey should be a good indicator of that goal. If you can answer the hard questions today—eight of which the subcommittee sent to you—then it would be possible to frame out a rough structure of a specific proposal. Detail could be filled in by surveying you later on technical matters, and sometime thereafter you could get a formal proposal for consideration as part of the general package of work on communication. That concludes our prepared remarks." CHRG-110hhrg44901--109 Mr. Cleaver," Thank you, Mr. Chairman. I have some curiosity about the radical groups my colleague was talking about, but I will suppress that and move on. Mr. Chairman, because our economy seems to have so many economic moving parts and with connections to the world economy, is it possible any more for us to bring forth a clear forecast? I mean, has forecasting just been tossed out of the window? " FOMC20070131meeting--404 402,MR. HOENIG.," Thank you. I’ll frame my remarks around two propositions. The first is the “yes.” We should be receptive to changes in our practices and procedures to the extent that they make monetary policy more effective and provide clear public benefit. My general sense is that providing more information about our views on the economic outlook can be a good thing when it comes without impairing the effectiveness of the policy process. The second is the “but.” Changes that we make in this regard need to be done in a way that respects the diversity of viewpoints that is central to the effectiveness and the effective functioning of this Committee. I believe that the strength of this Committee and the source of its ability to conduct sound monetary policy and facilitate confidence in our policy come in large part from the diverse backgrounds and views of the individual members. Although at each meeting we must arrive at a Committee decision, the decision and the way it is communicated to the public are shaped by the views of all participants. In my experience, Mr. Chairman, as policy evolves, it is rarely the case that everyone suddenly sees the wisdom of a major change to the direction of policy. Rather, one or more members begin to articulate concerns with our current policy stance based on their experience and their assumptions about unfolding events. As data begin to provide support for this viewpoint, the Committee begins to move in a new direction. Even when new positions are not subsequently supported by the data, our discussions benefit from considering alternative points of view and sets of assumptions. Consequently, as we consider options that we might pursue to increase the effectiveness of our communication, I am strongly opposed to changes that would limit the expression of alternative forecasts and viewpoints, either in the discussion within the room or in our communication with the public. I regard steps such as producing a joint forecast or requiring a common interest rate assumption as extremely detrimental to the Committee’s deliberation and public communication. Such steps would lead inevitably in my mind to the delegation of decisionmaking to a small group of individuals, and I don’t think that’s helpful. With that said, let me focus for a moment on some specific issues on the role of forecasts in policy communication, and I would begin with some comments on the proper vehicle for communicating forecast information to the public. If we decide to move forward with discussions of our forecasts and providing more forecasts, I would like to suggest an alternative—and like all the other alternatives today, it is superior [laughter]—and it is based on how we would choose to do this. If we want to convey this information in a way that is both timely and logistically manageable, we should use the minutes. This is an extension of what we now do. It takes us forward but, I think, in a proper step. Specifically, I propose that we consider releasing a summary of numerical forecasts as part of the minutes. We all prepare forecasts beforehand. As I remarked earlier, it is important that the information be in the form of a survey of individual forecasts, not a joint forecast, and each forecast should be based on the individual’s view of policy and not on a common interest rate path. The minutes would contain summary information in the form of tables or charts on a small set of key variables, such as real GDP, core inflation, and unemployment. This information would be presented in the form of a central tendency and the range of Committee member views. I would not include specific information about the policy assumptions used for the individual forecast. Members would present their views in the meeting and then be permitted to revisit their forecast in light of the Committee discussion and decision. The forecast period would likely be four to eight quarters, as now, with the semiannual report focusing on the longer horizon beyond that, if we go there. An advantage of using the minutes, besides timeliness, is that a narrative is already prepared. There would be less chance of confusion about the ownership of the forecast. The numerical forecast information would supplement the qualitative discussion currently in the minutes, and I think it would enhance the public’s understanding of policy. For example, the recent disconnect between our views and those of the financial markets might not have developed had the markets seen our forecasts of temporarily slower growth and persistent inflationary pressures. A final issue is the use of common conditioning assumptions in the forecast. As I indicated earlier, I would not be in favor of requiring a common fed funds rate path. I think it might be helpful for the Board’s staff to provide information on some of the conditioning assumptions they use in the Greenbook as a starting point for Committee members’ forecasts. However, as with the fed funds rate path itself, I would not be in favor of requiring a common set of assumptions for individual forecasts. I think this helps inform the public but also keeps the diversity within the Committee and leaves the Committee more effective. Thank you, sir." FOMC20050202meeting--231 229,MR. REINHART.," Over the intermeeting period, I surveyed you about whether the summary of your economic projections should be expedited—that is, released next week rather than three weeks later when the Chairman delivers the Monetary Policy Report in testimony to the Congress. My experience in surveying you has been that if I ask the 19 of you “What is the color of an orange?” I couldn’t be sure of getting a majority on a single answer. [Laughter] This most recent survey was no exception. Almost as many of you strongly endorsed an expedited release of your projections as strongly opposed it. An equal number of you endorsed it as opposed it, and there were two lonely people who were indifferent. [Laughter] Thus, since expediting the release of the forecast is a decision that cannot be reversed, it doesn’t seem appropriate to move forward with a discussion of it today. But let me add that one argument in favor of expediting the release of the forecast seems particularly pertinent at this time: There’s a risk that if those forecasts are particularly February 1-2, 2005 136 of 177 a consistent message to the public. This is pertinent now because the employment report will be released this Friday, raising the possibility that material changes in your economic projections will be necessary. It seems appropriate, then, to give you a little more time than usual to revise your projections. So I would ask that you get your final forecast to Dave Stockton by the close of business next Monday." FOMC20060629meeting--61 59,MS. MINEHAN.," Quickly, just as an extension to President Moskow’s question—if you look at the economic projections, particularly for 2007, the staff’s forecast is sort of low on GDP, middling to high on core PCE, but right up there over the central tendency on the unemployment rate. I think this comes under the heading of the surprise in this staff forecast versus what we’ve been seeing earlier this year. And I’m telling the truth here: I think our projections in Boston were closer to yours than what I see here in the central tendencies. So it’s not that I’m objecting tremendously to your forecast, but one element I did find a little off-putting and I wanted to ask a question about is the relationship of how much your unemployment rate rises, going up from 4.6 to 5.2, to the path of the GDP forecast, even recognizing that it’s ½ percentage point slower than an earlier forecast. That may be not your starting point. I recognize that. But it does seem like a big change even given the slower pace of GDP growth." FOMC20060808meeting--169 167,MR. GUYNN.," Mr. Chairman, since I’m not going to be here in October, I probably should sit quietly; but I can’t resist. I think almost everything has been said. I want just to comment quickly on a couple of things. I’m not sure we really talked about a very fundamental question—that is, who it is we are trying to communicate with. That deserves a bit of discussion, it seems to me. Building on the whole notion of trying to quantify our objectives, I think we’ve seen what a box we can get ourselves in. In the absence of something, we all start offering our own quantitative whatever. At the current time, we’re in a position in which many of us have specified what we think our comfort zone is. We haven’t explained how we’re going to measure it; we haven’t reconciled the differences across people; we haven’t explained what we’re going to do when we’re not there; so we’ve gotten ourselves in this kind of halfway house. Whether we’d like to talk about inflation targeting and all the things that go with it or not, we’re going to have to stop and deal with it. We haven’t really talked very much about the role of the forecasts—and I hope policymaking has always been based on forecasts—but we have been much more explicit about that role in recent times. That opens up the whole question of whose forecast and how we talk about forecasts at all the different stages. Finally—and I can’t resist commenting—I think the greatest short-term tension regards the issue of what to do with the four-paragraph post-meeting statement and what to do with the minutes. I’ve more and more come to the view of Bill Poole that less is more. We simply can’t get very much of the different ways of thinking into that four-paragraph statement. I think that’s an impossible task. We all think about it very differently. We’ve heard it today. The statement is simplistic. I would hope when you get around to talking about the issue that it would be clear that the minutes offer a much better way of trying to help people understand not only the uncertainty but the range of views that go with the policymaking and not let that little simplistic statement after a meeting become the most important communication. End of story. Thank you." FOMC20070628meeting--103 101,MR. REINHART.,"3 Sure. Thank you, Mr. Chairman. As was evident in the survey responses summarized in the memo of June 15 on your attitudes toward the economic projections, there seems to be broad agreement among you on the key features of the process. Where there was not, including about sharing forecasts, the specification of the monetary policy assumption, and the characterization of uncertainty, the Subcommittee on Communications tried to find common ground. The result was reflected in the survey on the economic outlook for this meeting, which I will discuss with the aid of the material distributed with the cover “Economic Projections of FOMC Participants.” As can be seen by comparing the bolded with the italicized numbers in the first exhibit, there were only minor changes in your projections of real GDP growth, the unemployment rate, and core PCE inflation over the next two and one-half years from those you submitted in May. Given the favorable data over the intermeeting period, you raised your real growth forecasts a notch and lowered the core PCE inflation forecasts for 2007. Still, as plotted in the top panel of exhibit 2, the red bars showing the central tendency of your forecasts indicate that most of you anticipate that GDP growth will be somewhat soft this year but will pick up a bit over 2008 and 2009. Although the submissions were not specific about potential output growth—and not all of you would agree that it is even a useful concept—this expansion of real output would seem initially to be slower than that of capacity in that the central tendency for the unemployment rate (the second panel) edges higher. With resource markets less taut and perhaps some transitory factors ebbing, core PCE inflation (the third panel) drifts down. In this experiment, you were asked for inflation readings coming from two measurement systems. The historical wedge between inflation measured by the core PCE price index and the total consumer price index is about ½ percentage point. The central tendency projections for those two series in 2008 and 2009 are about that far apart, leading to the inference that you are not forecasting significant changes to the relative prices of energy and food. The subcommittee suggested forecasting these two inflation series in the spirit of experimentation. Sometime in the next two days, you might want to express how useful you found that part of the experiment. Another notable feature of your projections is that the differences among them widen, rather than narrow, the further into the future you forecast. This suggests a diversity of views as to key attributes of the economy as well as where you believe inflation should be headed in the long run. As for the assumption about monetary policy underlying these outcomes, about two-thirds of you indicated general agreement with the path laid out in the Greenbook. As for the others, there were explanations advanced for being on either side of the staff assumption. 3 Material used by Mr. Reinhart is appended to this transcript (appendix 3). You were also asked to provide a qualitative characterization of your uncertainty about your outlook. The results for real GDP growth are given in the top panel of exhibit 3. Somewhat surprisingly, there was no Lake Wobegon effect, and the preponderance of responses viewed the real GDP growth outlook as just about as uncertain as has been the case on average over the past twenty years. As shown in the bottom panel, a majority of the submissions indicated that the risks around the projections for GDP growth are judged to be broadly balanced. This contrasts with the indication in the May minutes that, although the risks to economic activity had “diminished slightly,” they were still “weighted to the downside.” For some, the incoming news may have led to a reassessment of the risks to economic growth. For others, it may reflect a view that the main downside risks to activity are concentrated in the near term and those risks further ahead are broadly symmetric. To shed light on this issue, participants might want to address the main risks to economic growth and whether they are still judged to be weighted to the downside as had been the case in your May discussion. Some more detail about your forecasts of the unemployment rate is provided in exhibit 4. A majority of the projections embody a more muted rise in the unemployment rate than in the Greenbook forecast, the dashed vertical lines. This smaller expected increase may partly reflect the stronger outlook for GDP growth suggested by many of your projections. But then again, it may not: [laughter] From the comments in the narratives about the likely strength of trend growth, it is not clear that the projected growth in output relative to trend is expected to be materially more robust than that suggested by the staff’s forecast. Does the more modest projected rise in unemployment reflect a difference in views from the staff’s about the rate of growth of potential output, the unemployment rate associated with no change in the inflation rate, cyclical movements in productivity, or other factors? Exhibit 5 provides a tally of the year-by-year inflation outlook. A majority of the projections have a more benign medium-term outlook for core inflation than that suggested by the staff’s forecast. But the responses to the question about the appropriate path of interest rates indicate that for a majority of projections this does not stem from a significantly tighter stance of monetary policy than assumed by the staff. Likewise, the projections for GDP growth and unemployment do not appear to imply greater economic slack than expected by the staff. For some, this more marked moderation in inflation may reflect a judgment that more of the rise in core inflation reflects the effect of temporary influences, such as the rise in energy prices and owners’ equivalent rent, that are likely to abate over the forecast period. For others, it may reflect an assessment that the NAIRU is lower than that assumed by the staff or that inflation expectations may edge lower over the forecast period, perhaps pulled down by Federal Reserve communications. You might wish to exchange views about the main factors contributing to the expected moderation in inflation in your forecasts. As to where inflation is headed in the longer run, many of you indicated that the third-year projections (the bottom panel) reflect to a considerable degree your policy goal rather than initial conditions. If that is the case, the central tendency reveals that most of you individually define the inflation rate that best fosters the dual mandate to be 1½ to 2 percent when measured by the core PCE inflation rate. Given your apparent beliefs about future movements in the relative prices of food and energy, discussed earlier, you would also seem to think that total PCE inflation should place within a range of 1½ to 2 percent. As for the process from here on, if you would like to change your forecast in light of the discussion at this meeting or data received since you prepared your projection, we ask that you submit your revision to the Secretariat by close of business Friday. Unless we are instructed differently as a result of the discussion tomorrow, the staff will draft a minutes-style narrative description of the economic projections. This will be a standalone document that will circulate with the draft minutes on the regular schedule as was the case in May. One last point: Your final exhibit gives the traditional presentation of your economic projections that will be made public in the Monetary Policy Report and included in the published minutes. If you want to change your submission, please let us know by Friday. How you judge the usefulness of this exhibit compared with the forecasts compiled for the experiment presumably will be one topic for discussion tomorrow. That concludes my prepared remarks." FOMC20071211meeting--123 121,MR. EVANS.," Brian, thank you very much for that answer. I have a clarifying question because I’m not quite sure I caught, in the way you talked about the economic risks in section 4 of alternative B, how they could be added. One thing that I wanted to ask about is that in section 2 there’s no mention of downside economic risks. At least the five or six times I read it, I couldn’t find it. That seems different from alternative C and alternative A, and also the October statement, at least in the balance of risk, mentioned downside risks to growth. Is there a particular message that we’re thinking about sending with that? I guess part of the question is that, without some mention of expected slowing, are we maybe undercutting our November forecast that we published? It seems natural that there would be some discussion about how things have slowed relative to what we were expecting. I mean, that might be one way that those forecasts would be interpreted and used. But I lay that out as a question." FOMC20080130meeting--221 219,MR. MADIGAN.," I think my response is that it is very difficult to say how your communications should or will evolve going forward at this point because of the very substantial uncertainty in the economic outlook, which shows up very clearly in the Committee participants' economic forecasts. Presumably, what you say will depend on evolving circumstances. In terms of the yield curve, again, I think that is difficult. That will depend on the interaction of market participants' perception of incoming economic information with their sense of your own policy reactions. " CHRG-111hhrg49968--21 Mr. Ryan," Let's turn to inflation. Your colleague at the Philadelphia Fed, Charles Plosser--and I have spoken to some other Fed bank presidents who seem to concur--he recently gave a speech in which he said that the economic forecasters rely too heavily on measures of the so-called ``output gap'' as a predictor of inflation. These forecasters argue that inflation will remain low for some time, given the large current output gap. He notes that other indicators, more forward-looking economic models, suggest a much higher risk of inflation over the medium term. Are we looking at the right indicators to gauge the risk of future inflation? Gold and inflation compensation spreads and the Treasury bonds markets are rising. So what indicators are you using to measure inflation, and why are they the right indicators? " FOMC20061025meeting--256 254,MR. MOSKOW.," Thank you, Mr. Chairman. It’s probably best to state at the outset that I prefer a different approach to quantitative inflation guidelines, and that approach is actually touched on in Vince’s second question. The approach I would prefer is extending our economic forecast horizon. I’ll address this consideration first and fill in some of the details requested by Vince and the subcommittee, and I hope we would consider this option going forward. Moving to an explicit numerical specification of price stability would be a very big step for the Federal Reserve, for this Committee. Once we do that, as Don said, there’s no turning back. So this decision is extremely important for the Committee. To date, when we’ve been faced with major decisions of this type, we have taken an incremental approach, and I think that approach has served us very well. For example, we have increased transparency step by step over the past twelve years, and I think that approach has really been quite successful. So I’m attracted to an intermediate step of extending our economic forecast horizons. I think doing so would be a natural extension of what we already do, and it would give us experience with many aspects of the quantitative inflation regime. My preference would be to extend the economic forecast to a horizon that is at least five years ahead. At five years out, the inflation forecast should be close to our implicit inflation guideline. Output growth and the unemployment rate should move around only with regard to structural changes, like demographic changes and total factor productivity growth, for example. I realize that many details would have to be addressed to extend the forecast horizon, but figuring them out and getting experience with this approach would help us to learn what’s involved in moving toward an explicit numerical objective or to learn why not to go that far. First, what is the policy assumption underlying the forecast? Second, we currently report GDP growth, the unemployment rate, and core inflation—so how many variables would we report? Third, should we continue with our current approach of using a central tendency or develop an integrated consensus forecast? Fourth, should we convey uncertainty bands around that forecast at the longer horizons? I realize these questions are difficult for us to answer as a Committee, but there are other tough challenges in moving to an explicit specification of price stability. For me the biggest issue is the dual mandate responsibility and our relationship to the Congress. Clearly, a persuasive case must be made that we will continue to fulfill our dual mandate responsibilities. The challenge is how to make an explicit numerical specification of price stability operationally compliant with the dual mandate, and to do so, we need to clarify the flexibility of the time period for bringing inflation back to its target, as Jeff just talked about. The amount of time to do this would depend on the size of the current inflation deviation and the deviations from maximum sustainable growth and employment. So I think the intermediate step of explaining longer-term forecasts would help us learn how to communicate these difficult dual mandate issues more effectively. Let me cycle back to the questions in Vince’s memo. With regard to the first question, I think that further clarification of our price stability objective would be helpful and that extending the forecast horizon is a good first step. Providing more information about our long-term inflation goals should help us maintain or even reduce the currently low inflation risk premiums in long-term nominal financial contracts and interest rates. These inflation premiums are risk compensation against the economic outcomes that we have a lot to say about. The long-term inflation information will greatly facilitate communication both within the Committee and externally. I have expressed my views on explicit inflation objectives previously. Just to summarize, economic theory does not sharply pin down the optimum inflation rate, but my preference is a range of 1 to 2 percent for core PCE inflation. My preference is for core inflation to be 1½ percent, in the center of that zone. When inflation is outside the zone, policy should be broadly designed to move inflation back to the center of the zone. However, the time frame for core inflation to return to the center of the zone depends on a number of factors, like the dual mandate that I mentioned earlier. Finally, an important issue that we should discuss is whether to use core inflation or headline inflation. Other central banks use headline inflation, and they seem to manage that well. I’m open to a discussion on this, but I think the communication issues are more complicated for headline inflation when it deviates so much for transitory reasons than for core inflation. To conclude, I favor taking the intermediate step of extending the forecast horizon to five years, and I’d like to leave open the question of whether to establish quantitative guidelines until we get more experience with that approach." FOMC20081029meeting--216 214,MR. ROSENGREN.," --I would say that I'd be surprised by that outcome. There are several looming financial problems that are likely to affect financial markets. Bill Dudley highlighted the one that I think is the biggest for me, which is that the NAV (net asset value) triggers for hedge funds will be a significant problem in the fourth quarter. Without comprehensive information on hedge funds, it's difficult to know the extent of the problems they are facing. However, since the stock market remains one of the few markets available for the disposing of assets in bulk without a significant liquidity haircut, I'd expect significant selling in the fourth quarter. My second big concern is that rollover financing will become more problematic as financial problems persist. Particularly exposed are real estate developers and highly leveraged private equity firms. My third worry is that neither insurance companies nor commercial banks have reserved for the economic outcome in our baseline forecast. Under-reserving and high payout ratios are likely to limit the amount of additional lending that banks are willing to take on. These financial problems place additional downside risk to our forecast. Our forecast, like the Greenbook forecast, expects the rate of inflation to slow as a result of falling food and energy prices and significant excess capacity emerging in the economy. In fact, our equations indicate there is a non-negligible risk that deflation will be a problem in the outyears of our forecast. Unlike President Lacker, I was surprised that it stayed as high as 1 rather than as low as 1. The outlook for a weak real economy and falling inflation highlights the need for both monetary and fiscal policy to offset some of the financial and economic problems that we are likely to experience. Thank you. " FOMC20070131meeting--353 351,MS. MINEHAN.," No, I’ve got plenty of questions here. Anyway, I, too, appreciated the range of staff material that went into the preparation for this discussion. An awful lot of alternatives are on the table, and I think it’s good that we’ve been asked to focus on eight questions to try to clarify things. But from my view, the most important question was not posed, and Vince lightly passed over it. Yes, thirty years ago or so we fell into the process that we now use for both creating forecasts and communicating them, and yes, you could assume that anything you’ve done for thirty years probably could be improved. I think that’s possible. But I’d like to have some sense of what is wrong about what we’re doing before I seek major changes to improve it. The staff paper suggests that in deciding whether or how to change the way we communicate our forecasts, we ought to be looking at goals of better economic performance and better public discourse and accountability, presumably not just in the short run but also in the long run. There’s some marriage there with the potential for setting long-term, explicit price stability targets. A third goal would be better internal discourse and trying to do all of that in the context of having somewhat efficient operations. I think these are laudable goals. I continue to have concerns about whether explicit long-term targets for price stability are really helpful—whether they’ll help or hinder our cause. But setting that aside, I think we need to think about our forecasts not just as forecasts but in light of the full range of communications in which the Committee now engages. We have two Monetary Policy Reports a year. We have the central tendency of member forecasts around GDP, inflation, and unemployment. They don’t get a lot of attention right now. Maybe that’s good in some perspectives, given the way we do them. Maybe that’s not so good. We have eight meeting statements. We have eight sets of minutes, and we have copious speeches and testimony. So there is a lot of communication, whether it’s in numerical form or qualitative form, about how we see the future. Each set of minutes has implicit in it a qualitative discussion and some quantitative information from the Greenbook forecast and an indication of where the members of the Committee are in terms of how they see the future unwinding. We certainly, of course, express that a lot in our speeches and testimony. In my almost thirteen-year tenure on the Committee the transparency of policy deliberation has increased enormously. There’s a healthy public discourse about what we’ve done, what we’ve said about it, and what the likely future course of monetary policy is. In the end, I think accountability really depends on actions, not so much on words, and I believe our actions and our words have shown us to be accountable. So I’m questioning whether some of this moves us to be more accountable. In fact, if you look over the past twenty-five years at the range of our current forecasts, albeit they have potential problems and they receive little attention, that range hasn’t been at all bad in predicting what has actually happened over the period for which the projections are made, particularly when you look at inflation and unemployment. So despite our lack of common assumptions and with the wide variety of differences, particularly over the years, in how we view the mechanics of the economy, we have published a central tendency that’s been fairly narrow and reasonably accurate, at least for the things over which we have the most control—in particular, inflation. Will more communication of forecasts result in better economic performance? I think that’s hard to prove. The staff has said it’s hard to prove. Maybe yes; maybe no. Turning to the objective of better internal discourse, more communication has already improved the internal discourse of the Committee. I have some qualms about referring to our nineteen-person editing sessions as an improvement, but setting that aside, we have moved over the years from saying nothing to formulaic statements to more-flexible language combined with earlier release of the minutes. So I think that has all improved our internal discourse. Vice Chairman Geithner circulated something that implied we might further improve by sharing among ourselves more detail about our internal forecasts and the attendant uncertainties. I like that as an improvement on the internal discourse part of it. I think it has some merits for further discussion as long as the intent is strictly internal consumption and there’s no intention to force us to a common view. So I am a bit at odds with President Lacker, and you’ll see more of that. Can we do more than we’re currently doing? That’s the question here. Of course, it’s always possible to improve. But I think there are downside risks, and I don’t think they were well discussed or articulated, or articulated in a way I would like, in some of the material. First of all, the Committee is intended to be just that—a gathering of independent perspectives on policy. That’s why we have our own staffs. Our economic frameworks have converged over time, but there are differences in focus and in emphasis. If in the end we produce a single view rather than a range, what does that say about the need for a Committee, particularly with nineteen members? If there is a single, consolidated forecast that is, for efficiency’s sake, delegated to a small group, does that not over time tend to disenfranchise those who are not part of that group? Second, Committee members in my view should be chosen for their judgment, not their forecasting ability. Forecasts are useful tools, but they’re not the only things involved in policy. If they were, we could rely solely on a model to set policy, and we know we can’t do that. At some point, the effort involved in creating and refining forecasts over and over precludes the work necessary to form judgments about the current and the future stance of policy. Third, attempts to convey to the public the underlying elements of a forecast, including the policy path, run the real risk, as the staff has pointed out, of committing the Committee to a particular action. At the tails of the distribution of economic scenarios—that is, if things are particularly lopsided from either a growth or an inflation perspective or if there’s a bout of financial instability—some form of path commitment can be useful, and we have used that in the recent past. Normally policy is more reactive to incoming data than proactive, and appropriately so, in my view. The staff papers say pre-commitment is not a problem elsewhere or can be explained away. But the process of conveying such explanations in the context of U.S. financial markets may take more time and be bumpier than anyone expects. Again, I ask myself what greater good would be served by risking that market reaction. Finally, if we did decide to move to more-frequent forecasts, whether centralized or not, would the result be cacophony? We’ve got statements and minutes eight times a year, the usual plethora of speeches and testimony. If we added to that more monetary policy type reports with forecasts, is there a chance that we could have too much information out there, too many things that are potentially giving rise to commentary that’s not necessarily helping understanding but rather confusing it? So I come back to my answer to the first question that Vince should have asked, I think. I have serious misgivings about whether changing what we now do in the Monetary Policy Reports and the related forecasts might be beneficial enough to offset the downside risks. I think there is, however, some value in talking about something along the lines that Vice Chairman Geithner has implicitly proposed. Now, let me just quickly answer the eight questions that Vince did raise. First of all, I think a joint forecast should be avoided. A survey of individual member forecasts is my preference. I would aggregate them and present a central tendency either using existing procedures or some modification that seems useful. I would not require that Committee members use common assumptions either for the fed funds path or for other elements. In my experience, I’ve taken some comfort that different Committee members with different assumptions and policy preferences most often develop semiannual forecasts for the next year and a half or so that are not much different from my own. I don’t believe that we in Boston have the best take on how the economy works or how near-term risks will play out, but the fact that the way we see the near-term outcome with “appropriate policy” is in the mainstream of the way most others see it gives me some confidence that we’re on the right track. As I noted before, the range of our forecasts hasn’t been a bad predictor of key economic outcomes. The third question has to do with whether the forecast should be accompanied by a minutes- style description. The release of our forecast is now accompanied by the Monetary Policy Report, which by definition is the Chairman’s view of things. As a result, of necessity perhaps, the forecasts we develop get little attention in the report. If we were to release forecasts more often, we would need some verbal text like the Monetary Policy Report. But perhaps we could take a first step by just changing the way the Monetary Policy Report is formulated right now to give a little bit more attention to the forecasts that the Committee is making. Whether that means that the Monetary Policy Report is a Committee report, not the Chairman’s report, is an obvious next question, and I don’t have the answer to that. But maybe a small step to take would be to highlight more that the report has forecasts in there. The fourth question was whether the Committee should jointly agree on the minutes-style description. Frankly, I’m wondering when we would do all this stuff. We’ve got a meeting in January and February that comes out with minutes and a forecast and a Monetary Policy Report. We’ve got a meeting in March. We’ve got one in May. We’ve got June, which is similar to January, a meeting in August, one in September, one in November and December for which we’re writing minutes—all of which, as I noted before, have implicit in them either qualitative or quantitative senses of both the Greenbook forecast and the Committee members’ forecast. That implies that April and October are the only months in which we could probably do this. I think trying to create—and someone referred to this earlier—a minutes-like description of a set of forecasts without a meeting around that set of forecasts would be really hard. There may be some way of rearranging our meeting dates to get the dates to work out better. However, it seems as though we’d be working on a lot of stuff, some of it simultaneously if we were to keep the same range of things that we do now. So my answer to question 5 is that I’m not convinced that the two times a year we do it right now isn’t about the right frequency. On question 6, I understand the argument for a longer-term forecast period. I understand that it reveals future policy preferences and tradeoffs, but I don’t think long-term forecasts provide a whole lot else. A long-term forecast isn’t going to be realized. It’s more a goal than anything else. It’s hard to make forecasts six months out that are right on the mark, let alone several years out, and they could imply that we know more or control more than we actually do over a longer period of time. So if we were going to extend the horizon, I would extend it only a little—to go, for example, from a year and a half to two or three years perhaps. I would stay with the number of variables we currently forecast—nominal and real GDP, unemployment, and some measure of inflation. Finally, I think that conveying that we’re not certain about our forecast is obviously desirable. I know other central banks have used fan charts. They’ve proven useful. I know they’ve been accepted. I don’t know how well they’re understood. But I do find myself wondering in the U.S. context what the average person or the average congressman would actually take out of them. Even over rather short periods of time, the range of outcomes about which we’re certain even at the 70 percent level really is kind of wide. So my view is that a qualitative discussion of the sources of risk is preferable to a quantitative one. Over time anything can be well understood, I suppose, but I have a feeling that the range of uncertainty without an academic understanding of what you’re trying to do is more confusing rather than less. So to pull it all together, I’m intrigued by Vice Chairman Geithner’s implicit proposal of improving internal discussion with more detail about our own forecasts and what the constraining factors are and where we see policy going. I would not try to pull them together into a consensus view. If we had a consensus view, we would have to tell people about it, and I’d be a little concerned about that in terms of commitment. I also think that we could work on how our current forecasts are actually handled in the Monetary Policy Report. I do not think a central forecast is useful: It has problems in terms of what it says about the Committee and the Committee members. I’m not convinced that common forecast variables or a path of forecasts is useful. I’m not convinced that you can actually handle a more frequent release of forecasts to the public, and I think an explicit numerical discussion of uncertainty is difficult. So that’s where I am, for what it’s worth." FOMC20070509meeting--47 45,MR. REINHART.,"2 Yesterday afternoon, we posted to the secure document server a summary of the economic projections that you submitted. The material should be in front of you with a cover memo from Debbie Danker. I will use the table directly behind that cover to review briefly the key features of those projections, and then I will outline the schedule for the trial run going forward. As shown in table 1, the central tendency of the projections suggests that most of you anticipate that GDP growth will be somewhat soft this year but will pick up a bit over 2008 and 2009. Participants generally anticipate that core PCE inflation will edge a little lower over the forecast period and that the unemployment rate will inch up to the vicinity of 4¾ percent. The federal funds rate path associated with this projection for the economy (not shown) is fairly flat over this year and next and moves slightly lower in 2009. The width of the 70 percent confidence bands for economic variables suggests a wide range of outcomes for growth, inflation, and the unemployment rate over the forecast period. As noted by the memo lines, the central tendency forecasts prepared for the May meeting, relative to the forecast prepared for the January FOMC meeting, indicate a somewhat weaker path for economic growth in the near term and a somewhat higher trajectory for the unemployment rate. The central tendency for core PCE inflation has changed little. In your accompanying description of the key forces shaping the economic outlook, most of you cited continued weakness in the housing sector—with residential construction viewed as likely to remain a drag on growth for some time and the softness in home prices noted as a factor damping the rise in wealth and consumer spending. Against this backdrop, GDP growth was expected to remain somewhat below trend for a while, resulting in a small rise in the unemployment rate. It was also noted that labor hoarding in some industries over recent months had likely 2 Material used here by Mr. Reinhart is appended to this transcript (appendix 2). masked an underlying easing in labor market conditions that would become more apparent over the remainder of this year. Generally accommodative financial conditions and solid growth abroad were seen as supporting GDP growth. While most participants looked for core PCE inflation to edge lower, some related that the rise in energy prices and import prices, coupled with recent sluggish productivity readings, would put upward pressure on prices over the near term. As a group, you tended to be a bit more optimistic about the prospects for aggregate supply than the staff. Several participants noted that their forecasts were premised on a higher rate of potential output growth than projected in the Greenbook, owing in part to assessments (relative to the staff outlook) that labor force participation rates would not decline as much or that structural productivity growth would be stronger. Some participants also pointed out that their forecasts incorporated a lower NAIRU than did the staff outlook. As for the process from here on, if you would like to change your forecast in light of the discussion at this meeting or data received since you prepared your projection, we ask that you submit your revision to the Secretariat by the opening of business tomorrow. The staff will draft a minutes-style narrative description of the economic projections. This will be a standalone document that will circulate with the draft minutes on the regular schedule. That means you will see a first draft on May 17, a second one on May 22, and a final version on May 24. We ask that you comment on these drafts as if the final version were to be published—but it won’t be, nor will you be asked to vote on the document." CHRG-110hhrg38392--67 Mr. Bernanke," Well, as you know, the immigrant workforce is very important in some industries--construction, agriculture, and others. Some of them are seasonal, and I think the employers in those industries are interested in knowing where the workforce is coming from, and would like to have some clarity. But I understand that one of the key issues here is that many of the concerns about immigration go beyond purely economic considerations, and I understand that. So, within the economic sphere, as I said in February, immigrants do play a very substantial role in our workforce, and they represent a significant portion of the growth of our workforce. They are very important in some industries, and, from an economic point of view, we need to recognize that role they play. " FOMC20070918meeting--105 103,MS. PIANALTO.," Thank you, Mr. Chairman. The reports that I am hearing from my business contacts reflect a sudden and a significant deterioration in their evaluation of the business climate. The data in hand, except for the troubling August employment report, have not been especially dire, and neither are the impressions I get from the business community regarding their current pace of economic activity. In fact, by most accounts, business activity in the Fourth District, outside of the residential real estate market, remains reasonably positive, and the Beige Book report that we submitted for this meeting reflects that view. In most cases, the sharp downward reassessment of the business situation that I am now hearing from my contacts describes greater unease over what may happen and not what has happened. As we discussed earlier, our forecast models are not well equipped to accommodate the role that shifting expectations play in shaping the economic outlook. Nevertheless, the sharp falloff in business confidence that I am hearing from people in many sectors in the District has had a material influence on the economic projections that I submitted for this meeting. The market for real estate is still declining, perhaps even in a freefall, according to the descriptions I have been getting from people across the sector, including real estate professionals, developers, and manufacturers of home construction supplies and materials. I don’t pretend to have a very confident forecast of where the bottom of the residential real estate market lies, but the industry sources that I am talking to have convinced me that we should anticipate that this process will play itself out for a considerable time to come. Moreover, and unlike my last report to the Committee, my business contacts are now fearful that we are going to see a spillover from the declines in the residential real estate market, and they now expect some amount of retrenchment by consumers. I have incorporated some of that sentiment into my outlook. The most noteworthy development affecting my economic projection, however, has been the deterioration in business confidence and the effect that deterioration may have on capital expansion plans. The diminished confidence in the outlook that business leaders are reporting to me has had a significant negative effect on my outlook for investment. Like the Greenbook, I have scaled back my growth outlook to reflect a considerably softer trajectory for business fixed investment. Even with a monetary policy response, the combination of weaker consumer and business spending has led me to mark down my GDP projection for next year nearly ½ percentage point, to 2 percent. Meanwhile, the incoming inflation report continues to point to a gradual disinflation. The usual caveats about inflation forecasts apply, of course, but I am not seeing in the data—and I am not hearing from my business contacts—the same concern over rising prices that I heard in the spring. My outlook for inflation hasn’t changed that much since July. I am still expecting core PCE inflation to be just under 2 percent. But I am more confident, if just a little, that we are seeing the progress toward price stability that we had hoped to achieve. So I believe that the risks to the outlook, given no change in our policy, have shifted decisively toward potential rapid deterioration in the real economy. Some of that deterioration may reflect the unwinding of earlier financial imbalances, and every prudent effort should be made to allow that process to run its course. But the moral hazard caveat does not diminish the significance of the falloff in business sentiment that I have heard since our last meeting, and so I am concerned that we have seen greater risk to the economic outlook since our last meeting. Thank you, Mr. Chairman." FOMC20060131meeting--63 61,MR. STOCKTON.," The final exhibit presents your economic projections for 2006 and 2007. The central tendencies of those projections anticipate real GDP to increase about 3½ percent this year and then to run between 3 and 3½ percent in 2007. Forecasts of core PCE price inflation are centered on 2 percent this year and between 1¾ and 2 percent in 2007. Meanwhile, the unemployment rate is expected to be between 4¾ and 5 percent both this year and next. I would appreciate receiving any revisions in your forecasts by the close of business Friday. My colleagues and I would be happy to take any questions that you might have." FOMC20070131meeting--366 364,MS. YELLEN.," Thank you, Mr. Chairman. I also want to begin by complimenting the staff for a very thorough and thoughtful set of background materials. In recent years we have made notable strides toward increasing transparency, and that has served to enhance public accountability and to improve the efficacy of policymaking. At this point, further enhancements to our communications are both possible and desirable, and I think our economic projections may be an area with low-hanging fruit. Surveys suggest that market participants attach a very high priority to improved information concerning the Committee’s outlook for the economy and monetary policy. In fact, 83 percent of the respondents to the Macroeconomic Advisers’ survey accorded higher priority to this objective than to the adoption of a numerical inflation objective. So the provision of more-detailed and more-timely information concerning the outlook would help market participants form sensible expectations and possibly improve internal discourse. We have been publishing forecasts for almost thirty years, so we’re a pioneer in this area. But I think we have fallen behind state-of-the-art practice, and I think it would be useful now to make incremental improvements to the governance structure, the content, and the procedures of this program. So now let me address each of the questions that Vince sent out in the memo. The first is whether we should provide one forecast or many. My answer is many. We are too large and too geographically dispersed to make a unified option practical. The Bank of England has a committee a little less than half of our size. They seem to be the largest to produce a unified forecast, but the process is reportedly time-consuming and contentious, and I fear that the attempt to arrive at a single forecast could end up undermining our collegiality, not to mention our effectiveness. More important than the practical side is that a unified forecast is not desirable. I think we hold a diversity of views, and I believe that diversity should be respectfully represented in all aspects of our communication. That diversity goes beyond conditioning assumptions, like the price of oil. Some of us have divergent conceptions about the structure of the economy and the monetary policy transmission mechanism. Given the diversity of views, it’s fair to say that in most meetings, no unified forecast or forecast story even exists, and I don’t see how participants who fundamentally disagree could, if we tried to produce a unified forecast, speak in public about the economy without revealing those differences. The differences, on balance, are a source of strength. They reduce the odds that we will become trapped in “group think” mentality, conforming for conformity’s sake, and reduce the risk that we will miss important insights that could help us avoid errors. The problem is that this divergence makes it challenging to articulate the type of unified Committee views that I think markets really crave. The first question goes on to ask whether individual forecasts should be released in a disaggregated format or presented in an aggregated way. I prefer the aggregated approach that we use now with a range and central tendency. Most of the time we’ll end up with the center of gravity for the forecasts that can be described in a useful way, even though there are divergent views. Also, conveying how we interpret the body of forecasts will be more useful to the public than simply releasing nineteen separate projection documents. In principle, the drawback of a central tendency is that the results may not be entirely coherent because different forecasters get excluded for different variables. Based on our past experience, this seems to me more a theoretical possibility than an actual problem, but I was intrigued by the discussion in the R&S Division’s memo on how it could be possible to identify an entire set of variables for an individual participant as an outlier and exclude them. I think that’s worth thinking more about. Finally, besides distributing a central tendency and range, providing a histogram showing the full frequency distribution of forecasts could be useful. The second question asks whether we should base our forecasts on common assumptions concerning the stance of policy and other factors or, alternatively, appropriate policy and opinions about other factors. I’m certainly in the “appropriate policy” camp. I think the alternative is problematic. Several times in the past we’ve discussed the possibility of adopting a common assumption of a constant interest rate, but that approach could lead to forecasts that would not be seen as desirable by Committee members. For example, since a constant interest rate may not be the appropriate policy, it could produce a forecast with inflation that’s high and rising, and I think that would be confusing to the public and not convey our sense of what would happen. The problem can be especially pronounced as the forecast period is lengthened. A second issue is, as I said, that participants differ on the structure of the economy, and any common policy assumption may make sense in one model but not another. The same comment applies to all the conditions and variables—even things like the value of the dollar and house prices are endogenous variables that should be determined within the model being used. So imposing common assumptions with a variety of models could lead to incoherent results. Now, the third and fourth questions concern whether a narrative description of the forecast should be released and how it should be prepared. I think we should provide a minutes-style narrative description of the forecasts. Experience suggests that there is commonly considerable overlap among the FOMC participants regarding the factors that are critical in assessing economic trends. For example, right now a majority of us are focusing on developments affecting housing and motor vehicles, as well as the implications of tight labor markets for inflation over time, and that was reflected in the Chairman’s summary yesterday. These factors are usually emphasized in the portion of the minutes that describes participants’ assessment of economic conditions. The minutes do a good job of describing the state of opinion and also briefly describe divergent views concerning the economy, and the narrative should also describe the divergent views. Vincent’s background memo emphasizes the need for speed in releasing this information because new data can make forecasts stale. In addition, the Chairman’s monetary policy testimony and the issuance of the Monetary Policy Report typically occur before the release of the minutes from the January and June meetings. So it may be desirable to devise a procedure that would allow the forecasts and the forecast narrative to be released before the minutes themselves. We could delegate the preparation and release of the narrative to the Chairman. It seems to me that he has over the past several meetings provided an excellent summary of our discussions as soon as they concluded, and that’s the type of thing that I would expect in the narrative. My preference, however, would be for the Committee to agree on and approve the narrative. A Committee vote on the forecast narrative would avoid the possible disagreement that might arise after the release of the narrative but before the approval of the minutes. One way to expedite the preparation of the narrative is for all of us before the meeting to share our individual forecasts along with a brief written story explaining them. I thought Vice Chairman Geithner’s summary really is an excellent template of the form that such a submission could take. Most of the time we would find that there is an emerging majority view and a few alternative views. We could allow time toward the conclusion of an FOMC meeting to discuss longer-run forecasts, and this would provide the staff with some additional information concerning the Committee’s views. I would hope it would be feasible for the staff then to prepare a minutes-style summary of views rapidly after the meeting, circulate it, and allow a very limited time and very few iterations for comments and revisions so that the narrative could be approved and released before the full minutes were approved. Now, I just want to turn to the technical questions that Vince posed. With regard to the frequency of forecasts, the shelf life of projections generally is long enough to support a quarterly production frequency. However, given that we want to provide forecasts for the Monetary Policy Reports in January and June, it’s difficult to see how we could evenly distribute four forecasts over the year. The problem is that we have only two meetings between January and June. It would be possible to spread three forecasts evenly over the year in January, June, and October, and eight might also work well, but I fear that there could be a staff insurrection. [Laughter] In any event, on the question of the forecast horizon, I’m fine with maintaining our current practice, but I would not object to a small increase in the forecast period. All we really know about the more distant future is what our ultimate goals are, and I would prefer that we provide that information in a more direct way. The next question is which variables should be included. I’d prefer to continue to include forecasts for real GDP growth, the unemployment rate, and some measure of consumer inflation, depending on the interaction with what we may later decide about the inflation objective. I don’t think any of the other central banks forecast nominal GDP. I would drop that, and I think consideration should be given to providing information on the fed funds rate, perhaps the fourth- quarter level for each year of the forecast or, alternatively, a qualitative statement about direction. The policy path is necessary for understanding and interpreting any forecast, and it was at the top of Macroeconomic Advisers’ list for what the private sector wants to see. Large and widening error bands around the central tendency would help stifle the potential for markets to interpret these forecasts as commitments. Moreover, narrative comments on the forecasts could emphasize the conditionality and data dependence of policy. We will obviously need to do at least one trial run in producing forecasts before going public with the new system, and I would propose that we include a numerical forecast and a discussion of the fed funds rate path in that trial just to see how it works. Of course, all these variables will be forecast with considerable uncertainty, and I think it would be helpful to convey this fact clearly. One way to do it would be to put confidence bands around the forecast numbers, and they could be derived by looking at the track records of the FOMC, the CBO, the Blue Chip survey, the Survey of Professional Forecasters, and so forth. One could imagine adjusting them a bit based on Committee discussions—for example, when participants note that they see the risks as abnormally large or asymmetric. Information on forecast accuracy could be presented in a table attached to the FOMC forecasts to justify our choice of uncertainty bands. My staff has developed a mock-up of a graphical approach to representing the forecast and forecast uncertainty bands, and I brought some copies of what that might look like for you to take a look at. I thought I would just pass it around the table here.5 So in summary, I’m in favor of enhancing the forecast information that we release. The key point for me is that we should provide information on the diversity of opinion in the Committee about the numbers and the stories, and I think procedures like the one I described to produce a 5 Material distributed by President Yellen is appended to this transcript (appendix 5). minutes-style discussion of our stories would be effective and permit this information to be released in a sufficiently timely manner." FOMC20070131meeting--346 344,MR. LACKER.," I thought the documentation distributed by the staff did a good job of identifying the purposes that publishing forecasts ought to serve. They’re consistent with what I described in past meetings as guiding principles—namely, that communication is useful to the extent that it helps the public form better expectations about future policy and inflation and that it will help in that regard to the extent that it provides benchmarks against which people can assess their future actions. For me the purposes of communicating a forecast are, first, to reduce uncertainty in the public’s mind about future macroeconomic outcomes; second, to enhance our credibility and accountability; third, to improve the coherence and internal consistency of our discussions. It’s useful to stack up different questions and approaches against these purposes and to see how they do. In any case—and this is a theme to which I will return—in achieving these objectives, I think it’s really important that published forecasts be clear and understandable to the public. Now, the cardinal rule of communication is to understand your audience. It’s one thing to explain our forecast and procedure to Larry Meyer or Goldman Sachs economists; it’s another to explain it to President Plosser’s $2 million business head, the Helena Rotary Club, or wherever we find ourselves from time to time. Before addressing Vince’s questions, I just want to note that I think the value of publishing a forecast would be greatest if it were paired with an internal agreement about our long-run objective for inflation. I think having a prior consensus on that would simplify the process of obtaining a consensus on the outlook and about policy. My own preference is that we state that publicly. To the extent that an inflation objective represents a commitment regarding future policy, you can view it as representing an implied forecast of the long-run average value of inflation, and so publicizing that would help reduce the public’s uncertainty along a very important dimension. Regarding Vince’s first question, I believe a single Committee forecast is most desirable. This relates to the accountability objective. We are jointly responsible for the outcomes of monetary policy, so I think we should strive for an outlook that we can fairly agree represents a collective sense of the Committee. The value of accountability is that it enhances credibility, and it’s the credibility of the Committee rather than of individual members that’s really important. I recognize that crafting a consensus on a forecast among nineteen or even twelve members, even as collegial a group as this is, could be a daunting task. One approach would be to allow the expression of dissenting views. This runs the risk, however, of making a Committee forecast nothing more than a compilation of members’ forecasts, and I think it needs to be more than that. The message that the release of a Committee forecast should convey is that we came to a process with diverse views, we talked things over, our views perhaps moved closer together, and we ultimately came to agreement on a single forecast that most of us saw as not too different from our own. That meaning would be watered down if there were a lot of dissenting views—if they were too frequent or too numerous. So I think there should be sort of a high threshold of disagreement before any of us insists on differences being separately articulated. I would envision a process—I think one of Vince’s options sketched this—in which the staff produces an initial forecast along the lines of the Greenbook (they have a great forecasting record) and members would send in their own forecasts, commentaries, or disagreements. Then there would be some iterative communication process on the basis of which a new forecast would be developed for a Committee vote. Regarding the question of conditioning assumptions, I strongly believe that what we publish should reflect our best sense of what is actually going to happen. My preference, accordingly, would be to condition forecasts on how we think we are actually going to set policy as events unfold. Conditioning on any other assumption—a market’s policy path or an unchanged policy— means having to explain that our forecast may be counterfactual. It means that, in order to figure out our real forecast, people have to figure out how our policy choices are going to differ from our assumed policy and then guess how we think the differences in policy are going to affect the forecast. It means that the extent to which our published forecast reduces the public’s uncertainty about future macroeconomic outcomes is going to be limited. It means that our accountability will be limited because we will be saying up front that this forecast might not be our actual one. It also means that we will be chewing up valuable staff and Committee time constructing a forecast we don’t necessarily believe in. Here I think it’s instructive to imagine explaining a counterfactual forecast to President Plosser’s $2 million business head or to the Helena Rotary Club. I realize that some members of the Committee may be uncomfortable articulating an expected path for the federal funds rate, but what we publish about the nature of future policy settings is a separate question from whether we condition on a cohesive view about them. Our discussion of the forecast is going to be much more coherent if we reach a consensus on future policy. Telling the public that our forecast assumes appropriate policy obviously makes more sense, I think, if we have stated what inflation rate that policy is designed to achieve. If, instead, we adopt some counterfactual policy assumption, then not stating an inflation objective makes a published forecast even less informative since people would have to know how the forecast differs from our desired outcomes before figuring out what to make of it. As for Vince’s other questions, on questions 3 and 4, I think the accompanying narrative should be handled pretty much the same way the minutes are—drafted by the staff and approved by the Committee. On questions 5 and 6, I see greater value in publishing forecasts at longer horizons. In the event that we adopt an explicit objective, we would want the period to be long enough to show the forecast path for inflation returning near to the objective. Again, if we condition it on market assumptions, the period needs to be long enough to determine whether the forecast appears to be moving toward our objective at an acceptable pace. Question 7 asks how many variables we should forecast. I think the optimal number is four. [Laughter] In case you want to know which ones I’d choose, I’d say real GDP, inflation, the unemployment rate, and the fed funds rate. On question 8, yes, we absolutely should convey the uncertainties surrounding the forecast. I think it’s important for accountability that we articulate our sense of the range of likely future outcomes. This points to the importance of not simply assuming a path for the fed funds rate but allowing policy to vary across different draws of the shocks that are going to affect our future economic conditions. Otherwise our published fan charts for economic variables are not going to correspond to the probability distribution that we believe will actually govern future outcomes, and again, we’ll have to explain the difference to the public. Also, I think that agreeing on a fan chart around outcomes is likely to be conducive to achieving a consensus within the Committee on the outlook. In closing, let me reiterate the importance that I place on clarity. Our communication goals of reducing the public’s uncertainty about macroeconomic outcomes, particularly inflation, and enhancing our accountability strongly imply that we should adopt only a procedure that we can easily explain to the public, that the public will find useful, and that avoids the confusion of complex and subtle counterfactual assumptions." FOMC20060920meeting--66 64,MR. FISHER.," Well, again, it’s just something I’m interested in. It’s not unimportant, but I have a more important question. Karen, I noticed last week that the International Monetary Fund forecasts global economic growth, non-U.S. growth, of around 5 percent. Our number is 3¼ percent. What is the difference between us? If we’re underestimating, what would be the policy implications?" FOMC20061025meeting--33 31,MR. PLOSSER.," Thank you. As you suggested, labor force participation plays an important role going forward in how you think about your forecast of the longer-term growth rate and how it evolves. So I have two questions about labor force participation in trying to understand where it comes from and what’s going on. One is the distinction between what’s going on cyclically versus what’s going on in your trend demographics of the labor force participation rate. That distinction is part of it, as is whether the way you estimate the cyclical component of employment and so forth affects the forecast and whether it adjusts very quickly or very slowly in shaping the picture going forward, particularly into 2007 and 2008. The second question has to do with the secular decline in general that you’re predicting from demographics. Is there any mechanism in the way you come up with those forecasts that has feedback from the economy? For example, through a certain period, labor participation rates for the 60-year-old cohort were falling rapidly. From more-recent data, that cohort appears to be back in the labor force more aggressively than it was. I’m not exactly sure why that is. Maybe it’s uncertainties about pensions, Social Security, and what have you and whether real wages and adjustments in the labor market affect the secular decline. So I’d like a little discussion about what’s going on in the model that might help me understand where those pieces fit." CHRG-110shrg38109--81 Chairman Bernanke," We have not released any forecasts of the economy beyond a couple of years. The projections I gave today suggest reasonable growth and inflation over the next 2 years. The underlying fundamentals of the economy in terms of productivity and so on look good to me, and so my expectation is that the economy will continue to be strong after that period. But we have not released any specific forecasts. Senator Allard. Now, in 2009, our Social Security surplus begins to decline, and that is the projection that we are looking at now, where we have had the surpluses but now they begin to reduce. How does that get factored in? That is within the next 2 years. We will be working on the 2009 budget in a year from now. How does that factor into your economic growth projections? Or is it too early to begin to have much validity to that? " FOMC20070918meeting--136 134,MR. PLOSSER.," Thank you, Mr. Chairman. As many of you might imagine, I’ve struggled mightily with this particular decision. My outlook for the economy has changed sufficiently for me to support a cut in the fed funds rate at this meeting. My reasoning may be a little different from that of some of you; nonetheless it leads to the same outcome. My view is in many ways similar to that of President Evans—that economic growth has slowed, and it is likely to be somewhat slower into 2008. Thus my view that the equilibrium real rate has declined and its forecast has declined somewhat leads to my view that the funds rate needs to follow that real rate down. Also, given the current behavior of inflation, I am more comfortable moving toward what I would consider to be a more neutral rate. If we do cut the funds rate today, however, I believe that how we communicate that is far more important than anything that we may do in a long time. This is particularly true since we have not been particularly clear about our inflation goals. As I mentioned in my earlier comments, I’d be much more comfortable with this if we had a numerical target, which would help anchor expectations. I think we need to convey the idea that our policy, as many have said, is based on our forecast for growth and inflation and that it is forward looking. That forecast has changed, and we have lowered interest rates consistent with that revision. With that change in policy, we need to have a balance-of-risks statement that is much more balanced in its assessment; moreover, we need to convey to the market that we expect to see some weak data in future months but that those data to a large degree are already built into our forecast. The weaker-than-expected data in the coming months will not necessarily result in a new forecast. For example, I won’t be revising my forecast just because the September employment report comes in weak. It’s only when we accumulate sufficient evidence that the economy is veering from our new projected path that we would want to revise our forecast and perhaps our policy, although I do want to remind everyone that revisions can go both ways. We might be revising our growth forecast up if the evidence suggests that we’ve been too pessimistic about housing or about bank credit availability or, as Dave Stockton mentioned, about consumer sentiment. Similarly, we might find that we’ve been too optimistic about inflation if inflation expectations rise. I think it is crucial that we try to convey these ideas to the public, if not in the statement then at least in the minutes and our speeches going forward. Let me note that our decision to produce our forecasts on a more frequent basis will be a major step forward in actually trying to convey this type of information. I think it would be a mistake, as President Hoenig suggests, to set up expectations with our language that the rate cut today is necessarily or even likely the start of a series of rate cuts. This expectation could even undermine our action to the extent that it causes consumers and businesses to postpone spending until they think we’re done and could give the impression that, with each new piece of weak data, we’ll be lowering the funds rate further even though we have already incorporated that into our forecast. This reasoning leads me to think that, if we’re going to cut rates today, I would prefer to do 50 basis points, provided—and it’s a big proviso—that we work hard in our statement to convey the idea that the action we are taking is based on something like balanced risks. We have brought the rate to a level that we think is consistent with our new forecast and consistent with our goals of inflation and output growth. In fact, we may even be on hold for a while after this if things pan out according to what the Greenbook suggests. I think a 25 basis point cut would risk setting up expectations for further cuts, which perhaps would be read as taking the same strategy to lower rates as we took to raise them. I want to avoid that. I do realize there’s some risk that a more aggressive action could actually reignite inflation expectations. Vice Chairman Geithner made three good points about what the risks of a more aggressive action are: expectations of inflation, fear in the marketplace that we see something they don’t and that the economy is actually worse than they’re predicting, and the potential for fueling those people who think we are bailing people out and thereby creating moral hazard. Those are risks. I don’t deny that. But I think they are manageable, particularly if we mitigate them through our statement by saying that we now think risks are balanced and conveying the forward-looking impressions that I have given. This brings me to language. Of the three alternatives in the Bluebook, obviously in terms of rate cuts, alternative B is probably where I’d start, although I’m more inclined to have a more balanced approach to risk in paragraph 4. In fact, something more like paragraph 4 in alternative D would suit me better, but perhaps a simpler way would be to rewrite paragraph 4 as follows. This is just a suggestion—it’s a little shorter: “With this action, the Committee judges that the downside risks to economic growth are now roughly balanced by the upside risks to inflation. The Committee will continue to monitor incoming economic information relative to the outlook and act as needed to foster price stability and sustainable economic growth.” That is a little shorter and conveys the kind of balance that I think is important. In some versions of the statement, we have had a little too much of a temptation to promote the idea that we can fine-tune the economy, and I think that’s a dangerous and slippery slope. With regard to the rationale, I’m happy with paragraph 3 on inflation. Indeed, I noticed that there was no capacity utilization in that statement, which pleases me no end. [Laughter] You know, we have to take small victories when we can. I would like to see some changes to paragraph 2. In particular, I’d like us to say a little less about the disruptions in the financial markets. I think this has the potential to confuse people—that our move is being taken as a desire to bail out bad actors—and that could feed into moral hazard. We are moving because our outlook for the broader economy is weakening. The tightening of credit conditions may have the potential to affect the real economy, and that’s why we are acting preemptively. So I would again try to simplify paragraph 2, and I suggest the following language: “Economic growth was moderate during the first half of the year; but labor market strength has moderated, and the housing correction appears to have intensified and may be exacerbated by the tightening of credit conditions. Today’s action is intended to help forestall some of the potential adverse effects of those events on the broader economy and to promote moderate growth over time.” Finally, as I said earlier, I believe it will be very important to communicate, in the minutes and perhaps our speeches going forward, that our forecast incorporates weak data in the near term and, although we may individually have different views as to what that near term might look like, that forecast has been incorporated in our funds rate assessment and we intend to alter our bias or our policy only if our forecast changes appreciably in the months to come. Thank you, Mr. Chairman." FOMC20050630meeting--119 117,MR. WILLIAMS.," I think that the Greenbook forecast, as I understand it—and maybe Dave June 29-30, 2005 43 of 234 prices and takes into account the kind of models that Josh was discussing. The staff looks at all the empirical evidence, just as they do for every equation on every aspect of the economy. So, monetary theory would tell you to come up with the best, most reasonable forecast and adopt a policy that is appropriate to that path but also consider, as you’re saying, all the risks and the distribution of the risks. It’s along the lines of some of the charts in the Greenbook, which show the distribution of risks and then contemplate the implications for the current set of policy options over that distribution of risks. I think the basic idea in the economic literature is that you first want to get a very reasonable path, and that would be more or less your baseline. It’s not a path, I should say, that just keeps housing prices constant or keeps any asset price constant. It should be the best forecast of these asset prices that you can come up with, but subject, of course, to the fact that these are very hard to predict." FOMC20080805meeting--126 124,MR. STERN.," Thank you, Mr. Chairman. Let me make just a few comments about the Greenbook forecast at this point, which I found quite useful for thinking about policy going forward only in part because it is quite close, at least in broad overview, to the forecast I submitted before the June meeting on the economic outlook, inflation, and so forth. In any event, given the alignment in these forecasts, I think there are several characteristics worth emphasizing. First, financial headwinds persist--we have talked about this for quite a while--and the Greenbook now assumes more stress and more persistence than it assumed earlier. Second, the inventory overhang in housing persists with negative implications for activity and for prices in that sector. Third, real growth is subdued over the next several quarters at least. Against the background of the Greenbook forecast, growth over the balance of this year in excess of 1 percent in real terms would have to be considered a positive surprise. Growth in excess of trend next year would have to be considered a positive surprise. Finally, with regard to inflation, headline inflation abates after the current quarter, although overall both headline inflation and core inflation remain above 2 percent through 2009. I realize that there's considerable uncertainty surrounding all of that and that not everybody shares that assessment, but I think it's worth emphasizing those features because we need to try to think several months and several quarters ahead in terms of the environment in which we will be making policy decisions. If these forecasts are at least in the ballpark--at the risk of perhaps belaboring the obvious--it seems to me that a major message of those forecasts is that the policy environment is likely to remain significantly challenging for several more quarters at least. I could put that another way. It seems that evolving readings on the economy and inflation are not likely to line up appreciably at all with either aspect of the dual mandate over the next several quarters. Thank you. " FOMC20080130meeting--190 188,MR. ROSENGREN.," Thank you, Mr. Chairman. The contours of our forecast are broadly in line with the Greenbook: Growth well below potential for the first half of this year results in additional slack in labor markets with a consequent reduction in the core rate of inflation over time. Our forecast returns to full employment by 2010 only if we reduce interest rates more than they are in the Greenbook. Thus, our baseline forecast assumes that we reduce rates 50 basis points at this meeting followed by additional easing in 2008, which eventually results in core inflation below 2 percent and the unemployment rate settling at our estimate of the NAIRU, somewhat below 5 percent. But even with this easing, there are significant downside risks to this forecast. Historically, increases in unemployment in excess of 0.6 percent and forecasts of two or more quarters of real GDP growth below 2 percent have almost always been followed by a recession. In fact, a variety of probit models looking at the probability of recession in 2008 indicate an uncomfortably high probability of recession, in most cases above 50 percent. Several factors make me concerned that the outlook could be worse than our baseline forecast. First, we have consistently underestimated weakness in residential investment. While our forecast assumes a gradual decline in real estate prices, it does not have a substantial feedback between rising unemployment rates causing further downward pressure on real estate prices and the health of financial institutions. Were we to reach a tipping point of higher unemployment, higher home foreclosures, increased financial duress, and falling housing prices, we would likely have to ease far more than if we were to act preemptively to insure against this risk. Second, our weak consumption is driven by negative wealth effects induced by weakness in equity markets and modest declines in real estate prices. However, the heightened discussion of a potential recession could easily result in a larger pullback by consumers. This would be consistent with the behavior of rates on credit default swaps of major retailers, which have risen significantly since the middle of December. Third, banks are seeing increasing problems with credit card debt. Capital One, one of the few concentrated credit card lenders, has had their credit default swap rate rise from less than 100 basis points to more than 400 basis points as investors have become increasingly concerned about the retail sector. While liquidity concerns have abated, credit risk for financial institutions has grown. Rates on credit default swaps for our largest banks have been rising since December, despite the announcement of additional equity investments. In addition, the greatest concern I hear raised by the financial community in Boston is a risk posed by the monoline guarantors. The movement in equity prices last week as a result of highly speculative statements on resolving the monoline problem indicates a sensitivity of the markets to significant further deterioration in the financial position of the monolines. Fourth, our model does not capture potential credit crunch problems, although supplementary empirical analysis conducted by the Boston staff suggests that such problems pose additional downside risks to our outlook. Bank balance sheets continue to expand as banks act in their traditional role of providing liquidity during economic slowdowns. While the balance sheet constraints are likely to be most acute at our largest institutions, further deterioration in real estate markets is likely to crimp smaller and midsize banks that have significant real estate exposures. Given my concerns that we could soon be or may already be in a recession, I believe the risks around our forecast of core inflation settling below 2 percent are well balanced. Inflation rates have fallen in previous recessions, and I expect that historical regularity to be maintained if growth is as slow as I expect. Thank you, Mr. Chairman. " FOMC20070131meeting--393 391,MR. POOLE.," I have a couple of fairly quick points to make. First, in terms of the audience we’re talking to, you really have to talk to the Congress first. We operate under the Federal Reserve Act, and we’re reporting to the Congress. That’s a very important part of the audience. I would put the markets second and then the general public. So whatever we do has to be coherent to all three audiences. I started with a question, and I think it’s exactly where Cathy was coming from. Do we need to solve a problem? Is there something that is really creating a problem with what we now do? My answer to that is “no.” Do we have an opportunity to move forward? My answer to that is “maybe.” I don’t think we’re really solving a problem. My view is that we are not in deep water in what we do now. Take the fan chart as an example: If you do this six months earlier or six months later, the fans go in different places. Let me use an analogy. If you look at the CBO budget outlook, the CBO tracks changes in the deficit forecast and partitions the change in the deficit forecast into three pieces. One piece comes from changes in economic assumptions; one piece is changes in tax and spending legislation; and the third piece is changes in what they call technical estimates—how much revenue you get for a given tax law. I think that’s a very convenient way of explaining the evolution. There is an opportunity not so much focusing on the forecasts—the wide range of uncertainty makes it problematic as to how much guidance you’re really giving to the market—but to explain why the forecast has evolved the way it has. My guess is that most of our individual forecasts, although they’re not all the same, sort of move together. If something happens, we all move, although we’re not all moving to exactly the same degree. With the analysis of why the forecast has moved we could provide some insight into how our thinking has evolved as a consequence of new information. We don’t do that much right now. It could be incorporated in the Monetary Policy Report. I think some of it is already in there, but why the Committee’s central tendency has moved could be made much more explicit. We would probably be able to come to pretty good agreement on that if we were to look at a draft because we’re all responding to the same fundamental surprises in the information section." CHRG-109shrg26643--52 Chairman Bernanke," Yes, Senator. As I was indicating in my testimony, we look at a wide variety of indicators. We do look at the structure of interest rates and other financial asset market prices, but we also look at a wide variety of indicators in the real economy, and we are seeing very low unemployment insurance claims, for example, and we are seeing strong retail sales. We are seeing increased industrial production. My comments notwithstanding about slowing of the housing market, the level of activity in housing construction remains strong, and so the economic expansion appears still to be on a solid track. When we make policy, we have to think not only about all these indicators, but we also have to think in terms of a forecast. We look ahead and try to think where the economy is likely to be at a period 6 months, a year, 18 months in the future, and based on that forecast and the risk to that forecast, we try to pick the best policy. Senator Bunning. You know as well as I do that normal everyday citizens do not borrow at the Fed funds rate, but about a 300 basis point markup from that. So if Fed funds get to 5\1/2\ percent, the prime rate for borrowing would be about 8\1/2\ percent. I do not know too many Americans that can borrow at 8\1/2\ percent on prime rate. Most Americans pay prime plus. So we are getting to the point, if the Fed moves two more times, and Fed funds increase 25 basis points and 25 basis points, we are to that point, eight plus on prime. Do you find that disturbing to the economy or would that be just normal for our economic outlook? " FOMC20080318meeting--51 49,MR. ROSENGREN.," Thank you, Mr. Chairman. Since our last meeting, the economic data have continued to indicate a very weak economy and that, in all likelihood, we have entered a recession. Like the Greenbook, my outlook is particularly influenced by indications of significantly weaker labor markets and a housing market that is as yet showing no signs of reaching bottom. Private payroll employment fell 101,000 in February, and the sum of the downward revisions in December and January was about the same magnitude. Not only have we had three months of declining private payroll employment, but also the decline has been widespread across most industries. The Blue Chip economic forecast, the Greenbook forecast, and our own forecast have the unemployment rate peaking somewhere between 5� and 6 percent. While most analysts are in the process of downgrading their forecasts from skirting to actually having a mild recession, the risk of a more severe downturn is uncomfortably high. A major determinant of the severity of a downturn will be the housing market. Because recent developments in the housing market are so different from most postwar history, I remain very concerned that the effects of substantial declines in housing prices will be difficult to capture in statistical models based on historical data. The Case-Shiller index indicates that housing prices fell approximately 10 percent in 2007, and a decline of similar magnitude this year would mean that many homes purchased in the past several years are in a negative equity position. Elevated foreclosures and large inventories of unsold properties are providing abundant opportunities to purchase homes at heavily discounted prices financed at low interest rates by historical standards. But widespread concerns that prices will continue to fall have resulted in many prospective buyers deferring purchase decisions. To date, the housing market has been quite weak, despite relatively low unemployment rates. But if our forecasts are right, job losses this year are likely to exert a significant further drag on housing prices as rising unemployment rates force additional home sales or foreclosures. Falling housing prices are likely to have a collateral impact on consumption. Perhaps reflecting this risk, the credit default swap rates on retailers have been rising, and we are increasingly hearing of retailers that are closing stores or postponing expansions. Retailers, like consumers, are aware that high oil prices, increasing job losses, and losses of wealth in the stock and housing markets are not likely to be conducive to robust consumption. Exacerbating the negative economic news is the continued deterioration in financial markets. Credit spreads have widened significantly over the past six weeks, with many spreads more than 50 basis points higher than at the last meeting. Hedge fund and money managers that I talk to are acutely aware of the counterparty risk and are very carefully managing their collateral. Most firms with excess collateral are in the process of managing that position down. The deleveraging that is going on has reduced the willingness of banks and other financial intermediaries to finance their positions. In addition, as concerns with liquidity rise, we are once again seeing renewed pressure on the asset-backed commercial paper market. The rise in credit default swaps for companies like Washington Mutual and Lehman Brothers indicates increased concerns for the solvency of other large financial institutions with large exposures to mortgages. The potential for a further episode of financial market dysfunction and for runs on additional financial firms is significant. My primary concern at this time is that we could suffer a severe recession. Falling collateral values and impaired financial institutions can significantly exacerbate economic downturns. Some indicators of inflation are higher than we want, but during previous recessions, commodity prices and inflation rates fell. Given my forecast for the economic outlook, I expect substantial excess capacity to significantly reduce inflationary pressures going forward, and I see little evidence that higher commodity prices are causing upward pressures on wages and salaries. " FOMC20080130meeting--292 290,MR. STERN.," Thank you, Mr. Chairman. We had a fairly extended discussion yesterday about concerns about the condition of various financial markets and some financial institutions and their implications for the economic outlook, and I certainly share those. In this environment, I favor alternative B--a 50 basis point reduction in the federal funds rate target. My own forecast is below the Greenbook forecast for this year and next, and so my guess is that we're going to wind up moving further before we're done. But that said, I don't have enough confidence in my forecast to advocate that we do more right now. As far as language of alternative B is concerned, I am certainly happy in general with what we have as written, and I share President Hoenig's view, although perhaps for a different reason, that the less we say about inflation right now, the better. The reason is that, in some sense, we haven't adequately expressed to at least some market participants that we understand where the risks lie right now. In trying to remind people that we are not inflation nutters but are serious about maintaining price stability, we've kind of garbled our message, in my opinion, and I think people in the marketplace know this central bank is committed to price stability. I don't think we have to remind them with every statement. Thank you. " FOMC20071031meeting--12 10,MR. MADIGAN.,"2 I will be referring to the package labeled “Material for FOMC Briefing on October Projections.” The table shows the central tendencies and ranges of your current forecasts for 2007 and the next three years. Where available, the central tendencies and ranges of the projections last published by the Committee―those submitted for inclusion in the July Monetary Policy Report―are shown in italics. 2 Materials used by Mr. Madigan are appended to this transcript (appendix 2). Notably, a majority of you conditioned your current projections on an easing of monetary policy, with most of that majority apparently seeing lower rates as appropriate either imminently or within the next six months or so. Even with that assumed easing, your GDP growth forecasts for 2007 have been marked down slightly since last June, and your outlook for next year has been revised down more substantially. Many of you noted that last summer’s NIPA revisions led you to lower your estimate of potential GDP growth. Most of you cited the intensification of the downturn in housing markets, the turmoil in financial markets, and higher oil prices as factors leading you to scale back your expectations for actual growth in 2007 and 2008, though some participants commented that rising net exports could provide support to aggregate demand. The central tendency of the economic growth forecasts for 2008 is now 1.8 percent to 2.5 percent, below the central tendency of 2½ percent to 2¾ percent in June. Perhaps partly because you expect easing whereas the staff assumed an unchanged stance of policy, the central tendency of your economic growth projections is above the Greenbook forecast of 1.7 percent for real economic growth in 2008. That difference may also reflect your somewhat more optimistic view of potential growth. It is worth noting that the divergence among your views concerning the outlook for next year has widened substantially: The width of the central tendency, for example, at nearly ¾ percentage point, is about three times that in the June projections. The downward revision to the outlook for GDP growth was mirrored in a small upward revision to the unemployment rate: The central tendency of the projections for unemployment at the end of this year is around 4¾ percent, and it centers on a rate just under 5 percent at the end of next year. Based on the comments that some of you have made about sustainable rates of unemployment and on your longer-run unemployment projections, many of you apparently predict the emergence of a small amount of slack by the end of next year. With incoming data on core inflation a bit better than you had expected and with some slack likely next year, the central tendency of your projections for core PCE inflation is down noticeably for 2007 and is a shade lower for 2008; most of you now see core inflation below 2 percent in both years. Your near-term forecasts for total PCE inflation are higher than those for core inflation, reflecting surging energy prices and, in some cases, an expectation of continued brisk increases in food prices. With regard to the uncertainties in the outlook, most of you see the risks to growth as tilted to the downside—even with an assumed easing of policy—and judge that the degree of uncertainty regarding prospects for economic activity is unusually high relative to average levels over the past twenty years. Your commentaries highlighted downside risks arising from the possibility that financial market turmoil and tighter credit conditions could exert unexpectedly large restraint on household and business spending and that the downturn in housing could prove even steeper than currently anticipated. A slight majority perceived the risks to total inflation as broadly balanced, and a more sizable majority judged that the risks to core inflation are in balance; in both cases, those in the minority saw the risk to inflation as tilted to the upside. As the experience in the September trial run highlighted, the Committee’s policy statement will need to be reviewed carefully for potential inconsistencies with the risk assessments submitted with the projections. I will return to that issue tomorrow. Turning to the longer-horizon forecasts, you expect real GDP growth of around 2½ percent and unemployment slightly above 4¾ percent in both 2009 and 2010. Judging from your forecast narratives, these projections are close to your estimates of the economy’s potential growth rate and the level of the NAIRU. The former is a bit higher than the staff estimate of about 2.1 percent potential growth, and the latter is close to the staff estimate. For 2009 and 2010, all of your core inflation forecasts are in a range of 1½ to 2 percent. A couple of you expect rising prices of food and energy to keep total inflation above 2 percent in 2009, but all of your forecasts for total inflation are within a range of 1½ to 2 percent in 2010. Many of you state that you view your projections for inflation in 2010 as consistent with price stability." FOMC20060510meeting--65 63,MR. STOCKTON.," And small upward surprises on the withheld portion. As David notes, most of it is in the nonwithheld portion. On the economics behind the forecast for the profit margins to revert just a bit toward mean, there is empirical and historical support for that kind of movement, and I think there are some good economic reasons for it as well. Obviously, income shares in the United States have been remarkably stable over long periods of time, and it has been quite typical, after periods when profit margins have widened as much as they have in the past few years, for them to narrow. The mechanism through which that occurs is that there is both pressure coming through tighter labor markets to push up overall wages and competitive pressure in product markets to compete down those profit margins over time through lower prices. So you’re absolutely right. Obviously, no business will willingly give up profits. But we have a good reason to think that, faced with significant competitive pressures, profit margins ought, over time, to revert back to historical norms. We haven’t been terribly aggressive in pushing this particular feature of the forecast, meaning that we don’t have them coming down a whole lot. We basically have them leveling off and just inching down further on. But we think there are some good economic reasons why that happened in the past and why it could happen going forward. If we are experiencing right now some permanent shift in income distribution away from labor toward capital, then using history as a guide here could throw you off. But I guess that I wouldn’t start with that presumption." FOMC20070321meeting--193 191,MS. MINEHAN.," This whole statement is on faith, though. [Laughter] It relies on economic models and forecasts and a ton more detail than we can ever express. We say that recent indicators are mixed. We say that the housing adjustment is ongoing. But if we take it all together, we still think the economy is likely to expand. Aside from writing a treatise here, I don’t know what more we can say that we could all feel comfortable with and not have to reconsider." FOMC20070509meeting--73 71,MR. LOCKHART.," Thank you, Mr. Chairman. Since the last meeting, aggregate economic activity in the Sixth District has expanded moderately. Employment momentum in most areas of the District continues to exceed that of the nation overall. Florida is our exception. Most areas of Florida now lag the nation. Similarly, the housing downturn, as measured by sales and permits, remains less severe in the District than for the nation, except for much of Florida. The housing downturn in Florida has shown little sign of bottoming out, as builders continue to expect even lower levels of construction. Permit issuance continues in steep decline, down over 50 percent from March a year ago. We are not inclined to suggest that there is significance for the nation as a whole in the Florida developments. We have heard anecdotal views from Florida that there was a run-up in speculative activity in the second-home market in 2004 and 2005. Buyers were bidding up prices in anticipation of flipping properties at higher prices. So Florida is idiosyncratic. It is idiosyncratic also in the state’s ongoing insurance cost problem related to hurricane risk. However, in the Atlanta region, the conversations we’ve had with homebuilders about the housing market raised concern of a steepening decline in sales of new homes. Atlanta has generally tracked the nation, so we are carefully watching housing-sector developments in Georgia, particularly in Atlanta. Despite these negatives in the housing sector, we continue to find only limited evidence of spillover from the residential real estate adjustment to other sectors of the regional economy. Labor markets appear to have remained very tight in the District. The measured unemployment rate is around 4 percent for the District versus 4.4 percent nationally. Even the demand for skilled building tradesmen appears strong, as builders—and this may be relevant to the earlier discussion—seem to be taking the opportunity to upgrade the quality of their staffs. Trends in state sales tax revenue support the view that consumer spending has been relatively unaffected by the housing downturn. Again, the exception is Florida, where sales tax revenues in the first quarter were substantially below year-ago levels. Our perspective on the national economy is that significant uncertainty remains about the overall outlook for 2007 and for the path of inflation. Our economic staff uses three models to forecast the key macroeconomic measures. Our average forecast for real GDP growth is generally in line with the Greenbook forecast, and neither suggests that a recession is a risk. There are minor differences between our composite forecast and the Greenbook on unemployment. The only significant difference is the declining path of inflation in the Greenbook versus our inflation forecast that holds steady around 2.3 percent for the forecast period. So, to summarize, we harbor greater doubt than the Board staff that the inflation rate will come down as projected in 2007." FOMC20070628meeting--220 218,MR. REINHART.,"5 Thank you, Mr. Chairman, for giving me the normal role as speed bump. In that effort we are now handing out material to which we will be referring. If someone will let me know when the doughnut truck comes, I’ll pick up 5 Material used by Mr. Reinhart is appended to this transcript (appendix 5). the pace. [Laughter] The Subcommittee on Communications began its work only fifteen months ago, [laughter] which seems like yesterday (at least in geological time). Given the considerable discussion the Committee has had since then on its communication policies, it seemed appropriate to take stock. In particular, I sent around a list of questions designed to elicit your views on the potential roles of the survey of economic projections, the minutes, and the statement in refining your dialogue with the public. The material with the cover, “FOMC Communications,” is designed to help to organize this discussion. With regard to the enhanced economic projections process, the survey results circulated on June 15 reported general support for the key features of the process, with three notable exceptions, given at the top of exhibit 1. The subcommittee tried to address those concerns in the modified projections process used for this meeting. So the first question listed at the top of your first exhibit boils down to, how did they do? Did the changes address the concerns you expressed in answer to the May survey? In particular, some of you preferred not to share your forecast submissions, mostly on the grounds that it might make the discussion of the economic outlook at the meeting more inflexible. But some of you held that sharing was important, both to help inform your internal deliberations and as a source of material for the forecast write-up. As a compromise, the submissions were circulated on an anonymous basis, with an opt-out clause that one of you took this time. Some of you were concerned about specificity—particularly in writing down an explicit path for the federal funds rate and in quantifying uncertainty. Those questions were turned into qualitative ones that asked for comparisons with the staff policy assumption and historical uncertainty. Another process question is item 2. In what form should the projections be released? Debbie Danker’s memo identified the three options listed in the exhibit, which basically differ by the extent to which the narrative description is tailored to suit different purposes. Option 1 is one-size-fits-all: The staff would produce a single document describing your economic projections, which would be dropped into the Committee-approved minutes and repeated verbatim in the Board-approved Monetary Policy Report. The chief advantages of this option are that the vetting process is tried and true and that there will be consistency across Federal Reserve documents. The disadvantage is familiar to anyone who has bought clothes off the rack in a big box retailer—the fit will not be perfect across documents. Option 2 opens the door to some variety. The Committee-approved minutes would include a brief description of the forecasts, as is the practice now. A separate document would give a fuller account of the projections. In that case, there would be more flexibility as to who approves the document and when it is released. This poses a tradeoff that has come up in previous discussions in that the earlier the narrative is released, the more useful it will be in explaining the policy decision but the more complicated the governance process will be. Option 3 is the bespoke alternative in which separate, complete discussions would be prepared for the minutes and the Monetary Policy Report. The fit will be better, but carrying it out will be more expensive, and even subtle differences may draw attention. The third question asks when the projections should be finalized. The choices essentially are the day of the meeting, the end of the week of the meeting, or as late as practicable to be close to the official release of the document. But you have a more fundamental question to answer first. What is the purpose of the economic projections? If they are supposed to help explain your most recent policy choice, they should be conditioned on the same information set that the policy decision is. That is, they should be finalized as soon as possible after the meeting so that they are not contaminated by post-decision information. That is the rule we now use for the minutes. If, in contrast, the Committee’s objective is to release an up-to-date assessment that sheds light on future policy actions, then the individual projections should be nailed down only close to publication day. The middle ground of closing the books on the projections a few days after the meeting seems unsustainable to me, particularly if the narrative description is to be included in the minutes. The first time an important piece of news hits within the window between policy decision and update deadline, the explanation of the policy action will become muddled. Some immediate feedback on that score will be helpful because the schedule for this round allows for your projections to be updated through close of the week. If so, you would seem to have to incorporate Friday’s chockfull data calendar. Do you really want to do that, particularly as it may lead to confusion in the minutes about what you knew and when you knew it? The next exhibit focuses on the minutes. You have 2½ years of experience under your belt in publishing the minutes three weeks after the day of the policy decision. In that time, the document has received more attention from you in the editing process and from market participants and the press on its release compared with the previous regime of delaying publication until after the next meeting. How do you assess the benefits and costs of further expediting the minutes? The benefits, listed at the left, are the same as discussed in 2004. A document made public closer to the day of the decision will be more of an aid to the private sector in understanding the current outlook and the prospects for policy. In that regard, you will be able to use that material from the minutes for public statements more promptly. A speedier release may facilitate making the post-meeting statement shorter or less substantive. I point out, though, that my sense in 2004 was that a few of you supported expediting the minutes in the hope that the statement would subsequently be shortened, but that did not pan out. To appreciate the costs listed at the right, you should understand that we use the three weeks after the meeting partly to accommodate your busy schedules and partly to provide a cushion so that the drafting iterations can converge without a dissenting vote. The costs, then, would include your increased effort to ensure that your schedules align with that of the drafting and approval process for the minutes. You should also recognize that less drafting time might lead to more compromises that make the minutes less informative so as to avoid dissent, and more staff resources will be needed to prevent errors. Simply put, with fewer hours, we need more eyes looking at the document. Of course, the decision on expediting the minutes further may interact with other potential decisions on communication policies, especially those regarding the enhanced projections process. In particular, if you decide to include a narrative description of your forecasts in the minutes, you may want to delay any speeding-up of the minutes until you are comfortable with the new process. You may also want to consider ways to make drafting and commenting easier. That is the subtext underlying question 5. How do you assess the current content of the minutes, including the staff’s description of recent data? Some time ago, it was suggested that the first eight to ten pages, which provide a backward-looking review of recent economic data, be relegated to an annex. In a similar vein, it could be described explicitly as a staff summary—with its production perhaps even linked up mechanically to a modified Part 2 of the Greenbook. That way, you would be responsible for commenting only on the forward-looking and policy portions of the document, and some of the pressures on staff time could be relieved. If you have any other views on the content of the minutes, today probably would be an appropriate time to raise them. The last exhibit raises issues that have not been addressed for some time, namely the role of the post-meeting statement. Some of you might consider the statement as a vehicle designed only to convey coarse signals about policy, with more-nuanced information provided in subsequent communications. Others might see it as important that the statement be able to stand on its own as a reasonably complete explanation of the Committee’s monetary policy decisions and intentions. What is the appropriate role of the statement in light of the changes to the Committee’s other communication devices (question 6)? The statement’s role, which can be described in terms of a monetary policy rule, has varied over the years. At times the statement has provided hints about the odds on future action by characterizing the left-hand side of the policy rule—that is, by directly addressing the path of the federal funds rate. At times the statement has described the right-hand side of the policy rule—that is, the risks to the dual macroeconomic objectives. That is another way of stating question 7: If you believe that the statement should provide guidance about the outlook, should that guidance be couched in terms of the policy interest rate or the dual objectives? If you decide to describe the economic outlook, you will have to settle on the policy assumption underlying that projection, as in question 8. The conditioning possibilities include the appropriate path of monetary policy, some reading on market expectations, or an unchanged policy rate. This choice may interact with the role you envisage for your economic projections in explaining policy decisions. As for question 9, your ambition regarding the complexity of the statement will determine how much time needs to be devoted to drafting. Because of constraints as to how long you can meet as a group, a complicated statement necessitates pre- meeting consultation. That may get the nuance right, but it may also force you to settle on a policy view before you have had the benefit of consulting with your colleagues on the Committee. Moreover, it shifts some of the policy discussion out of this room, for which a transcript is kept and minutes are produced, and into informal back channels. A statement that could be agreed upon mostly within the confines of these four walls is probably one that is short and relays a routinized risk assessment, given your long-held view that “nineteen people cannot edit the statement on the fly.” Question 10 raises one last governance issue: Who owns the statement? At the inaugural of the age of statements in 1994, the Committee formally directed the Chairman to explain its policy action. Over the years, the statement has come to be viewed as a Committee product, with the words sometimes viewed to be at least as important as the immediate policy action. But you still vote only on the policy action and the risk assessment. Should that continue, or should you be asked to vote on the statement in its entirety? These three sets of questions are interrelated, and there is no obvious place to wade into this thicket. One possibility would be to conduct two go-rounds on these issues, with the first covering your views on the enhanced forecast and the minutes and the second addressing the statement. The first two issues are closely related and perhaps closer to closure. I suspect that you are closer to the beginning of your discussion of the statement than to the end. That concludes my prepared remarks." FOMC20070321meeting--55 53,MR. STOCKTON.," Thank you, Mr. Chairman. On the whole, the staff forecast has survived the economic news and financial events of the past seven weeks reasonably well. Although we revised down our projection for the growth of real activity, we don’t really see the fundamentals of the economy as having changed significantly over the intermeeting period. Indeed, our forecast for the growth of real GDP for 2007 has been fluctuating in the 2 to 2¼ percent range since last August, and this latest revision has only returned us to the lower end of that relatively narrow range. Still, I’ll admit that I’ve been experiencing something like the pangs of a nervous flier. For the most part, my anxieties have been held in check by an economic ride that has proceeded relatively smoothly along the anticipated flight path. But each episode of turbulence seems to trigger the panicked thought that economies, like planes, really do crash from time to time. Don’t worry. I will spare you another episode of self-psychoanalysis [laughter], loosen my grip on the armrests, and concentrate this afternoon on a dispassionate analysis of recent events and their implications for the economic outlook. I must say, we have had some important developments with which to contend— weaker economic data, higher oil prices, problems in subprime mortgage markets, and a drop in equity valuations. Among the weak reports, one that was not a surprise to us was the downward revision in the BEA’s estimate of fourth-quarter GDP. As you will recall, one of the major differences between our January forecast of a 2½ percent increase in fourth-quarter real GDP and the BEA’s advance estimate of a 3½ percent increase was their much higher figure for inventory investment. While I am certain that it was more luck than skill, the incoming inventory data for the fourth quarter were very close to our expectations and far below the BEA’s figures— accounting for a sizable fraction of their downward revision to real GDP. That was important because a central element in our story is that, although some inventory buildups have developed in recent months, production adjustments are occurring promptly enough to prevent the emergence of a full-blown inventory cycle that could cause a period of subpar growth to morph into an economic downturn. Inventory-sales ratios rose noticeably over the second half of last year, as the growth of final demand shifted down. The problems were most apparent in the motor vehicle industry. But aggressive cuts in motor vehicle assemblies in the second half of last year and early this year combined with a reasonably stable pace of sales in the neighborhood of 16½ million units appear to have put this problem largely behind us. Judging by the increases in production scheduled for the second quarter, the automakers seem to share that view. Inventories also backed up in a wide variety of construction-related industries, and substantial cuts in the production of construction supplies occurred in the fourth quarter. But we still see inventory problems lingering here. More recently, some signs of excess stockbuilding have extended beyond motor vehicles and construction supplies, most notably in machinery, electrical equipment, appliances, and furniture. As a consequence, we expect manufacturing output to remain quite tepid in the first half of this year. That forecast seems consistent with the generally lackluster results from national and regional surveys of business activity. Still, we don’t see the current situation as precipitating a cyclical downturn in aggregate activity. I offer that observation with some trepidation. For some reason, I recall past humiliations more vividly than successes, perhaps because they have occurred with much greater frequency. [Laughter] But I recall sitting here in the autumn of 2000 telling President Poole that we did not see a serious inventory overhang in the tech sector. Looking back on that episode, it wasn’t that we weren’t looking carefully enough at the data in hand, rather we were led astray by our failure to anticipate how rapidly final demand for these goods would crumble. If you were inclined to worry on that score, the recent data on final demand might not be encouraging, as we have had more surprises to the downside than the upside. In that regard, one of the most noteworthy areas of downside surprise has been equipment spending. The January figures on orders and shipments for nondefense capital goods were weaker than we had expected, and those readings came on the heels of considerable softness late last year. Demand for high-technology goods seems to have been well maintained, and although transportation investment has been weak, that had largely been expected. The principal surprise has been equipment investment outside high-tech and transportation, which now seems poised to fall about 7 percent at an annual rate this quarter after having fallen about 5 percent in the fourth quarter—both figures well below our earlier expectations. To be perfectly honest, we’re not entirely sure what to make of the magnitude and extent of this softness in capital spending. We don’t think that it is entirely a statistical mirage because we have seen a noticeable weakening in our industrial production measures of business equipment, which for the most part are independent observations. To be sure, much of the slowing has occurred for equipment related to the motor vehicle and construction industries. But just like the inventory data, the recent information on capital spending suggests weakness beyond these two areas. Our best guess is that businesses may have become a bit more cautious and possibly scaled back or put on hold some capital spending plans while they gauge the extent to which the economic landscape may have shifted over the past six months. If so, it may be a while before those concerns fully abate; accordingly, we have marked down our forecast for the growth in real E&S in 2007, to 2¾ percent, from the 5¼ percent pace we were projecting in January. We do, however, expect spending growth to pick back up to a rate of about 5 percent in 2008, only a bit below our previous forecast. We don’t think a more aggressive adjustment—such as the one we highlighted as the business pessimism scenario in the Greenbook—is yet warranted. Financial conditions remain favorable, corporate balance sheets generally look healthy, capital spending surveys have been upbeat, and business sentiment has softened a bit but not seriously sagged. We just don’t see the preconditions for a serious retrenchment in capital spending in coming quarters. In addition to E&S spending, the other major source of downward revision in our projection was housing. Two factors led to the further downward adjustments that we made to our housing forecast. First, the actual data on housing starts and building permits came in below our expectations in January and suggested to us that the pace of activity in coming quarters was likely to be more subdued than we had earlier expected. The data that we received this morning on starts and permits was a mixed bag. Starts of single-family homes rose 10 percent in February, in contrast to the 2 percent increase that we had projected. But adjusted permits, a less noisy indicator of activity, fell 2 percent last month, close to our expectations. Taken together, the February readings have little consequence for our projection. The second factor weighing on our housing forecast was the rapid intensification of problems in the subprime market. In this projection, we made an explicit adjustment to our forecast of sales and starts for what we now expect to be a significant pullback in nonprime originations in the period ahead. As we noted in the Greenbook, we estimate that the easing of lending standards may have elevated nonprime originations by an amount equal to 10 percent of total home sales in 2005 and 7 percent of sales in 2006. We have lowered the level of our forecast of starts and sales a further 3 percent to account for a more abrupt pullback in nonprime originations in the months ahead. This would be roughly consistent with a decline of about 35 percent in nonprime originations this year. In revising this aspect of our forecast, we have assumed that the increase in foreclosures associated with subprime difficulties will have only a small negative effect on overall house prices. We take some comfort from the fact that futures prices on the Case-Shiller house price indexes have edged only slightly lower in the past couple of weeks as this issue gained attention. We have also assumed that there is little spillover from subprime difficulties into the prime portion of the market. We have for some time been assuming that, as newly issued loans seasoned and as rates reset on adjustable-rate mortgages, some gradual deterioration would occur in loan performance, and that is still our view. In sum, the combination of the weaker incoming data and the problems in subprime lending led us to mark down our residential investment forecast enough to take about ¼ percentage point off the growth of real GDP this year. Obviously, this area will require continued scrutiny in the period ahead. Elsewhere in the household sector, consumer spending has been coming in very close to our expectations. Last week’s retail sales report was read by many as weak, but it was right in line with our forecast. To be sure, sales increases have trailed off in recent months, but that pattern is consistent with the marked slowing in consumption growth that we are forecasting for the second quarter. Although the data have been in line with our expectations, the fundamentals for consumer spending have weakened since the January Greenbook. In particular, the trajectory of oil prices is about $5 per barrel above our previous forecast, and this should take a bite out of purchasing power going forward. In addition, we now have equity prices running about 4 percent below our previous projection, which along with slightly weaker house prices, suggests a bit less impetus to spending from wealth. All told, real PCE is expected to increase at an annual rate of 2½ percent this year and next, down about ¼ percentage point from our previous forecast. This might sound like a pretty gloomy report. But there have been some positives, too. Karen will discuss the external sector, which is expected to be a smaller drag on output in this forecast compared with our previous one. Also, fiscal policy, most notably defense spending, seems likely to impart more impetus to growth than we had earlier expected. Moreover, the labor market continues to flash stronger signals than would be expected from an economy in which growth has slowed below the pace of its potential. The unemployment rate fell back to 4.5 percent in February and has been basically trendless since last fall. If payroll employment gains have slowed at all in recent months, they have slowed just a bit. There have been a few developments of late that hint of a slowing in labor demand. Initial claims have averaged a higher level in recent weeks, and insured unemployment has moved up. Moreover, job losers unemployed less than five weeks—a proxy for the layoff rate—have increased, and surveys of hiring plans have turned a bit less positive. We still think a slowdown in labor demand will become more evident in the coming months, but you’ve heard me say that before. In the end, there were more minuses than pluses over this intermeeting period, and we marked down our forecast for the growth of real GDP by ¼ percentage point both this year and next, to 2.1 and 2.3 percent, respectively. But we consider these to be incremental adjustments to a story that remains basically unchanged. Housing is currently exerting a considerable drag on aggregate economic activity. That drag should lessen in the second half of this year, and the pace of expansion should pick up somewhat. However, the reacceleration of activity seems likely to be limited. The slowdown in house prices implies a diminishing impetus from household wealth and the normal multiplier-accelerator consequences of the current hit to home construction should restrain the growth of consumption and business investment. With growth projected to remain below potential, the unemployment rate is expected to drift up to 5.1 percent by the end of next year, a bit above our previous projection. As for inflation, we have had only minor changes in our forecast of its key determinants. As I noted earlier, the path of oil prices is up about $5 per barrel, and this adds about ¼ percentage point to overall PCE inflation this year, boosting our forecast to 2½ percent for 2007 and leaving 2008 unchanged at about 2 percent. The indirect effects of higher oil prices add a few basis points to our forecast of core PCE inflation, but those effects were roughly offset by the slightly larger GDP gap and the slightly higher unemployment rate in this forecast. After the forecast closed last week, we received the CPI and the PPI for February. The core CPI increased 0.2 percent last month, right in line with our projection. However, a jump in the PPI series on physician services suggests that core PCE prices could be up about 0.3 percent in February, a tenth above our forecast. If this estimate is close to the mark, we will revise up our forecast of core PCE inflation in the first quarter to about 2½ percent. We are not inclined, however, to accord much signal to one monthly reading, and for now, we are sticking with our forecast for core PCE inflation of 2¼ percent this year and 2 percent in 2008. One reason for keeping the inflation forecast unchanged despite this news on prices is that we have had some low readings on labor compensation. The ECI and average hourly earnings have come in below our forecast; after we adjust for the transitory influence of a jump in bonuses and stock options, the growth of nonfarm business hourly compensation looks to be running below our previous forecast. Looking at the big picture, pressures on inflation do not appear to us to be intensifying, but they also don’t seem to be abating much either. For the most part, that is what we had been expecting to see at this juncture. I will now turn the floor over to Karen to sum up developments in the other 190 economies of the world. [Laughter]" FOMC20070131meeting--410 408,MS. PIANALTO.," Thank you, Mr. Chairman. I also want to start by saying that the memos that we received from the staff before this meeting were helpful, and I think that Vincent provided the right set of questions to guide our discussions. The goals that were laid out in the memo that Dave distributed seem appropriate to me. From that memo and the comments from David and Brian this morning, assessing whether releasing more forecast-related information will improve economic performance appears difficult. However, I am persuaded that, by making some modest changes to our current practice of preparing and releasing forecast-related information, we could readily and inexpensively facilitate a richer internal discussion and at the margin better inform the public about our thinking. So I want to say at the outset that I’m interested primarily in using the forecast to help us better understand each other’s thinking about longer-term objectives, policy risks, tradeoffs, and the workings of the economy, along the lines laid out in Vice Chairman Geithner’s memo. From my assessment of our current practices and the experience of foreign central banks laid out in Karen’s memo, I find no compelling case for releasing additional forecast-related information to the public, with one exception related to the forecast period that I’ll comment on later. So using Vincent’s language, I’m in the “modify the status quo” camp, and I’d like to answer Vincent’s questions from that perspective. I support the “independent” option regarding forecasts. I think there is great value in the diversity of opinions that individual Committee members bring to both the internal and the public discussion about monetary policy, and I would like to use it as constructively as possible. Right now, I am not in favor of pursuing a single official forecast to be published by the Committee as an element in our policy communication process. Although I am not opposed to publishing information about individual forecast submissions, I think it would be fine just to pursue the central tendency approach that we’re using and the forecast range summaries that appear in the Monetary Policy Report today. Regarding the conditioning assumptions, I think it would be counterproductive to impose a common definition of appropriate monetary policy or a common set of conditioning variables. My hope would be that the assumptions and the conditions that are important to each individual’s outlook would be revealed as part of the dialogue that we have among ourselves about our forecasts. I suggest that we incorporate a summary of our views in the semiannual Monetary Policy Report. For now, it would be enough for me to simply reflect the general sense of the conversation in the Monetary Policy Report and in our minutes, in the same way that we regularly summarize our views about the outlook and the policy situations today. I have no objection to delegating the release of a minutes-style description of the Committee’s forecast discussion to the Chairman, subject to some consultation with meeting participants in the drafting process. The process that we’re currently using to review the minutes after each meeting could be used for drafting and publishing such a description. The narrative then could be included in the release of the Monetary Policy Report, much as the central tendency forecasts are included today. My suggestion is that our forecasts continue to be shared in our semiannual format. I don’t see the need for a more-frequent release of forecasts, although listening to some of the comments today I wouldn’t be opposed to going to quarterly once we get some experience with the process. One important change that I would make is that I would supplement our current semiannual projections with a medium-term forecast for the relevant variables. Governor Mishkin mentioned three years. My personal preference is to go out to a fifth year, so I would continue to do the one and two years and then go out to the fifth year. My guess is that in most cases providing something like a five-year period is long enough to assume that the fifth year would obviously be made under the assumption of appropriate monetary policy, and that would generally align with individual members’ views of our longer-term policy objectives. Even if a five-year period is not long enough to reveal our long-run objectives perfectly, the longer period will help us to clarify the pace that the Committee members view as appropriate in terms of moving toward a more desirable inflation rate. It would also provide a description of any tradeoffs that we perceive in meeting our objectives. I am comfortable with publishing a small set of essential outcome variables, much as we do today. At some point we might want to discuss further whether it’s still useful to include nominal GDP, as others have mentioned, and what price index or indexes we should include. For now, I am not proposing that the forecast discussions be extended to include any formal measures of uncertainty. In summary, my preference is to stay much closer to the status quo than many of the other options that were presented by the staff. We have a lot to gain from shifting the focus of our internal policy discussions to include a medium term, and we can share that information qualitatively with the public at a very low cost. These modest steps would not preclude us from making more-ambitious changes that the Committee might wish further down the line. Thank you, Mr. Chairman." FOMC20071031meeting--66 64,MR. EVANS.," Thank you, Mr. Chairman. The Seventh District economy appears to be expanding at a moderate rate, similar to what I reported at our last meeting. As we talked with business contacts, we heard mixed reviews regarding activity across different sectors of the economy. On the downside, everyone in the construction industry, from builders to suppliers, had grim assessments, and our contacts with the Detroit Three characterize the vehicle market as mediocre. Another negative is on the labor front. Our contact at Manpower reported that demand for temporary workers was down a lot. He said that the current market felt almost as it did in 2001. Kelly’s assessment was not quite so negative, although they did say that some indicators were flashing yellow. Of course, the BLS has been showing declines in temp help employment since early 2006, and most other indicators point to a healthy labor market. Indeed, we continue to hear about firms trying to cope with shortages of skilled workers. For instance, a couple of heavy- equipment manufacturers based in Illinois said that they were recruiting engineers from the Detroit area. That was encouraging. There were other upbeat reports on activity. United Airlines said that all their markets were quite good, apparently better than President Fisher was reporting earlier. They noted the bookings for business travel, which can be an indicator of business’s more general willingness to spend, remained strong in October and November. International bookings also were extremely good. We heard numerous reports of strong export demand—for example, for machine tool manufacturers and heavy-equipment producers. With regard to the financial situation, I continue to hear that there is a disconnect between Wall Street and Main Street. Importantly, except for construction, our contacts do not see nonfinancial firms being constrained by a lack of access to credit or by the pricing of credit. Turning to the macroeconomy, the news on economic activity that we’ve received over the past six weeks has been better than the downside scenario that we feared. Indeed, it has been better than what we had assumed in our baseline forecast in September. Like the Greenbook, we have raised our outlook for growth in the second half of 2007 about ½ percentage point. Residential investment does look a bit worse than we thought, but consumption came in a good deal stronger than we had expected. Also, the incoming news about labor markets, including the revisions to employment in August, points to continued support to household spending from growth in jobs and income. Unlike the Greenbook, we marked up the outlook for activity a bit in 2008 and 2009. Our current projection sees growth recovering to a little above potential in the second half of next year and in 2009. With regard to inflation, the incoming price data have been positive, and we have revised down our forecast for inflation a bit, to about 1¾ percent in 2008 and 2009. I think the risks to this forecast are two-sided. Some of our statistical models translate the incoming data into quite low forecasts for inflation in 2009 and 2010 if you take them at face value. But higher costs for energy and other materials, the weaker dollar, and potential pressures from resource utilization still pose some risk that inflation will come in higher than we currently are forecasting. For me, the positive inflation developments are an important ingredient allowing us to focus on risk management. Since risk-management considerations have played a key role in our policy decisions, it is important to think about how the risks to the forecast have changed since September. Last time and today, Dave Stockton cited several downside risks to watch for: an intensified fallout from the problems in mortgage finance onto housing demand; a substantial drop in consumer sentiment; and a spillover from financial market disruptions to business spending. These high-cost scenarios are possible, but I think their likelihood is smaller than they were in September. We have been pessimistic on housing for a while, and for once, despite Dave Stockton’s warning, I am encouraged that the Greenbook’s forecast for 2008 has not been marked down materially. It is a small comfort, but just a bit. The economy outside of housing seems to have entered the fourth quarter with more momentum than we had thought it would. Importantly, consumption growth has been solid even though there has been another downtick in sentiment. On the financial front, the Greenbook points to the special Beige Book capital spending questions and to the senior loan officer survey as signals that we could expect more spillovers to nonfinancial activity. Tighter standards for C&I loans are definitely news, but they are hardly surprising. The real news will be next quarter. Looking at previous surveys, we had one bad quarter in 1998, and then it came down, and then the later tightening was part of the increase in the fed funds rate. So I think that the next quarter will be very informative and important. In assessing how risks have changed, these surveys need to be balanced against the improvements we have seen in credit markets. While I continue to be concerned about collateral damage from the credit markets to real activity, I still think the problems in financial markets are likely to remain largely walled off from the nonfinancial economy. So on balance, the economic outlook has improved, and the risks of financial contagion have diminished somewhat since September, although they haven’t disappeared. Thank you, Mr. Chairman." FOMC20080130meeting--76 74,MR. MADIGAN.," 3 I will be referring to the separate package labeled ""Material for FOMC Briefing on Economic Projections."" Table 1 shows the central tendencies and ranges of your current forecasts for 2008, 2009, and 2010. Central tendencies and ranges of the projections made by the Committee last October are shown in italics. As for conditioning assumptions, most of you see the appropriate near-term path of the federal funds rate as at or below that assumed in the Greenbook. Eight policymakers explicitly assumed somewhat more near-term easing than in the Greenbook. However, several of you assumed that policy would need to begin firming no later than 2009. Many of you also projected that the funds rate would exceed the level forecasted in the Greenbook by the end of the forecast period. As shown in the first row, first column, of table 1, the central tendency of your forecasts of real growth for 2008 has been marked down about � percentage point since last October. Most of you remarked that a range of factors had prompted you to lower your growth expectations for the current year, including the continued turmoil in financial markets and the resulting tightening of credit conditions, the persistent deterioration in the housing market, incoming data suggesting slower consumption expenditures and business investment growth, and higher oil prices. A few of you suggested that stronger export demand as well as fiscal stimulus would provide some offset to weakness in private domestic demand, particularly beginning later this year. Your half-yearly projections, not shown, suggest that you all think that, more likely than not, the economy will skirt recession. On average, you see real GDP growing at an annual rate of about � percentage point over the first half before picking up to a 2� percent pace in the second half. As shown in the second row, in view of the weak growth forecast for this year, most of you revised up your expectations for the unemployment rate in the fourth quarter about 0.4 percentage point, to around 5� percent. Most of you project slightly brisker growth this year than the Greenbook does--perhaps partly reflecting the assumption that a number of you made that there would be more near-term monetary ease than the staff assumed. As shown in the third and fourth sets of rows, with incoming inflation data a bit higher than previously expected and despite projected weaker real activity, the central tendencies of your projections for total and core PCE inflation this year have increased about 0.3 percentage point. That upward revision is a bit larger than the 0.2 percentage point upward revision to the Greenbook inflation forecasts but leaves the level of your projections close to those in the Greenbook: Most of you see total and core 3 The materials used by Mr. Madigan are appended to this transcript (appendix 3). inflation this year at a little above 2 percent. But as shown in the bottom section, the upper limit of the range of your overall inflation projections for this year has moved up to 2.8 percent. Your forecasts for total PCE inflation this year remain a bit higher than for core inflation, reflecting the expectation of higher energy, food, and in some cases, import price inflation. Looking ahead to next year, your forecasts indicate that you expect economic growth to pick up as the drag from the housing sector dissipates and credit conditions improve. The midpoint of the central tendency of your forecasts for real GDP growth is 2.4 percent. Your growth forecasts for next year are mostly above the staff's forecast of 2.2 percent, perhaps again because a number of you assumed moreaggressive policy easing in the near term and perhaps because at least some of you appear to see potential output growth as a bit brisker than the staff does. With most of you evidently seeing growth a bit above trend next year, the unemployment rate begins to edge lower, but the central tendency of your unemployment projections still remains distinctly above that in October. Although you are generally optimistic about improving conditions next year, your views have become considerably more dispersed: As shown in the lower section, the width of the range of the growth projections for 2009 has nearly doubled, as has the width of the range of the unemployment projections. The third and fourth sets of rows in the upper panel indicate that most of you see overall and core inflation as moving below 2 percent next year. Some of you said that those declines reflect less pressure from energy prices and, with the unemployment rate above the NAIRU, the emergence of some slack in the labor market. It is worth noting, however, that despite the easing of pressure on resources during 2008 and 2009, the central tendencies of your inflation projections for next year are essentially unchanged from October. This development presumably reflects your perception of some deterioration in the near-term inflationoutput tradeoff, perhaps prompted in part by the publication of surprisingly high inflation data for the fourth quarter of 2007 and an expectation that those effects will linger in 2009. Turning to 2010, the interpretation of your longer-term projections is a bit less straightforward than it was in October. It was noted during the trial-run phase that a time may come when the economy is seen as unlikely to be in a steady state by the third year of the projection. To some extent, that time seems to have already arrived. In particular, a comparison of the central tendencies for unemployment in 2010 from your January and October projections suggests that you now see a bit of slack persisting that year. The central tendencies and ranges of your total and core inflation projections for 2010 have changed just a bit from those in October, but those changes might be viewed by outside analysts as significant. In particular, the central tendency for total inflation in 2010 has inched up 0.1 percentage point, and the lower limit of the central tendency for core inflation has increased the same amount. Absent guidance to the contrary, some analysts might now conclude that your ""comfort zone"" has edged up to 1� to 2 percent from 1� to 2 percent. To counter this impression, presumably the published ""Summary of Economic Projections"" should suggest that, because a bit of economic slack is expected to persist at the end of 2010, inflation could continue to edge lower beyond the projection period. This discussion, however, raises not only a presentational point but also a substantive one, and that is, Why should your inflation projections for 2010 have revised up at all? True, the inflation-output tradeoff appears to have deteriorated a little recently, but as Dave Reifschneider noted, some of that deterioration is likely to be temporary. Also, higher inflation than otherwise might in principle be a consequence of taking out some insurance now against especially weak economic outcomes. But given the significant negative shock to aggregate demand embedded in your modal forecasts and the associated upward revision to slack across all three years of your projections, as well as the absence of any upward revision to your inflation projections for 2009, even the small upward revision to your inflation projections in 2010 seems somewhat surprising. Turning to the uncertainties in the outlook, the upper panel of exhibit 2 shows that even more of you than in October judge that uncertainty regarding prospects for economic activity is higher than its historical level. Even with the significant reductions in the target funds rate already in place and, for many of you, an assumption of more easing to come, the lower panel illustrates that most of you still see the risks to growth as tilted to the downside. As reasons, you again cited tighter credit conditions for households and businesses emanating from further disruptions in financial markets as well as the persistently deteriorating housing outlook. As shown in the upper panel of exhibit 3, more of you than in October see the uncertainty around your total inflation forecasts as close to that of the past two decades, while a smaller minority viewed uncertainty as greater than in the past. As shown in the lower panel, fewer of you now see the inflation risks as predominantly to the upside. On balance, as in October, downside risks to growth were more frequently cited than upside risks to inflation, which seems broadly consistent with each of the alternative policy statements that were in Bluebook table 1. Thank you. " FOMC20060629meeting--54 52,MS. YELLEN.," This is a question for Steve or for Karen. In Monday’s international briefing you referred, and I’ll quote, to the possibility that we may be “nearing limits on global capacity” when you were discussing foreign inflation prospects. I’m really following up on President Fisher’s question here. I want just to clarify what your thinking is about how global capacity figures into those foreign inflation forecasts that you make and then potentially into U.S. inflation. One model might be that inflation in each country depends mainly on the country’s own domestic capacity or unemployment along with some role for import prices. If so, you might refer to global capacity as just an average of the states of foreign labor markets, possibly driven by some common external force that’s driving global growth in all the countries. An alternative is that you might feel that there is some role for global capacity in the inflation process above and beyond how it may affect import prices. That’s, I guess, the view that President Fisher has put forward, and it is interestingly endorsed in the BIS annual report that came out yesterday." FOMC20070131meeting--408 406,MR. BARRON.," Thank you, Mr. Chairman. It may come as a surprise to some of my colleagues, given my expressed concerns over publication of numerical inflation targets, that I am very supportive of publication of forecasts by participants. The Committee has for some time now made routine references to the outlook in the statement, without an explicit Committee forecast. Explicit forecasts will, in my opinion, add to the already improved transparency and accountability of the actions of the Committee and will, over time, serve as a reference point for expressing the important differing views among the Committee members at this table and in public speeches. As cumbersome and as painful as the process might be, at least initially, the Committee also needs to develop a consensus forecast that would embrace a central tendency outlook. However, this forecast should embrace, not truncate, outliers and use those as a signal of dispersion of views around the forecast. As for the basis of the forecast, it seems logical that some agreement on assumptions would lead to fewer outliers in the forecasting process. While I can appreciate the benefits of the “common assumption” approach, I would suggest that the Committee follow the “appropriate policy” approach as it relates to the federal funds rate, at least at the outset. That said, one alternative might be for the staff to suggest a set of common assumptions that would be used in the development of alternative forecasts by the participants. However, it would be understood that each participant’s baseline forecast would be free from imposed assumptions. I believe it is imperative that any forecast be accompanied by a story to support the outlook. This is consistent with my own recommendation as it relates to question 7 that we should minimize the number of variables that we use in the forecast for the public. With just a few key variables put forward, we should be able to agree on a narrative for the forecast, much as we agree on a narrative for our current policy statement. I recognize that this will be cumbersome and time-consuming, but numbers without the story would be analogous to asking a doctor to treat a patient by seeing only the skeleton. The story could be developed in a minutes- style description, but I would suggest that the forecast and description be an addendum to the minutes. This would enable participants to share their forecast and opinions at the meeting. In the discussion process, participants would be given the opportunity to absorb the discussion of the meeting and the various forecasts and then go back and visit with their staff to consider if any changes are warranted in their own forecast and outlook. I hope that, after the resolution of the start-up problem that would no doubt be encountered in this process, the current publication schedule of the minutes for those meetings where we do set forecasts would be restored. That said, I hope also that the debate over the story would be limited to substantive issues somewhat like a dissent on the current policy decision and not a vehicle to capture every nuance in everyone’s forecast. I suggest that the forecast frequency be limited to two per year to start out but that we would eventually move to a quarterly forecast, much as has been said earlier. Listening to my staff talk about the planning period and the policy action requirement so far as time is concerned, I am struck that a three-year planning period would be ideal from a forecast standpoint. The process would be more effective, at least at the outset, with fewer rather than more variables, and I suggest that those variables be some inflation measure, real GDP, and unemployment. My preference is to exclude a fed funds rate forecast because it could be interpreted, as mentioned earlier, as a commitment. As for the uncertainty, clearly our story must address uncertainty and potential changes that might come in the future. I would choose not to use fan charts, at least at the outset, as I could almost bet that a fan chart on unemployment would be on some congressional committee member’s desk at an upcoming hearing, illustrating the point that, if we miss our target, millions of people will be unemployed. Thank you, Mr. Chairman." FOMC20060131meeting--81 79,MR. SHEETS.," I think the source varies from forecast to forecast. One difference across these forecasts relative to ours is in the oil price. The other forecasters are in the $50-$55 range, whereas we have an oil price of $65 to $70. So that’s a piece of it. Looking at the assumptions embedded in these forecasts pretty carefully, the one forecast that has a much sharper depreciation of the dollar than what we’ve written down is the Global Insight forecast, which shows the dollar falling quite dramatically over the next year or so. But I don’t find significantly different assumptions about the exchange rate in the other forecasts. So I guess the bottom line is that I think a lot of this difference is just a difference in models, and we’re confident that—if you give us an exchange rate, relative prices, and so forth—we’re pretty good at mapping those underlying variables into a path for the current account." FOMC20080625meeting--32 30,MR. MADIGAN.," 3 I will be referring to the separate package labeled ""Material for Briefing on FOMC Participants' Economic Projections."" The top two sections of table 1 show the central tendencies and ranges of your current forecasts for the first and second halves of 2008; central tendencies and ranges of the projections published by the Committee this past April are shown in italics. To facilitate comparisons, the Greenbook projections are shown in the bottom section. In your forecast submissions, most of you indicated that you saw appropriate monetary policy as entailing a path for the federal funds rate that lies above that assumed in the Greenbook. As shown in the first row, first column, of table 1, the central tendency of your real growth forecasts for the first half of 2008 has been marked up substantially since April. However, a number of you noted that recent upside surprises to consumer and business spending are likely to prove transitory and that falling house prices, tight credit conditions, and elevated energy prices will probably restrain growth over the remainder of 2008. Accordingly, some of you revised down a touch your growth expectations for the second half of this year (the second column) especially those of you who had previously anticipated the briskest 3 The materials used by Mr. Madigan are appended to this transcript (appendix 3). growth rates, as indicated by the downward revision to the upper end of the range shown in the middle section. Most of you think the economy will skirt recession. Nonetheless, your projections for the speed of recovery over the second half exhibit considerable dispersion: Four participants are projecting growth rates of real GDP between 2 and 2� percent, whereas an equal number are calling for growth at an annual rate of only around � percent, a pace similar to the one projected in the Greenbook, with many of you attributing the tepid growth partly to financial headwinds. The tendency for some clustering of your second-half growth forecasts at the extremes can be seen by noting the similarity between the central tendency and the range. As shown in the second set of rows in the top panel, your projections for headline PCE inflation in the second half of 2008 have been revised up more than 1 percentage point, to around 3� to 4� percent, largely as a result of the surge in prices of energy and agricultural commodities. However, in view of better-thanexpected news on core PCE inflation, the central tendency of your projections for core inflation during the second half (shown in the third set of rows) revised up only 0.1 percentage point. Looking ahead to 2009 (table 2, the middle column), you continue to expect growth to pick up as the drag from the housing sector dissipates and credit conditions ease. The midpoint of the central tendency of your forecast for real GDP growth next year is 2.4 percent, the same as in April and the same as the staff's current forecast. Your growth forecasts for 2010 (the third column) are a shade lower than in April, and the central tendency of your forecasts for the unemployment rate is a touch higher, perhaps because a number of you assumed more policy tightening over the forecast period in order to counter heightened inflation pressures. The midpoint of the central tendency of your projections for the unemployment rate edges down from about 5� percent in 2009 to about 5� percent in 2010. Your commentaries suggest that many, albeit not all, of you view those rates as a quarter-point to a half-point above your estimates of the NAIRU. The third and fourth sets of rows indicate that most of you see overall and core inflation staying above 2 percent next year; but by 2010, the extended period of economic slack and the assumed leveling-out of energy prices push down overall and core inflation to around 1� to 2 percent; for core inflation, the central tendency and range are a touch higher than you forecasted in April. For the first time since you started these projections last October, the upper end of the range of your projection of total inflation in 2010 exceeds 2 percent, albeit marginally. Thus, many of you project that, at the end of the forecast period, the economy will still be operating with some slack and real output growth will be slightly above the growth rate of potential. The continued presence of slack suggests that you anticipate that inflation will continue to edge lower in 2011 and, given the assumption of appropriate monetary policy, implies that you typically anticipate that inflation will still be a bit higher in 2010 than you see as consistent with price stability. Exhibit 3 presents your views on the risks and uncertainties in the outlook. As shown by the green bars in the top two panels, a large majority of you continue to perceive the risks to growth as weighted to the downside (the left panel), and many judge that the degree of uncertainty regarding prospects for economic activity is unusually high (the right panel), although the number of you seeing uncertainty about growth as elevated has declined slightly over the first half of the year. In your narratives, you attributed the downside risks primarily to the potential for steeper declines in house prices and persisting financial strains, which through a further tightening of credit conditions could exert an unexpectedly large restraint on household and business spending. Although your views of the risks regarding growth have shifted only modestly, the distribution of your perceptions of the risks regarding inflation (shown in the bottom two panels) has changed significantly so far this year. As shown in the lower left panel, about three-quarters of you now see the risks to the outlook for overall inflation as skewed to the upside. In your commentaries, you typically pointed to continued increases in energy and food prices and an upward drift in inflation expectations as the main reasons for the upside risks to inflation. In addition, as shown to the right, the number of participants who perceive the degree of uncertainty regarding the inflation outlook as larger than usual has risen considerably. Turning to exhibit 4, as I noted, your projections suggest that you do not see the economy as having fully settled into a steady state by 2010. The dynamics of the economy evidently are such that, following moderately large shocks, it can take quite a few years to converge back to steady state, a view that is captured by many econometric models such as FRB/US and is also reflected in the current Greenbook forecast. Thus, the three-year forecast horizon currently used by the Committee does not necessarily allow your forecasts to reveal fully your views of the steady-state characteristics of the economy and your views of the rate of inflation consistent with the dual mandate. Recognizing this, the Subcommittee on Communications recently sent the Committee a memo outlining several possible approaches to providing longer-term projections. The approaches are summarized in the lower panel. One option would be for participants to extend their entire set of projections out to, say, five years. Under this option, participants would be asked to submit projections for economic variables in year 4 as well as in year 5. You would also expand your individual forecast narratives to explain the trajectory of the economy and inflation over the five-year projection period. This approach would have the advantage of providing the basis for a complete presentation of the Committee's medium-term and long-term views. The principal disadvantage of this option is the relatively heavy burden it places on Committee participants to make projections covering five years. Another disadvantage is that in some circumstances--that is, following a very large shock--the economy still may not be in a steady state after five years. A second option is for participants to continue to submit economic projections and narratives out to three years as now but also to provide estimates of the values of output growth, unemployment, and inflation in year 5 under the assumption of appropriate monetary policy. Under this approach, you might wish to collect and publish long-term projections only for output growth, unemployment, and total inflation, and not for core inflation, in order to emphasize that total inflation rather than core inflation is the appropriate metric for the longer-run goal of price stability. This second approach presumably places less demand on your time than the first but it would make for a less integrated presentation. It would also suffer from the same defect as the first approach, in that the figures you submit might not reveal the steadystate characteristics of the economy after a large shock. In a third approach, you would augment your three-year projections with projections of the average values for output growth, unemployment, and total inflation over the period five to ten years ahead. This approach would have the advantage of more directly revealing your estimates of the key operating characteristics of the economy--that is, the parameters related to productive capacity and your inflation objective. It might also be less demanding of your time in the sense that you would need to project fewer time periods than in the first option. On the other hand, it might be more difficult in that you would need to consider likely trends in demographic variables and productivity further ahead than is ordinarily necessary for monetary policy making. Moreover, it is possible that some of the parameters you would be supplying for the period five to ten years ahead might take on different values than would apply to the medium term that is relevant for monetary policy. In your comments in the upcoming economic go-round, you may wish to express your views on whether you support publication of longer-run projections and, if so, which of the approaches you prefer. You might also wish to comment on the desirability of conducting a trial run with long-term projections--say, in October-- before going live with long-term projections, perhaps in January. That concludes our prepared remarks. " FOMC20050202meeting--164 162,MS. BIES.," Thank you, Mr. Chairman. To me, the forecasts presented in the Greenbook and the consensus forecast of those from the private sector paint a sound economic picture for 2005— February 1-2, 2005 118 of 177 I’m comfortable that the removal of policy accommodation at a measured pace that we’ve announced and have been implementing is supportive of this growth going forward. As some of you have mentioned, given such a good forecast, the question that arises is: What should we be worrying about in this picture? I’d like to mention two concerns that I’ve been focusing on lately. The first is the risk around inflation. This is not a huge risk, but when I look at the Greenbook projection compared to various private-sector forecasts, the Greenbook’s inflation forecast is at the lower end of the range of the Blue Chip forecasts. Hopefully, the Greenbook will be the right forecast on this, but the inflation numbers have shown a lot of volatility in the last two years. So in light of the recent volatility, even in the core measures of inflation, I think it’s important that we look carefully at incoming data every month and keep on top of what is happening to try to get a better understanding. The second concern has also been mentioned by a couple of you around the table, and that is the mystery of why long-term interest rates aren’t any higher than they are. My personal forecast a year ago would never have had long-term interest rates at the levels at which they’ve been sitting. If I look at various aspects of this, in trying to understand it, I can explain some things. For example, we know that corporations have been seeing record profit margins and, as a result, have been generating tremendous cash flow. That means that corporations have been able to fund a large part of their investment in inventory buildup through internal funds, as opposed to going to banks or to the markets. We also have seen fewer accounting scandals, which generated a lot of the uncertainty that widened credit spreads in 2002. Those spreads have really come back down again as we’ve had relatively fewer shocks to market confidence. We’ve also seen rating agencies worldwide reduce the number of downgrades relative to upgrades; so that has turned around, which is another good sign. And as Governor Olson mentioned, the bankers are very positive about current credit quality. But I would say again that we should recognize that we are probably at the sweet spot in that credit February 1-2, 2005 119 of 177 On the other hand, consumers have been borrowing like crazy, and they’ve been borrowing at the long end of the curve. In large part, this is a reflection of the fact that interest rates are historically low, and people are being very rational by locking in at long-term rates and borrowing all that they can. On net, though, we’ve seen that there’s been plenty of liquidity in the long market. So what could happen here if long rates do move up as we go forward? I guess I worry primarily about what that could do in terms of business investment. We know that there may be a narrowing in profit margins. And cash flow has changed to some degree, in that companies are beginning to look more to the outside for credit, especially as merger activity picks up, and that could affect the relative demand for credit from corporations. On the household side, we’re seeing that consumers have used these low rates to support consumption. They’ve done it through equity extractions as they refinance. They’ve also had the benefit of tremendously innovative mortgage products being offered by bankers and other lenders. For tax reasons, people want to borrow as much of their debt against their houses as they can, and lenders have accommodated them by innovations in ARMs [adjustable-rate mortgages] where borrowers can lock in a low rate for a period on the short end of the curve. But lenders have also offered interest-only loans and mortgages with very high loan-to-value ratios to provide more credit that is eligible for tax deductions. If interest rates rise, will consumers begin to slow their use of credit and, if so, what does that mean for consumption in the forecast? This is the issue I really want to focus on because, to me, consumers have been the mainstay of this whole economic cycle. To the extent that there is a wealth effect of housing, this could be a concern if people begin to purchase houses at a slower pace or even if housing construction stays at a high level but doesn’t grow. We’ve seen several private-sector forecasts of flat house prices next year. If suddenly the equity buildup and the net worth of households were to slow, that could have an impact for consumers. When we look at why the saving rate is so low today, we also have to look at the fact that the ratio of net worth to income is at record levels. Consumers have not had to save out of current February 1-2, 2005 120 of 177 income almost entirely to current consumption. But if net worth begins to stabilize and consumers are not able to increase cash flow through refinancings or home equity lines, that could slow the pace of consumer spending and result in less GDP growth than in the Greenbook forecast. Thank you." FOMC20071031meeting--10 8,MR. STOCKTON.," Thank you, Mr. Chairman. From a forecast perspective, it’s been a pretty wild ride over the intermeeting period, with our outlook for activity shifting sharply at various points in the process in response to large swings in the stock market, the exchange value of the dollar, and the price of crude oil. A couple of weeks ago, with the incoming data stronger, the stock market up substantially, and the dollar down noticeably, we were looking at a forecast that had economic growth moving materially above potential later in the projection period. It appeared that, after taking you for a tour of the sausage factory in my September briefing, I would need to issue a recall of that last batch of sausages even before the arrival of their typically short expiration date. In the event, the stock market retraced most of its earlier increase, and some of the improvement in financial conditions that had occurred immediately following the September meeting was subsequently reversed. As a consequence, our forecast changed relatively little, on net, over the past six weeks. The growth of real activity is higher in the near term, but in 2008 and 2009, the stimulative effects on GDP growth of the lower dollar are offset by the restraint on incomes and spending imposed by the higher path for oil prices. We expect the growth of real GDP to slow from a 2¼ percent pace this year to a 1¾ percent pace in 2008 before edging back up to a 2¼ percent rate in 2009. The period of below-trend growth late this year and next year results in some easing of pressures on resource utilization, and core inflation moves roughly sideways at just under 2 percent over the forecast period. To my mind, recent developments raise three big questions about our forecast. First, does the broad-based strength that we have seen in the data on spending and activity over the intermeeting period suggest that we have overestimated the restraining effects on aggregate demand emanating from the recent financial turbulence? Second, is the staff missing signs of greater restraint on aggregate demand that will weigh more heavily on activity in the period ahead? Finally, with oil prices up sharply, the dollar having depreciated, and resource utilization a touch tighter, why is our forecast for core inflation about unchanged? Let me start with the question about whether the strength in the incoming data casts doubt on our estimates of the restraining effects of financial turbulence. There can be little denying that, almost across the board, the readings on economic activity have been stronger than our expectations in September. In terms of domestic spending, the largest upside surprises have been in consumer spending, and much of the upward revision reflects data on activity after the financial turbulence had already begun. Overall consumer spending was stronger than we had expected in August, and the available information on retail sales and on sales of motor vehicles suggests that real PCE exceeded our expectations for September as well. At this point, we know very little about October. Chain store sales have softened somewhat but only by enough to make us comfortable with the meager monthly gains in spending that we are projecting for the fourth quarter. Our discussions with the automakers suggest that sales this month have remained reasonably steady. All told, third-quarter growth in consumption looks stronger than we had expected, and spending appears to be headed into the fourth quarter with a bit more momentum. In the business sector, stronger purchases of motor vehicles led us to raise our forecast of equipment spending in the third quarter. The other components of E&S came in close to our expectations, though last week’s data on orders and shipments of capital goods, which we received after the Greenbook was completed, were also a bit stronger than we had anticipated. The incoming data on construction put in place are consistent with our projected sharp slowdown in the growth of nonresidential structures after a surge in the second quarter. But even here, the data have outflanked us to the upside, with surprising strength in commercial construction, factory buildings, and telecommunications structures. Taken together, stronger consumption and investment account for only about half of the upward revision that we made to real GDP growth in the third and fourth quarters. The external sector accounts for the other half. In particular, continuing a pattern we have seen during much of this year, the growth of exports once again exceeded our expectations. We estimate that real exports increased at an annual rate of nearly 17 percent in the third quarter, about 3½ percentage points above our September forecast, and we have marked up export growth in the current quarter as well. The greater strength in both foreign and domestic demand led us to revise up the growth of real GDP in the second half of this year about ½ percentage point, with annualized growth rates of 3¼ percent and 1½ percent in the third and fourth quarters, respectively. So, do these fairly broad-based upward surprises in spending and activity suggest that we overreacted in the extent to which we marked down our projection in response to the recent difficulties in financial markets? It certainly seems a legitimate possibility. However, we think it would be premature to make that call. As Bill noted, financial market conditions have improved somewhat over the intermeeting period but remain far from normal. In terms of credit provision, the Senior Loan Officer Opinion Survey revealed a sharp jump in the fraction of banks reporting tighter terms and standards on loans to businesses and households, a development consistent with the restraint on spending that we have built into our forecast. Consumer sentiment remains depressed relative to overall economic conditions, perhaps because of worries about financial developments. For now, although we have slightly trimmed the magnitude of the turmoil effects on aggregate demand, the more important adjustment in this forecast has been to push more of the restraint into next year. At the other end of the spectrum of worry is the second question that I posed earlier: Have we missed some significant signs of potential economic weakness in the developments of the intermeeting period? Financial market participants seem to have reacted to the news of the past six weeks by marking down the expected path for the fed funds rate, whereas our forecast and policy assumptions are nearly unchanged. Is it possible that we are missing signs of an impending downturn in aggregate activity? Of course, the prudent and accurate answer to that question is always “yes.” But if that turns out to be the case, it won’t be for lack of attention. At present, it is difficult to find evidence in high-frequency indicators that the economy is in the process of turning down. Initial claims for unemployment insurance have remained relatively low, motor vehicle sales are reported to have been well maintained at least through mid-October, commodity prices are firm, reports from purchasing managers continue to suggest modest expansion, and few anecdotes outside the housing sector sound as though we’ve moved past a tipping point. If we are missing something important, it seems more likely to me that we could be facing a more-grinding period of subpar economic performance associated with a deeper and more-protracted adjustment in the housing sector. It might seem a bit surprising to point to housing as a major downside risk when this has been one aspect of our forecast that was right on the mark over the intermeeting period; we had expected steep declines in sales and starts, and that is what we got. But I would counsel you not to take too much comfort from that observation. In our forecast, we expect sales and starts of new single- family homes to decline another 8 percent before bottoming out around the turn of the year. The projected configuration of starts and sales is consistent with a dropback in the months’ supply of unsold new homes from an estimated peak of 8½ months early next year to 4½ months by the end of 2009. Residential investment continues to fall through the middle of next year and only edges up thereafter. But it is not difficult to envision a more painful period of adjustment. We know a huge inventory imbalance still exists in the housing sector. If, in response to that imbalance, house prices register steeper declines than the ones we are forecasting, prospective purchasers could experience an even greater fear of buying into a declining market, reinforcing the housing sector’s drag on aggregate activity. Moreover, sharply lower prices could have more-serious implications for the ability of households to refinance existing mortgages and could impair the performance of mortgage markets more broadly. Those strains, as they have in recent months, could spill over into other areas of the financial markets. As we showed in a couple of alternative simulations in the Greenbook, a steeper decline in house prices and construction activity could result in a path for the fed funds rate that does not differ materially from the one that appears to be currently built into market expectations. We remain comfortable with our baseline projection for housing, but it is still easier to see sizable downside risks than sizable upside risks to this aspect of our forecast, and that suggests to me that our modal forecast of GDP still has more weight to the downside than the upside. That said, given the strength over the intermeeting period of the incoming data outside housing, that downward skew is probably less pronounced in this forecast than in the one we presented in September. Turning to the price projection, the question I posed at the outset was why our forecast of core price inflation is largely unchanged given higher oil prices, a lower dollar and tighter resource utilization. With respect to resource utilization, both the GDP gap and the unemployment rate suggest only slightly tighter product and labor markets than in our previous forecast, and given the flatness of our aggregate supply curve, the effect on prices over this period is negligible. As for the lower dollar, we see higher import price inflation in the near term in line with the recent depreciation, but these effects quickly play through. More broadly, the available evidence continues to suggest that exchange rate pass-through to import prices is quite low, which in turn mutes the effects on broader prices. The indirect consequences of higher oil prices are a bit more consequential, and all else being equal, would have added about a tenth to our core price projection in 2008. But not all else was equal. The incoming data on core PCE prices were again slightly more favorable than we had expected. The surprise in this intermeeting period was largely in nonmarket prices. More broadly, the deceleration that we have observed in core PCE prices over the past year has been greater than can be explained by our models, and we have carried a bit larger negative residual forward in this forecast. As a consequence, we expect core PCE price inflation to move sideways at a 1.9 percent pace in 2008 and 2009, unchanged from our previous forecast. Overall price inflation is projected to move down from 3 percent this year to 1.8 percent in 2008 and 1.7 percent in 2009. The deceleration in overall prices reflects some decline, on net, in energy prices over the next two years and a dropback in food price inflation to a rate closer to that of core consumer prices. On the whole, I’d characterize the risks around our inflation forecast as roughly balanced. Nathan will continue our presentation." CHRG-109shrg26643--99 Chairman Shelby," Or as much time as you need. Senator Bunning. Thank you. Just to follow up on Senator Schumer's discussion about China. We took six Senators to China to talk trade with the Chinese. They would not even visit with us. Six U.S. Senators, five were on the Trade Subcommittee of the Finance Committee, and we got number six in line in the Chinese bureaucracy and he knew nothing about trade. So, I just want you to know what a problem there is, and we worked like the devil to get them into the WTO, and I wish that they would just follow the rules of WTO. That is an aside. Yesterday, you talked a lot about our budget deficits and particularly our long-term obligations that are only going to increase. You also rightly said those decisions are ones that Congress needs to make. How much of a factor are those long-term entitlements in your economic forecast? I am speaking about Medicare, Medicaid, and Social Security. It looks like by the year 2030 that they will take up about 70 to 75 percent of our budget. So we will be squeezed down to about 25 percent for discretionary spending. So how much do they come into your forecast? " FOMC20051213meeting--82 80,MR. STERN.," Thank you, Mr. Chairman. Let me try to restart this discussion by saying, first, that I largely agree with the Greenbook assessment of the economy and, in particular, with the overall positive economic outlook it presents. This is consistent with the incoming data on the national economy that we’ve received recently and with the preponderance of recent reports on the District economy as well. Notably, the District is benefiting from an overall good year in agriculture, sustained improvement in the manufacturing sector, and what I would call positive substitution effects stemming from hurricane-related disruptions elsewhere, which have led, for example, to more shipping out of the Port of Duluth-Superior than otherwise would have occurred, more volume for local trucking firms, and so forth. One minor difference I might have with the Greenbook outlook pertains to the labor market and the unemployment rate. It seems to me that the forecast for economic growth in 2006 overall is December 13, 2005 50 of 100 dropped nearly a full percentage point from the end of 2003 to the end of 2005. Using that as a rough guide or rule of thumb, I would think we’d get at least some modest further decline in the rate of unemployment next year. I would hasten to add—and I think this is potentially a more important and maybe also a more controversial point—that even if we get that drop in the unemployment rate, it wouldn’t affect my inflation forecast. In fact, looking at the totality of the information available, I don’t think that the risks to the core inflation outlook are skewed one way or the other, and I’m inclined to agree with Dave Stockton’s assessment that inflationary pressures are close to topping out. I say this because incoming data on core inflation have been relatively favorable, bond markets suggest to me that inflation expectations remain well anchored, and a lot of policy accommodation has been removed. Indeed, summing up these factors as well as the results from most versions of the Taylor rule presented in the Bluebook, calculations with Fisher-type interest rate equations, and the Greenbook forecast itself, it seems to me that after this meeting we will at least be very close to the point where we will have raised the federal funds rate sufficiently for now. Thank you." FOMC20070131meeting--423 421,MR. MOSKOW.," Thank you, Mr. Chairman. As I thought about the alternatives before us for making forecasts, I had an even greater appreciation for the way we’ve done this to date. I looked at the Monetary Policy Report, of course, and other things that we’ve done, and I think we’ve been well served by the approach we’ve taken to date—the twice-a-year forecast and the central tendency descriptions. Some of us were here when Chairman Greenspan told us that he didn’t really care for these forecasts very much. He said it was psychologically debilitating for him to discuss them in his testimony [laughter] three weeks later because they became stale. Well, Chairman Bernanke has done an excellent job, and I don’t think he has been psychologically debilitated so far that I’m aware of. [Laughter] But you have woven them into your testimony, and I think it has been very effective. So if there are important improvements that can be made, I certainly would favor them. But I don’t have a good sense at the moment, as some others have expressed, which communication issue we’re trying to address here. The background memos were first class, and I should compliment the staff. They did an excellent job of describing how forecasts can play an important communication role for central banks that have adopted inflation guidelines in one form or another. Of course, we haven’t adopted any yet. Maybe we will. I think that’s still an open question. But depending on the specific mandates of the central bank, the forecast procedures may depend on those details. In an ideal world, I’d prefer to know more about how we’re going to address the other communication issues first. Specifically, will we adopt a quantitative inflation guideline? Will we specify a timeframe for achieving that objective as well? How we answer those questions will give us a framework for deciding what types of forecasts we want to provide. I guess that will be the discussion in March. In the meantime, we should go slowly in making changes in our current forecast process. Our approach to improving transparency has been incremental. We have taken a step, sometimes a small step, and then we assess that step before we take another step. Over time we make a series of steps that has significantly improved our transparency. This approach has served us well, because, as Gary said, it would be very difficult to reverse a step that provides more transparency. It would be viewed as a takeaway. In that context, let me quickly go through the questions; then just for the record, I’ll make some summary comments. So, one, I would say that we want to have individual forecasts. That’s what the sense of the Committee seems to be. Two, they should not have common assumptions. I think it’s important that they should be based on appropriate policy. They should be what we actually think is going to happen. Otherwise, it would be very confusing. I think that a minutes-style narrative would be helpful. We actually do it already. It’s a Board of Governors document, but we do it. I’ll say a little bit more about that later. Should we jointly agree on the narrative? I think we should. We have to work out the timeframe, but I think we should. How frequently? I could see a case made for starting out doing one more a year in the fall. Doing it would be difficult, for reasons that Janet gave, given our meeting schedule. But it could be done, and I think it could be done without a lot of work. I’ll get to that later as well. How many years? I would like to go more years, as you know, rather than fewer. I like Sandy’s approach, going out five years, but I certainly think we should extend the timeframe. How many variables? I would drop nominal GDP, as others have said. Then, on the uncertainty question, my initial instinct is to communicate it in words rather than in fan charts, but that’s something we could learn more about. I’m open to considering other ways if we find one that is simple and that people can understand. Let me make a few overall comments. First, I thought that the document that Tim circulated before the meeting was useful. The major benefit to me in looking at it was to see what assumptions you’re making, and I think that does help us in communication and in understanding where people are coming from as they make statements at the meeting. It’s not something I would want to see made public, but I think it does help us in terms of communicating with each other. Second, there was some discussion at one point about actually putting out a forecast of the fed funds rate. I’d be very cautious about that. I know this is probably at the top of the list of what private-sector people want; but for obvious reasons—as Don said, they’d like to know what it is going to be at our next meeting—I would just be very, very careful about that. Third, I thought Tom Hoenig had an intriguing idea about putting this in the minutes. From an efficiency standpoint, doing so has a lot of advantages. In the minutes we actually describe what we think the forecast is, and we all review that description and make changes, and the process has been fairly efficient so far. I could see doing that without producing another document, so it would still be a Committee document. Of course, the narrative would still be the Committee narrative, but we’d just do it as part of the process of reviewing the minutes. I don’t think you need any side bar disagreements in there because we do that already. In some cases, we say “many members” or “some members.” I think it is handled quite well. So I’m intrigued by and attracted to that suggestion from an efficiency standpoint, and if we were going to do a third forecast, say in October, it doesn’t have to be a separate document at all. It could just be in the minutes. We could have a little table with the forecast, the central tendency, and the range, and then a description in the minutes. That brings me to the point that a number of people have made about a dry run, which obviously is crucial, because we’ll learn more about the process. This gets back to the point about who does the description. Is it the FOMC? Right now, the FOMC does the forecast, and the Board of Governors does the explanation of the forecast. If we put it in the minutes, it would be an FOMC description, and the narrative would be the FOMC’s narrative. In terms of timing with the Chairman’s testimony, this time the minutes come out just after you testify. So to fulfill the accountability issue that the Congress wants, we could have it in the minutes as an FOMC narrative, but the Board of Governors could then adopt it if the Congress felt that was important from an accountability standpoint. But it could be the same document. That way to do it seems to me to be more efficient, and it would be the Committee’s view. That gets me to Kevin’s point about whether we are constraining the Chairman when he is testifying or speaking about this forecast or about the economy. Certainly, we don’t want to constrain the Chairman. His credibility is the Committee’s credibility and the institution’s credibility, and so it’s crucial that we not constrain him in that way. But if he felt strongly about a difference between what the central tendency of the Committee forecast was and his own view, I have great confidence that he could handle that without detracting from his credibility but still enable us to have a Committee narrative on the forecast. As I said, I think a dry run would help us understand this better, but I do think we want to do this in as efficient a way as possible before producing additional documents because it does require a lot of effort, particularly from the staff here but also from all of us who are involved and our research staffs." FOMC20050202meeting--133 131,MR. SANTOMERO.," Thank you, Mr. Chairman. Economic activity in the Third District continues to expand at a moderate pace, but there is some variation across the three states of our District. Leading indicators are signaling continued solid growth in New Jersey and Delaware but more modest growth in Pennsylvania. Payroll employment in our states grew at a 1¼ percent pace in the fourth quarter of last year, down from an unsustainably strong pace earlier in the year. Pennsylvania continues to have the slowest job growth and the highest unemployment rate among February 1-2, 2005 89 of 177 Our business outlook survey indicated a considerably slower pace of expansion in regional manufacturing in January. The general activities, new orders, and shipment indexes all fell to their lowest levels in 18 months. This is something to watch. The deterioration is not just localized in Philadelphia. I note that New York’s manufacturing survey also weakened in January. At the same time, it’s important to remember that these are just one-month readings, and other indicators in the January survey are less negative. For example, current and future employment indexes in our survey are near their highest levels in the current expansion. Turning to future capital spending in the District, we participated, as did the other Districts, in the Board staff’s survey. Our results are quite similar to the results for the nation as reported in Larry Slifman’s memo. On a related topic, all of these results—in addition to the comments from firms in our District over the past several months—suggest that the expiration of the partial- expensing provisions had a smaller impact on firms than is assumed in the baseline Greenbook forecast. Turning to our economic intelligence on other sectors, there appears to be little change. Consumers continue to spend at a moderate pace. Holiday sales in the region generally met expectations for a good, if not spectacular, showing. As was true in the nation, sales of luxury items showed the strongest performance, with year-over-year current dollar gains greater than 10 percent. Most of the other retailers reported year-over-year increases of around 3 percent. As I reported last month, nonresidential construction in our region remains soft. The office vacancy rate in the Philadelphia metropolitan region has remained at about 16.5 percent since the end of 2003, although we are seeing some net absorption over the past year. The construction of two new office towers will increase available space significantly, by about 5 percent. Meanwhile, residential construction has remained healthy, but it is down from its peak. House appreciation continues, especially on the New Jersey shore, where prices were up over 20 percent in the past year. In summary, the economic expansion continues at a moderate pace in the Third District, and February 1-2, 2005 90 of 177 My outlook for the nation is similar to that of the Greenbook, with real growth averaging about 3¾ percent over the next two years. Like the Greenbook, we expect consumer spending to expand at about that pace as well. This consumption forecast reflects our view that the current personal saving rate, despite its low level, is not likely to lead to a reduction in household spending. As we all know and as was mentioned here today, the personal saving rate averaged 1 percent last year. That compares to an average since 1959 of over 7 percent. There has been some concern expressed that consumers will hold back on their spending as we withdraw monetary stimulus, but a Philadelphia staff analysis casts considerable doubt on this outcome. That study points out several factors that warrant our attention. First, measured personal saving excludes some investments, such as investment in human capital and capital gains, therefore underestimating the true saving rate. Second, our real-time data series show that personal saving rates have been revised upward systematically, tending to wipe out low measured saving rates in the past. Since 1965, the mean revision has been about 2½ percentage points. Third, the permanent income hypothesis suggests that a low saving rate may signal expectations of faster future growth in labor income. Moreover, there is no significant empirical evidence that a low saving rate forecasts slower consumption growth. While our forecasts are similar to the Greenbook’s with respect to consumer spending and total GDP, there are some key differences. As I’ve already mentioned, we expect less of an effect from the expiring tax incentives on business investment. So we see stronger growth there, and our pattern of growth is smoother than in the baseline forecast in the Greenbook. We also anticipate a large depreciation in the dollar for reasons we talked about today; that discussion was helpful to me in understanding the Greenbook forecast. Thus, real net exports do not make much of a negative or positive contribution to growth over the next year in our forecast. Our larger depreciation of the dollar, coupled with less slack than in the Greenbook baseline, leaves us to project a slow rise in core PCE inflation over the forecast horizon to 1¾ percent for 2005 and 2 percent for 2006. This February 1-2, 2005 91 of 177 and our forecast are predicated on maintaining our strategy of gradually removing policy accommodation to bring policy back to a more neutral stance. Nothing in the current conditions or in the economic outlook suggests that it’s time to revise that strategy. We are at a point in the cycle where I think it is particularly important that we remain vigilant and forward-looking with respect to inflation. The recent acceleration in core CPI inflation means that it is no longer in the lower part of the acceptable range, in my view. This acceleration has not been large, and it has not yet shown up in the core PCE inflation. Nonetheless, both oil prices and the dollar pose an upside inflation risk. Thus, it seems prudent for us to remain vigilant and to continue on our upward path for the funds rate." FOMC20071211meeting--126 124,MR. ROSENGREN.," Thank you, Mr. Chairman. Weakness in economic data reported since the last meeting, continued financial turmoil, and a forecast that places us uncomfortably close to a recession calls for action, and my strong preference is for the decisive action reflected in alternative A. With well-anchored inflation expectations and the possibility of unemployment rising above our estimate of the NAIRU, the risks to inflation from this action seem quite low. However, the possibility that the economy will soon be in a recession is too high, and our action should be significant enough to substantially reduce that risk." FOMC20050630meeting--338 336,MR. LEAHY.," Well, our forecast, obviously, is for import prices to decelerate. That’s based on forecasts that the dollar will flatten out, roughly, or decline only moderately going forward, and that commodity prices will also be relatively flat. So, to the extent you put a lot of confidence into those forecasts, I think you could transfer that to our outlook for import prices. That’s how we do the forecasts." CHRG-109hhrg28024--41 Mr. Bernanke," Congresswoman, if you break up the term structure into short tranches, or term interest rates across the length of the term structure, you'll see that what's happening is that the far out short-term rates, the ones at far maturities, are the ones that have been declining. And this is the phenomena we discussed before, the decline in term premiums and the expectation of low returns to investment. So that's the reason for the phenomenon. I don't think that it necessarily affects our ability to affect inflation. Short-term interest rates, first of all, directly affect a good bit of economic activity. And secondly, there's also going to be impact on longer-term rates that will feed through into the rest of the economy. Our strategy is not to pick a magic rate or to pick a magic long-term rate. Rather, we consider alternative paths of future policy rates, and under each alternative path, we try to make a forecast about where the economy is going to go. Based on those forecasts, we try to judge what path will give us the best outcomes in terms of our mandated objectives. " FOMC20080430meeting--56 54,MR. MADIGAN.," 2 I will be referring to the package labeled ""Material for Briefing on FOMC Participants' Economic Projections."" Table 1 shows the central tendencies and ranges of your current forecasts for 2008, 2009, and 2010. Central tendencies and ranges of the projections published by the Committee last February are shown in italics. Regarding your monetary policy assumptions (not shown) about three-fourths of the participants envisage a moderately to substantially higher federal funds rate by late next year than assumed in the Greenbook, a path perhaps similar to the one incorporated in financial market quotes. Most of you conditioned your projections on a path for the federal funds rate that begins to rise either in late 2008 or sometime in 2009, in contrast to the Greenbook path, which remains flat through 2009. Many of you were less clear whether you differed from the Greenbook path 2 The materials used by Mr. Madigan are appended to this transcript (appendix 2). over the near term; but with a little reading between the lines, it seems fair to say that most of you assumed a slightly higher funds rate over the near term. As shown in the first set of rows and first column of table 1, the central tendency of your real economic growth forecasts for 2008 has been marked down nearly 1 percentage point since January. Most of you pointed to weak incoming data, tight credit conditions, falling house prices, and rising energy prices as factors that prompted you to lower your growth expectations for this year. About half of you forecast a decline in economic activity over the first half of the year (not shown), with another quarter of you seeing a flat trajectory over that period. However, only four of you used the word ""recession"" to describe the current state of the economy. None of you has a more negative first-half outlook than the Greenbook. The downward revisions to your growth forecasts are roughly equal across both halves of 2008, and so the contour remains one of a rising growth rate over the year. Members' projections for the speed of the recovery in late 2008 exhibit considerable dispersion, with some calling for a quick return to near-potential growth supported by monetary and fiscal stimulus, and others seeing a prolonged period of weakness owing partly to persisting financial headwinds. Most of you appear to expect growth to return to near its trend rate in 2009 (column 2) and to move slightly above trend in 2010 (column 3). The Greenbook forecast for real growth in 2008 is near the low end of the central tendency of FOMC members' projections, but it is at the high end in 2009 and 2010. The second set of rows indicates that you have revised up your projections for the unemployment rate throughout the forecast period. Of those of you who provided estimates of the natural rate of unemployment, most expect unemployment to remain above the natural rate in 2010 with the others seeing a return to the natural rate. As shown in the third set of rows, your projections for headline PCE inflation in 2008 have been revised up a full percentage point, largely due to the surge in the prices of energy and other commodities. Incoming information has also prompted a small upward revision to your projections of core PCE inflation this year (the fourth set of rows). The rate of decline of core inflation in 2009 is essentially unchanged from that in the January projections, presumably reflecting the offsetting effects of the higher unemployment rates in the April projections, on the one hand, and the lagged pass-through of this year's higher food and energy prices, on the other. By 2010 the prolonged period of economic slack pushes down core inflation to around the same rates that were projected in January. Although the central tendencies for headline inflation, the third set of rows, also decline markedly over the forecast period, overall inflation is projected to be about � percentage point higher next year than you anticipated in January. Nonetheless, by 2010, headline inflation is expected to be in essentially the same range of around 1� to 2 percent that you forecasted in January. Your inflation projections for 2010 are close to their values in January, but more than half of you raised your projections for the unemployment rate in 2010 significantly more than 0.1 percent. To the extent that the higher unemployment rate projections are viewed as implying an economy operating below its potential in 2010, outside analysts may infer that you expect inflation to edge down further beyond 2010. Turning to the risks to the outlook, as shown in the upper left-hand panel of exhibit 2, a large majority of you regard uncertainty about GDP growth as greater than normal. The upper right-hand panel shows that most of you perceive the risks to GDP growth as weighted to the downside. Correspondingly, the risks to unemployment, not shown, are seen as weighted to the upside. You typically attributed the downside growth risks to the potential for sharper declines in house prices and persisting financial strains. Overall, the distributions of your views on the uncertainties and skews regarding growth are little changed from January. However, as shown in the lower panels, your perceptions of the risks regarding inflation have changed noticeably since January. As shown in the lower left panel, only half as many participants now see the degree of uncertainty regarding the inflation outlook as historically normal, and twice as many see the uncertainties as larger than usual. As indicated to the right, fewer see the risks to their outlook for overall inflation as balanced, and more see the risks as skewed to the upside. Your narratives indicate that you see the upside risks to inflation as deriving from the potential for continued increases in commodity prices, further depreciation of the dollar, and an upward drift in inflation expectations. That concludes our remarks. " FOMC20050809meeting--143 141,MR. STERN.," Thank you, Mr. Chairman. The District economy continues to track the national economy quite closely, as it has for a long time. And as I commented at the last meeting, what is striking about the District economy right now is the breadth of the economic expansion. Virtually all sectors are either strong or improving, and I won’t go through a review August 9, 2005 46 of 110 improving employment conditions, wage increases still remain quite modest, as best I can judge. And inflationary pressures haven’t changed, as best I can assess the situation. As far as the national economy is concerned, we’re now almost four years into the current economic expansion and, overall, things look quite good to me. That in a way is remarkable in and of itself, as I think of the conversations we’ve had around this table over the last four years and the variety of concerns and issues that were raised. To be sure, policy has played a role in supporting this economic performance but, as I’ve commented before, I think once again we are observing the fundamental soundness, resilience, and flexibility of the economy. The situation is starting to resemble in broad terms, in my mind at least, the long expansions of the ’80s and ’90s. In fact, without stretching too far, I think one could perhaps make the case that the situation is even a little better than a few years into those expansions. After all, today we have low interest rates, low inflation rates, well-anchored inflationary expectations, for the most part a fairly well-balanced domestic economy, and what I might call a promising international economy. I call it promising not because I’m thinking about Europe or Japan, but because I’m thinking about China and India and some of their smaller brethren. There are some issues, to be sure. One is oil prices, which have already been mentioned today. The federal budget situation is another one, although I think that’s more a secular than a cyclical problem. And then there are housing prices. All I would say there is that even if there is a bubble, and even if it bursts, the quantitative significance of that remains quite unclear, as far as I’m concerned. I do think we need to pay considerable attention, as we have been, to the inflation situation, but my sense of the situation is that there is no significant deterioration under way or August 9, 2005 47 of 110 forecasting inflation. It has worked remarkably well for a good number of years now. [Laughter] Having said that, I do think it’s appropriate to continue with the policy path we’ve been on. That seems, given the way the economy has evolved, fully appropriate to me." CHRG-109shrg26643--100 Chairman Bernanke," Senator, your basic facts are absolutely right. The numbers I have are that in the next 40 years the share of GDP being devoted to Social Security, Medicare, and the Federal part of Medicaid is going to go from about 8 percent today to about 16 percent 40 years from now. Since the historical share of GDP collected as tax revenues is something in the order of 18.2 percent, that suggests there will be very little room in the budget for anything other than entitlement spending and suggests it is very important for Congress to begin thinking about how it wants to reorder or set its priorities. It is important to get that going soon, first of all, to assure financial markets that Congress will be responsible and, second, and perhaps even more importantly, to give people the time they need to plan for retirement and make provision based on any changes that Congress might decide to make. In terms of our forecast, as I reported today, are usually only a year or two in the future, uncertainty being what it is. So only the near-term effects are reflected in our forecasts. We are already beginning to see some effects of entitlement spending on the budget deficit. We factor that in, but since we are only looking at the near-term effects, we obviously are not incorporating these very large, long-term entitlement obligations into the near-term forecasting exercise. Senator Bunning. If nothing is done to shore up these programs, and I am speaking about entitlements, for several more years, what kind of impact is this going to have on our economic growth and employment and how will that affect your ability to act? " CHRG-109hhrg28024--36 And what I hear from many of my constituents, particularly women that are middle-aged and possibly older is, ""What jobs are we going to educate them for?"" We live in a changing economy, but what policies, including the Federal Reserve's policies, have played a role in labor's share of economic gains dropping to an unusually low level? " CHRG-109hhrg28024--205 Mr. Price," Thank you, Mr. Chairman. And I welcome you, Mr. Chairman and wish you the very best in your new role, and I want to echo some others and thank you for the responsiveness that you have given this morning to your questions. There are some benefits to coming late in the questioning, and one of them is that oftentimes we have an opportunity to clarify the record. There have been some things said that I'd like to just get your comment on. It's been said that the economic policies that we currently have are, quote, ``not working for the average American,'' unquote. Would you say that our economic policies are not working for the average American? " FOMC20060920meeting--59 57,MR. STOCKTON.," Thank you, Mr. Chairman. I cannot recall the precise baseball analogy employed by David Wilcox at the last FOMC meeting, but I have a vague recollection he speculated that I was either due for a forecasting hit or due to be hit by the forecast. [Laughter] In any event, since the Greenbook was completed last Wednesday, we have made several trips to the plate with consequential economic statistics on the mound. And how is the team doing? I guess I=d say, better than the Washington Nationals, not as well as the New York Mets. Last Thursday, we received retail sales figures for August. As you know, we focus on the retail control component of spending, which strips out sales at auto dealers and building material and supply stores. The August increase in this category was 0.2 percent, a bit stronger than we had expected. But both June and July were revised down, and on net these data were a touch weaker than those incorporated in the September Greenbook. Retail inventories for July also were a bit below our expectation. Housing starts for August were released yesterday. In line with our forecast, single-family starts dropped nearly 6 percent, to 1.36 million units, and the permits data point to some further declines in the months ahead. But multifamily starts declined somewhat more that we had expected. If we had to redo the forecast today, we would probably lower the increase in real GDP in the second half of this year to 1½ percent at an annual rate. Last Friday=s report that both headline and core consumer prices increased 0.2 percent in August was right in line with our forecast. The major components of yesterday=s PPI actually came in below our expectations, most especially the core finished goods index, which declined 0.4 percent in August. The only sour note was an increase in the PPI for medical services. The PPI for medical services is used by the BEA in constructing the core PCE price index, and it caused our estimate of core PCE prices for August to revise up from a high 0.2 percent to a low 0.3 percent. All in all, however, the incoming data over the past week left our forecast pretty much unscathed. I am relieved about that, because, if I do say so myself, it=s a beautifully constructed forecast. [Laughter] After all, with no further tightening of monetary policy, the economy eases into an extended period of slightly below-trend growth led by a retrenchment in the housing sector. That slower growth of activity opens a small output gap by the middle of next year but does not trigger a more precipitous cyclical contraction. Then, as the downturn in housing wanes and the associated multiplier and accelerator effects largely play out, the growth of real GDP picks back up toward potential in 2008. Meanwhile, the output gap that develops over the next year or so, in combination with inflation expectations that remain well anchored and a near flattening out of oil and other commodity prices, is projected to impart a mild tilt down in core inflation—to 2¼ percent in 2007 and 2 percent in 2008. So, what should you make of this forecast? Is it a construction as elegant and durable as say the Eiffel Tower in Paris, or is it more like the Eiffel Tower in Las Vegas—it looks pretty good a few blocks away but isn=t that impressive upon closer inspection? [Laughter] In that regard, you could not be faulted for wondering whether this forecast represents our averaging of two possibly more plausible outcomes that we simply didn=t have the courage to choose between. One view could be that this forecast is far too pessimistic. After all, our projection for growth in the second half of this year and in 2007 is now well below the consensus. Most of the available measures of aggregate activity remain solid. Real GDP is estimated to have increased 3½ percent over the year ending in the second quarter, about in line with its pace over the past several years. More recently, despite some notable month-to-month swings, manufacturing industrial production is up at a 5 percent annual rate over the three months ending in August. An even more timely economic indicator, the level of initial claims for unemployment insurance, has moved sideways through the middle of this month and does not yet suggest any inflection point in activity. Moreover, oil prices are down, the stock market is up, and financial conditions in the corporate sector remain favorable. These developments could cast doubt on our projected slowdown in real GDP. The other view might be that our forecast is too optimistic. Cyclical contractions are often precipitated by large imbalances in the economy that cause a great deal of pain and extensive damage when they get rectified. Certainly, housing is looking increasingly like a sector that could play that role. Starts and sales have dropped sharply in recent months, inventories of unsold homes are still soaring despite cutbacks in production, and prices are rapidly decelerating. This jolt is occurring while households are still dealing with the substantial hit to their purchasing power from the higher energy prices that they have encountered over the past several years. Yet all of this results, in our forecast, in only a very modest and gradual rise in the unemployment rate over the forecast period. I must admit that there were times over the past several weeks when I felt as though I=d seen this forecast before—specifically, in the summer of 1990 and in the autumn of 2000. At those times, the staff saw that forces of restraint were in place, and we projected a noticeable shortfall of growth from potential. But we failed to anticipate much in advance the impending cyclical downturn in the economy—and I doubt that we will when such an event occurs again in the future. I can assure you that we spent a great deal of time examining both of these possible critiques of our forecast, but in the end, we still view something like our projection as more likely than either of these two alternatives. So let me lay out the logic of the forecast and along the way address some of these concerns. As I noted earlier, we are now projecting the growth of real output in the second half of the year to be around 1½ percent at an annual rate, about ½ percentage point less than in the August Greenbook. The lower scheduled vehicle assemblies announced by the automakers were part of the downward adjustment. But the major source of the projected weakness in aggregate demand lies in residential construction, which is now expected to lop off nearly 1½ percentage points of growth in real GDP in the second half. If it doesn=t really feel to you like an economy that is growing as slowly as 1½ percent, there may be a good reason. Our assessment is that, except for the housing sector, the economy is growing at a pace of roughly 3 percent. So far the collateral damage from the downturn in housing has been limited, and for the most part, we expect it to remain that way, at least for a time. A pickup in nonresidential construction activity has offset some of the weakness in residential construction. Moreover, the recent declines in energy prices seem likely to cushion some of the near-term effects of the housing contraction by restoring some lost purchasing power to households and by helping to support consumer spending. With overall business sales holding up reasonably well so far, the cost of capital still low by historical standards, and financial conditions solid, outlays for equipment should move forward at a fairly rapid clip for the remainder of the year. But it seems implausible to us that the downturn in housing will not have multiplier-accelerator consequences that hold down growth going forward. Along those lines, we expect employment growth to slow more noticeably by the end of the year. Slower job gains and a further deceleration in housing wealth should damp consumer spending as we move into next year. The result is a steady, though gradual, rise in the personal saving rate over the next two years of about 2 percentage points. With the usual lags, slower growth of sales and output cause a mild deceleration in equipment spending. At the same time, fiscal policy is becoming progressively less stimulative over the forecast period. These forces are attenuated, but not offset, by the boost to spending generated by a higher estimated level of labor income and by a lower trajectory of consumer energy prices in this forecast. All told, we see these influences as likely to hold the growth of real GDP below potential over the next two years. Still, we are not anticipating the weakening in activity to cumulate into outright recession. In our forecast, the fact that the implications of the housing downturn for the broader economy are relatively limited rests importantly on two suppositions, both of which are open to question. The first is that the slump in housing produces a sharp slowdown in house prices but not a large nationwide decline in those prices. In the past, housing prices have been relatively sticky on the downside, with homeowners resisting price cuts and keeping their homes on the market longer. Our forecast envisions something similar occurring in this episode. The second assumption is that housing wealth affects consumer spending like other forms of wealth and that there are no other channels of influence of house prices and housing finance on consumption. For example, we have not incorporated any significant negative effects on consumer sentiment that might accompany a rapid deceleration of house prices. We have also made no special allowance for the decline in mortgage equity withdrawal to restrain consumption because we find the empirical evidence of such a connection to be fragile. Previous Greenbook simulations have demonstrated that turning on any of these channels would amplify the effects of a weak housing market on the aggregate economy. Their absence in our baseline forecast is one of the reasons that the economy bends but doesn=t break in response to our projected housing slump. As you know from reading the Greenbook, not all of the action was on the demand side of our forecast. In fact, we revised down aggregate supply by virtually the same amount that we revised down aggregate demand, leaving the output gap nearly unchanged from the August Greenbook. I would not be surprised if some of you were suffering a little reverse “sticker shock” from the low rates of GDP growth that we are now projecting, much of which can be traced to the downward adjustments that we made to potential output in each of the last two projections. The growth of potential is estimated to be about 2¾ percent this year and next and 2½ percent in 2008. Although we still could be characterized as productivity “optimists” with our projection of gains in structural productivity of 2¾ percent per year—a figure that is above many of the outside forecasts that we monitor—we are increasingly looking like potential output “pessimists” because of our expectation of only meager gains in available labor input. As you know, we are projecting a steepening downtrend in labor force participation and a slowing in the working-age population as the front edge of baby-boom retirements arrives late in the projection period. Our views are significantly below the consensus here. However, as we have noted in the past, if potential GDP ultimately proves stronger than we are forecasting, actual GDP will likely be stronger as well. So to a first approximation, the GDP gap and the assumed accompanying path of the funds rate would be largely unaffected by errors in our forecast of potential labor input. Much like the real side of the projection, our inflation forecast had some large moving pieces that, on net, left us pretty much in the same place as our August projection. On the favorable side of the ledger, oil prices are projected to average around $10 per barrel below our previous forecast. Taken in isolation, this development would have led us to revise down our projection of core PCE prices about 0.1 percentage point next year. But there was news on the unfavorable side of the ledger as well. On the basis of unemployment insurance tax records, the BEA revised up the growth in hourly labor compensation to an annual rate of 13¾ percent in the first quarter of the year. Once again, we are confronted with a huge difference between the signal provided by nonfarm business compensation and the employment cost index (ECI) measure of compensation, which increased at a rate of just 2½ percent in that quarter. Such wild discrepancies have led some inflation forecasters to employ reduced-form price equations that circumvent measures of labor compensation altogether. We are sympathetic to that approach, and those types of models are in our stable of forecasting equations. But we think it unwise to ignore entirely the issue of labor costs, given that they constitute two-thirds of business costs. So what do we make of this first-quarter jump in hourly labor compensation? As you know, one of the principal differences between the two major measures is that stock option exercises are included in the nonfarm business measure of hourly compensation but not in the ECI. Our colleagues at the New York Fed have been monitoring data on option exercises by company insiders, and those data suggest that an outsized jump in exercises in the first quarter probably helps to explain an appreciable fraction of the jump in hourly compensation. But that doesn=t seem to be the full story, as wages and salaries were revised up in categories, such as construction, where options probably do not figure prominently in employee compensation. In our forecast, we have assumed that stock option exercises and other nonrecurring nonwage payments provided a temporary boost to the level of income in the first quarter, about half of which will be reversed by the third quarter. What about the consequences of these higher measured labor costs for prices? Models that take the data simply at face value want to revise up the forecast of core consumer price inflation forecast between ¼ and ½ percentage point in 2007. However, these data should not be taken entirely at face value, at least as a measure of incremental business costs. As we have argued in the past, option exercises are not likely to represent a marginal cost of production and, at the very least, are probably misleading with regard to the timing of any such cost increase. Thus we have discounted the price implications of the first-quarter surge in compensation per hour, adding just a tenth to our inflation forecast for this factor. This exactly offsets the negative effects of the lower energy prices and leaves our projection of core PCE inflation unchanged at 2¼ percent in 2007. After that, a further waning of energy and other commodity cost pressures, the emergence of a small output gap, and the assumption that long-term inflation expectations continue to be reasonably well behaved cause inflation to drop to 2 percent in 2008. In that regard, the better core inflation figures of the past two months, the fall in oil prices, and the drop in various readings on inflation expectations over the intermeeting period provide us with some encouragement that inflation pressures will gradually fade over the projection period. But we would hasten to note that none of these developments cinch the case that we have turned the corner on inflation. Karen will continue our presentation." FOMC20080109confcall--13 11,MR. STOCKTON.," 2 Thank you, Mr. Chairman. Earlier today along with Bill Dudley's materials we circulated a note describing some of the revisions that we have made in our projection since the December forecast. I should caution the Committee 2 The materials used by Mr. Stockton are appended to this transcript (appendix 2). that this projection has not been the result of running the complete machinery that sits behind the staff's forecast. Rather, we've done our usual, I hope, careful job of doing the near-term adding up, and then we've used the model simulations and rules of thumb to adjust our medium-term outlook to reflect changes in the data and changes in the conditioning assumptions that we've taken on board here. That said, I do feel reasonably comfortable that what we're showing you here puts us in the right ballpark in terms of how the data and how changes in some of the major conditioning assumptions are likely to affect the forecast that we will be showing you in a few weeks. Several key features of note in this revised forecast: Growth in real GDP in the fourth quarter of last year has been revised up by a noticeable amount. However, we will revise down growth in real GDP in both 2008 and 2009 also by a noticeable amount. Unemployment runs higher throughout the projection period. Despite that higher level of the unemployment rate, total and core inflation are higher in 2008 than in our December forecast because of sharply higher oil prices incorporated in this forecast. Inflation is roughly unchanged in our 2009 projection. So let me touch briefly on each of these elements. As you can see in the table, we've revised up our estimate of GDP growth in the fourth quarter from a forecast that was basically flat at the time of the December meeting to an increase of about 1� percent at an annual rate. Much of that revision reflects the stronger retail sales data that we received shortly after the last FOMC meeting as well as the stronger consumption of services that we received in the personal income release late last month. In addition, the incoming data on construction put in place for November were much stronger than we anticipated for nonresidential structures and for state and local construction. Not all the data that we've received, however, have been on the positive side. Housing continues to outflank us on the low side. Both starts and permits for November came in well below our forecast, and sales of new homes were much weaker than we'd expected. We now think the trough in housing starts, which we still see as likely to occur in the first half of this year, will be deeper than our previous forecast and by a considerable amount--nearly 10 percent deeper is what we've built into this revised provisional forecast. The other major negative surprise was the employment report for December. Private payrolls contracted by 13,000 last month. We'd been expecting an increase of about 50,000. Moreover, the unemployment rate jumped 0.3 percentage point in December. That increase was certainly eye-catching from our perspective. As we noted in the handout, higher average hourly earnings offset the weaker employment so that the labor income actually is not too much different than we had expected at the time of the December forecast. Still the labor market appears to us to have softened noticeably last month, and we've taken signal from that and revised down expected employment growth going forward. Our forecast for economic growth in the first quarter is unrevised at an annual rate of � percentage point. We do carry a little more momentum in consumer spending and a little more momentum in nonresidential structures into the first quarter, but that is offset by the substantial downward revision that we're making to the housing forecast. Beyond the near term, we've had a lot of negative influences to contend with. I've already noted that we've taken down our housing forecast. That revision alone was sufficient to knock another tenth off GDP growth in 2008, bringing the total subtraction of housing from GDP growth in this projection in 2008 to � percentage point. Oil prices are about $6 per barrel higher on average than was incorporated in our December forecast. The impact of those higher oil prices on purchasing power and consumption are large enough to reduce projected GDP growth in both 2008 and 2009 by a tenth each year. I should note that households are on the verge of experiencing another stiff increase in gasoline prices over the next couple of months, and households are probably not yet aware that that's on the way, except for those that actually follow oil futures markets--I assume that's a relatively small group. We've lowered the path for equity prices by 7 percent in this forecast. About half of that revision reflects the change that occurred since we put the December Greenbook to bed. The forecast that I circulated today doesn't include yesterday's decline or today's increase. We basically used Monday's close. The other half of the decline in equity prices that we've built into this baseline forecast currently reflects the fact that, for purposes of this provisional forecast, we made no change in our assumption about the path of the federal funds rate from our December Greenbook. Obviously, the December path assumed no change in the funds rate at the January meeting. That would come as a significant disappointment to the markets, and by our normal calibration, we estimate it would take about 3� percent off the level of equity prices going forward. So that gets us to the 7 percent. House prices have come in a touch lower than we had forecast. We have also lowered our projection on the level of house prices about 1 percentage point in this forecast. Taken together, those lower equity prices and the lower house prices take 0.1 off growth in 2008 and 0.2 off GDP growth in 2009. Turning to the labor market, the jump in the unemployment rate in December in combination with our weaker outlook for growth in real GDP going forward has led us to raise our projected level of the unemployment rate to 5.2 percent at the end of 2008 and 5.3 percent at the end of 2009. As for prices, the recent news on inflation has been disappointing. Total and core PCE prices came in above our expectations in November. As can be seen in our table, we've raised our estimate of total PCE price inflation in the fourth quarter to 4 percent, and we've increased our estimate of core PCE price inflation to 2.7 percent. Both those figures are � percentage point above our estimates in December. Some of the upward revision in the core price measure is due to higher figures for nonmarket prices, but market-based prices were higher than we had expected as well. Going forward, the higher oil prices that I referenced earlier also leave a clear imprint on projected inflation. We've raised our headline price inflation to 2.4 percent in 2008, up 0.4 percentage point from our previous projection. With energy prices expected to edge off in 2009, total PCE inflation recedes to 1.7 percent. For core inflation, we've added 0.1 percentage point to our projection this year, reflecting the indirect effects of higher energy prices. Our forecast for core inflation in 2009 is unchanged. Some lingering indirect effects from higher energy costs are offset in this forecast by a wider margin of slack in resource utilization. Let me just say a few words about how the risks to the forecast have changed. I believe that the adjustments that we have made to this provisional forecast actually are quite reasonable in light of the developments and the data that we have been contending with, but I'd have to admit that the downside risks to our projection have become more palpable to me. Despite a year of nearly continual downward revision, we just can't seem to get in front of the contraction in housing. The steep descent in sales and construction of new homes has not let up, and there seems to me to be more downside risk than upside risk to our house-price projection. Another area of concern would be the recent readings on the labor market, which have been very soft. Although quite volatile on a week-to-week basis, initial claims for unemployment insurance and insured unemployment have been trending up. Moreover, both the payroll survey and the household survey deteriorated noticeably in December. As I noted earlier, private payrolls contracted last month, and a jump of 0.3 percentage point in the unemployment rate in a single month is rare, though not unprecedented, outside of recessions. The steep decline in the manufacturing ISM in December was both unexpected and of a magnitude well outside the normal volatility in the data. The drop in consumer confidence has pretty much matched our expectations, and it didn't continue to worsen in December; but the total drop that we have seen in recent months is similar to drops seen before previous recessions. Any one of these indicators taken by itself would not be especially troubling; but taken together, they certainly deserve attention. We are not ready to make a recession call yet. The spending data still have exceeded our expectations by a noticeable margin, especially consumer spending. Motor vehicle sales at a 16.2 million unit rate in December certainly don't look like a recessionary development, and business spending has slowed but certainly not slumped thus far. Furthermore, the anecdotes--at least my read of the anecdotes--still seem more consistent with the weak economic growth that we are projecting rather than outright contraction. But at this point we do feel as though we are on very high alert. I'd be happy to take any questions from members of the Committee. " FOMC20071031meeting--17 15,MR. STOCKTON., Thinking about our forecast as a modal forecast is correct. FOMC20060920meeting--60 58,MS. JOHNSON.," In the international economy, the striking development over the intermeeting period has been the rapid and substantial drop in crude oil prices and in prices for some nonfuel commodities. The spot price of WTI crude reached a recent high of about $77 per barrel on August 7, following news of problems with the BP pipelines at Prudhoe Bay. Since then, it has declined to less than $62 in trading yesterday, decreasing about $15 per barrel. The far futures price is down somewhat less, nearly $10 per barrel, leaving a barrel of WTI crude for delivery in 2012 priced about the same as a barrel of crude in the current spot market. As has been our practice for many years, we have assumed for the Greenbook baseline forecast that oil prices over time will match those contained in the futures price curve that held when we finalized the forecast last week. The timing of our forecast this Greenbook and last and the smoothing from quarterly averaging results in our forecast path for the oil import price shifting a bit less than did the spot price of crude. The downward revision in the oil import price amounts to nearly $12 per barrel in the near term and narrows to somewhat more than $8 per barrel by the end of 2007. Some other commodity markets were remarkably volatile over the intermeeting period as well. The spot prices for gold declined more than $60 per fine ounce since the time of the August FOMC meeting. Many of the industrial metals also moved down sharply in the past week or two, but in some cases these declines merely retraced run-ups earlier in the intermeeting period and resulted in only small net changes. Regarding the implications of the lower oil prices for our forecast, it is helpful to remember that our assumed price for WTI crude in the fourth quarter is near, but still more than $1 per barrel above, the average price that prevailed in the first quarter of this year, when we regarded oil prices as very elevated. In addition, the forecast path for WTI now rises into 2007 and then is about flat at close to $70 per barrel through the end of 2008. It also is relevant for constructing the forecast to ask why oil prices have come down as they have. The new developments that triggered the reaction in market prices seem to be importantly about the risks attached to future supply. Some aspects of geopolitical tensions, such as the conflict in Lebanon and the ongoing dispute with Iran over its nuclear program, seem to have eased. The Atlantic Ocean hurricane season has pleasantly surprised, with fewer storms than previously expected and none so far threatening the Gulf of Mexico. One factor that likely influenced the price reaction to the apparent lessening of risks to supply is the high level of inventories of crude oil at the present time. Current demand and supply plus market expectations of future demand and supply combine to determine spot and future prices plus desired inventories. With inventories already high, news that future supply is less uncertain sharply lowered the price required to clear the spot market and the premium that buyers are willing to pay to ensure future access to oil. Nevertheless, the positive slope to the futures curve over the forecast period suggests that, on balance, market participants are not expecting future supply to be as abundant relative to demand as is the case currently. With respect to the implications for our forecast of foreign growth and inflation, we needed to consider the direct effects of lower energy prices and also to ask whether actual or prospective slowing of global economic activity and, hence, demand for oil and other primary commodities have contributed to the downward shift in these prices. On balance, our outlook for real GDP growth abroad generally remains quite strong. However, we do expect a decrease in the average rate of growth of foreign real GDP from about 4 percent at an annual rate in the second quarter to 3¼ percent in the second half of this year and over the remainder of the forecast period. In both the industrial countries and the emerging-market economies, the pace of real growth was particularly vigorous during the first half of this year and contributed to continued strong demand for oil and other commodities. Monetary policy has been tightened in response to concerns of inflation and overheating in many countries, measures to tighten fiscal policy have been passed in some cases, and officials in China have imposed additional administrative measures to restrain growth. Prospective moderation of the rate of foreign growth was a feature of our forecast in August. Data from Canada and Japan already provide evidence of a lessening in the rate of growth in those countries. However, available data on activity in the euro area, China, and Mexico continue to be buoyant. In putting the pieces of the forecast together, we have concluded that the lower oil prices are consistent with overall foreign growth remaining moderately strong and will help to ensure that it remains so. At the same time, the projected pace of global economic activity is consistent with oil prices remaining quite elevated and rising somewhat into next year. We judged that the implications for foreign growth of the downward revision to the outlook for U.S. real output growth were partly offset by some boost to foreign growth that we otherwise would have incorporated in response to the reduced energy costs, although these factors differ across countries. As a result and given data received since the August forecast, the path for foreign real GDP growth was little revised on balance from that in the previous Greenbook. We have revised down our forecast for headline consumer price inflation abroad a few tenths for the second half of this year and next as a consequence of the lower path for energy prices. We project that in the industrial countries other than Japan inflation will move down somewhat over the forecast period. In contrast, Japanese inflation is expected to edge up but to remain below 1 percent. Some emerging-market economies in Asia still have controls on or subsidies of domestic fuel prices, which delays any pass-through of higher energy prices into domestic inflation. Accordingly, we project that increases in global oil prices earlier this year will push inflation in emerging Asia temporarily above 3 percent during the first half of next year. We look for inflation in Latin America to remain contained near present rates. We see the risks to this forecast in many respects as balanced. We have been surprised on the upside by the strength in foreign real activity during the first half of the year, and strong domestic demand in some regions could push off into the future some of the slowing that we are projecting. Alternatively, foreign activity may be more sensitive to the U.S. slowdown than we currently envisage. We feel especially uncertain with respect to the outlook for oil prices, given market reaction to recent events; the sharp change in prices caught us and the futures market by surprise. Although we are once again assuming that oil prices will follow the path implied by futures prices, we recognize that a much larger move up or down is quite possible. David and I will be happy to answer any questions." FOMC20060328meeting--119 117,MR. STOCKTON.," Well, in fact, we’re forecasting a recovery. We’ve been forecasting a recovery for the last year and a half that hasn’t happened yet. I actually don’t view us as being terribly pessimistic in that regard. We’re forecasting an upturn after a long period of disappointing, sluggish performance on that side. So I guess I’d characterize our forecast as somewhat optimistic relative to where we’ve been over the past two years." FOMC20060328meeting--51 49,MR. STOCKTON.," I will start out with the gap. Indeed, we have been surprised by the strength in the nonmarket component of PCE prices, and in this forecast round, we revised up our implicit projection for that component going forward. Over the next two years, we are looking at a gap that is expected to narrow from where it was, and it is more likely to be ¼ percentage point or so. And, as you know, we do not have a good model for the nonmarket component of core PCE. So much of what we are doing is trying to gauge what that gap has been and where it will be, rather than modeling it on the basis of an economic behavioral set of equations. Thus I would suggest that we have had in our own minds a slight recalibration of that gap in the direction that you were suggesting, at least for the next two years." CHRG-110hhrg46594--344 Mr. Wagoner," That was an industry forecast, U.S. industry forecast, light vehicles, yes. " FOMC20070628meeting--126 124,MR. LOCKHART.," Thank you, Mr. Chairman. I would like to speak earlier next time, so I don’t have to give credit to so many of the previous speakers—[laughter] including President Poole, who really said a lot of what I have to say. There wasn’t much change in the Sixth District economic picture during the intermeeting period, particularly regarding things that are relevant to the national outlook. So I am not going to devote a lot of time to discussing across-the-board conditions in the District. My staff’s outlook— and my outlook—for the national economy doesn’t differ much from the Greenbook analysis and forecast, so I also won’t detail small differences between those two forecasts. The Greenbook outlook reflects the baseline expectation of a diminishing drag on real growth from residential investment. Since our forecast largely agrees with the Greenbook, we obviously see the most likely playout of the housing correction similarly. However, as suggested in the Greenbook’s first alternative simulation, we may be too sanguine. I think this is really President Poole’s message about a recovery in the housing sector. That is to say, the downturn in residential investment will be deeper and more prolonged and possibly involve spillovers. So I would like to devote my comments, in a cautionary tone, to this particular concern. Credit available for residential real estate purchases is contracting, and the credit contraction, specifically in the subprime mortgage market, has the potential to lengthen the transition period required to reduce housing inventories to normal levels. This tightening of credit availability, along with higher rates, may affect the timeline of the recovery. One market of concern is the starter home market. The subprime mortgage market has been a major credit source for first-time homebuyers—although, as has been mentioned earlier, subprime mortgages are a small portion of the aggregate stock of mortgages. Subprimes were 20 percent of originations in 2005 and 2006, and if you added alt-A nonprime mortgages, you would get 33 percent of originations in the past two years. In many suburban areas, like those around Atlanta and Nashville in my District, much home construction was targeted at first-time buyers. We have heard anecdotal reports from banking and real estate contacts in our region that tighter credit conditions have aggravated the already sluggish demand for homes. The country’s largest homebuilder—there may be a debate with President Fisher—[laughter] so one of the country’s largest homebuilders, headquartered in Miami, reported on Tuesday a 29 percent drop in homes delivered and a 7.5 percent drop in average prices. But that is combined with a 77 percent increase in sales incentives. They attribute their negative sales experience to rising defaults among subprime borrowers and higher rates. That company’s CEO said that he sees no sign of a recovery, and he provided guidance of a loss position in the third quarter. Because of the major role that homebuilding—and, I might add, construction materials, particularly in forest products—plays in the Sixth District economy and because of some tentative signs of spillover, we will continue to monitor these developments in our District very carefully. As I stated at the outset, we share the basic outlook described in the Greenbook, but observation of the housing sector dynamics in the Sixth District has raised our level of concern that the national housing correction process may cause greater-than-forecasted weakness in real activity. If that is the case and inflation gains prove transitory, as suggested in the Greenbook commentary, we may be dealing with a far more challenging policy tradeoff than we are today. Thank you, Mr. Chairman." FOMC20081029meeting--211 209,MR. LACKER.," Thank you, Mr. Chairman. Business and consumer sentiment in the Fifth District has deteriorated markedly. Even though economic conditions were already decelerating heading into our September meeting, a discrete shift in outlook seems to have occurred. It seems to me to have originated during the week of September 15 or shortly thereafter. Our business contacts express anxiety about the national economy, and they express uncertainty about the meaning for their firms' prospects of the astonishing sequence of events that began unfolding that week. Both consumers and firms have been increasingly unwilling to make long-term commitments and engage in discretionary expenditures. Consumers are delaying large and discretionary expenditures. Firms have adopted a wait-and-see attitude on investments. Our regional survey released this morning shows a substantial drop in business conditions as well. Our business survey respondents report that obtaining business loans is more difficult than three months ago, and there are widespread reports of lenders tightening credit terms and seeking to reduce exposures. Most respondents, however, also indicated that they would still be able to satisfy their borrowing needs. When you listen to bankers, they will tell you that they are tightening standards, but they also report that they are still extending credit to solid borrowers with high-quality deals. I find it difficult right now to pin down the real effects of the financial market turmoil of the last few weeks. As the Greenbook notes, assessing such effects ""poses significant identification challenges."" Specifically, it is hard to disentangle the effects of the increased cost of bank capital from those of the deterioration in the economic environment facing borrowers. Personally, I suspect the latter are playing the more prominent role in the tightening of credit terms right now. Looking on the bright side, the near-term inflation picture has eased noticeably since our September meeting, mainly because of the decline in oil and other commodity prices. The Greenbook carries this moderation into its long-term forecast, where PCE inflation now converges to 1 percent in 2013. I did a double-take when I saw that--it had me wondering whether the Greenbook was ghost-written this month by President Plosser. [Laughter] Whoever's forecast it is, the longer-term projected moderation in inflation relies heavily on the opening-up of a large and persistent output gap. In the current circumstances, I am not sure how plausible that story is. In particular, I have been struggling with how to think about the effect of credit market disruptions on the concept of potential output. To the extent that we think of these disruptions as analogous to shocks to intermediation technology--and that is what the models of these kinds of credit channel effects generally tell you to do--it seems to me that we should see them as pulling down potential as well as actual output. I believe this point has been made at previous meetings. We have also talked before about the tenuous nature of the Phillips curve relationship, and it is difficult to forecast. The slope is sort of flat. We had been scheduled to discuss inflation dynamics, and we postponed that, for good reasons I believe. I hope we can get back to it soon because I think it's going to be relevant to how we see our way through this. In any event, I think we should be careful not to be overly optimistic about the forecast of an inflation decline driven by a large output gap. The shift in the Greenbook's long-term inflation projection is noteworthy for another reason, I believe. We are getting closer to a 1 percent target federal funds rate, and we may actually reach 1 percent at some meeting soon. The last time this happened it sparked a widespread discussion of and concern about the zero lower bound on nominal interest rates. I want to make a couple of related observations. First, a key to conducting monetary policy at the zero bound is being able to keep inflation expectations from falling and thereby increasing real interest rates. From this perspective, the revision of the Greenbook's forecast from 1.7 percent one meeting ago to 1.0 percent for five-year-ahead inflation implies that we run a monetary policy regime in which five-year-ahead expected inflation varies pretty significantly in response to contemporaneous shocks. I don't think that variability in long-run inflation projections can help our ability to manage inflation expectations at the zero bound. We'd be better if we ran a policy in which long-run expected inflation was more anchored, more stable. You can tell where I'm going with this, I'm sure. This highlights the value of an explicit inflation objective as well as the value of being able to communicate clearly about how we view the functioning of monetary policy at the zero bound. Second, I will just note briefly that the economics of monetary policy at the zero bound are closely related to the economics of paying interest on reserves at close to the target rate. In fact, if I'm not mistaken, they are virtually identical. I think progress on both fronts would be useful right now. Finally, let me just comment on financial market conditions. My sense is that what the public has seen--the large failures, the variety of resolution techniques, the deliberations leading up to the Congress's adoption of the bill it adopted--taken together have added up to significant pessimism on people's parts and have altered optimal strategy for a lot of financial institutions. So I think that is altering how people allocate portfolios and has led to further volatility in certain markets. It has led some institutions to adopt a wait-and-see attitude, to see how particular programs are going to be implemented. I think that we are seeing at least some dead-weight loss associated with the burdens of shifting financial flows between things that are covered and things that aren't and we are seeing a good deal of rent-seeking behavior as well. What we are seeing is going to have the effect of masking the evolution of underlying fundamentals. It is going to make it harder to see our way through this and understand just what is happening. I think that is going to be a thicket that we will need to cut through in the months ahead. That concludes my comments, Mr. Chairman. " FOMC20081007confcall--67 65,MR. RASCHE.," It is not desirable to implement a reduction in the intended funds rate at this time. First, intermeeting actions should be reserved for those few instances in which significant unforeseen developments with predictable consequences for the economy occur. The current situation is highly volatile and unsettled. Clearly financial markets are experiencing great turmoil. However, we have established new risk facilities to address liquidity issues, including new facilities in the past two days. The outlook for economic activity in the second half of 2008 has deteriorated. It is likely that this period eventually will be labeled a recession. Probably the extent of the weakness is not apparent at this time. The revised forecast from the Board's staff as of last Friday is for real GDP to be essentially flat for the current and final quarter of 2008. The Macro Advisers forecast from last weekend has flat GDP for the third quarter and a 2 percent annual rate of decline in the fourth quarter followed by weak but positive real growth in the first half of 2009. While the uncertainty surrounding these forecasts may be greater than in a typical environment and while a good case can be made that the risk to the forecast is weighted to the downside, there's still a significant probability that any recession will be quite mild. We have acted preemptively, aggressively, and unilaterally since the beginning of the year against the risk of an economic slowdown. We can afford to be patient until we have more information and can better assess the impact of recent financial market events on the real economy. Second, a rate cut at this time carries downside reputational risk. After the decline in equity prices over the past ten days, an action today could be perceived as an effort to shore up those markets. Whether we like it or believe it, a significant population is convinced that we set policy to provide a ""Greenspan put"" for the markets. A rate action under current conditions could reinforce that perception. If there is a dramatic market rally before the next scheduled meeting, would we entertain a reversal of any actions taken today? Worse, if equity markets continue to slump between now and the end of the month, would we entertain additional rate cuts solely for that reason? At this point it's too soon to realize any impact of the TARP. The idea of a ""Wall Street bailout"" is not universally popular, and commentators and pundits are already questioning whether it will succeed. A rate action today carries the risk that the Committee will be perceived as questioning whether the TARP can achieve the desired results. Finally, an action today could be interpreted as a lack of confidence on the part of the Committee in the efficacy of various liquidity facilities that have been announced or enhanced in the recent past. Thank you. " FOMC20070918meeting--54 52,MR. MADIGAN.,"2 I will be referring to the table in the package labeled “Material for FOMC Briefing on September Trial-Run Projections.” I will first focus on the near term. The upper panel of the table shows the forecasts for the second half of the year that are implied by the estimates that you submitted for the first half of 2007 and your projections for the year as a whole. Participants revised down their expectations for real GDP growth in the second half of 2007 by several tenths of a percentage point. Most of you cited the steeper-than-expected downturn in housing markets and tighter credit conditions as key factors. The downward revision to output growth was accompanied by a slight upward revision to the unemployment rate. Your forecast for total inflation in the second half of this year was revised down noticeably, but the central tendency for core inflation was unrevised. Almost all of you conditioned your outlook on near-term monetary policy easing. A slight majority characterized the Greenbook’s assumption of a 50 basis point near-term reduction in the target funds rate as appropriate monetary policy, but almost as many think a somewhat larger cumulative decline will prove appropriate. The lower panel shows your annual forecasts. The central tendency for GDP growth in 2008 was revised down about ¼ percentage point and now centers on about 2¼ percent rather than 2½ percent. The central tendency for the unemployment rate at the end of the year revised up 0.2 percentage point. Your total inflation forecast for next year edged down 0.1 percentage point, but the central tendency of your core projections was unchanged. You also again characterized your views of uncertainty relative to historical norms and skews. Those views presumably apply primarily to the relatively near term outlook. Most of you again see risks to growth as tilted to the downside. In contrast, almost all of you now see inflation risks as roughly balanced rather than as tilted to the upside. A majority of you judge that the uncertainty attending the prospects for economic activity is greater than has been typical in the past. Looking further ahead, the projections for 2009 changed little. For the first time, you submitted forecasts for 2010. The forecasts for those years and your commentary suggest that most of you see actual and potential GDP growth over that period at around 2½ percent, a bit above the staff’s estimate. The unemployment rate hovers just below 5 percent. (Let me note at this point that in the table there is a typo in the 2009 column for the unemployment rate. The central tendency of August projections should read 4.7 to 5.0 percent.) With the unemployment rate just a bit above the 4¾ percent that a number of you have identified as your estimate of the NAIRU, both core inflation and total inflation are expected to edge lower in the out years—at least if you squint hard and focus particularly on the lower bound of the central tendencies. [Laughter] Your forecasts for core and total inflation in 2009 are essentially unrevised—not surprisingly, if you view those forecasts as reflecting to an important 2 Materials used by Mr. Madigan are appended to this transcript (appendix 2). degree your longer-run objectives. The relatively narrow central tendencies and ranges for total and core inflation in 2009 and 2010 suggest substantial agreement in your views on this score. That concludes our presentation." FOMC20051101meeting--98 96,MS. JOHNSON.," Let me make one point, if I may. We have wrestled with the notion of what constitutes a neutral assumption about the exchange rate, and it is not obvious because we know that the forward rates implied by interest rate differentials are very, very poor forecasters. Everybody November 1, 2005 25 of 114 forecast—does not seem attractive to us. But the alternative is an approach that is kind of “consistent with the other pieces of the forecast and neutral.” It’s a tough call. We have clung to something that is close to, but not exactly, the random walk version of things for a while now. We certainly don’t see our exchange rate forecast as having a determining effect such that we’re driving the forecast by making this assumption. We try not to do that." FOMC20080916meeting--118 116,MR. HOENIG.," Mr. Chairman, I see no reason to focus on the details of the forecast. Clearly, the economy is under stress, both as we look at the economic growth forecast and as we look at the inflation forecast. So I recognize the amount of stress we are under here. I would say to you, in dealing with that stress, I am fully supportive of the actions that we take in terms of liquidity--the TAF and the other efforts to provide liquidity into the market. These are tools that we can and should use for these kinds of shocks in a short-term context. On the other hand, I would encourage the Committee to resist the impulse to ease policy in a sense of doing something. The issue is not the level of our policy rate at this time. It is the dysfunctioning of the markets that we hope our liquidity efforts will help address. To begin to talk about easing or even to put language in there that suggests easing is to cause people, on the expectation that we might ease at some point even if we hold off now, to delay decisions that they would otherwise make that would benefit the economy. I also encourage us to look beyond the immediate crisis, which I recognize is serious. But as pointed out here, we also have an inflation issue. Our core inflation is still above where it should be. Headline inflation has been up, even though there are some signs that commodities and energy are backing off. But the businesses themselves are saying, ""How do I recover my margin?"" So there is no impulse to pass along those reductions. We talk about wages and labor backing off. But they are holding off, they are not backing off, and in negotiations they are much more antagonistic. Those kinds of pressures will emerge at some point. Those are the longer-run issues that I think we need to keep in mind as we deal with this immediate crisis. So I would strongly encourage us to leave rates where they are, to be very careful with our language, not to encourage the expectation of further rate decreases, and to continue to be aggressive in our liquidity provisions as we have been the last several weeks and months. Thank you. " CHRG-110hhrg34673--164 Mr. Bernanke," Well, it is certainly true, as they say, that immigrants built the country. All of my grandparents were immigrants, and they came and they had new lives, and they contributed to our economy. So immigrants have played, historically, a very important role in U.S. economic development. I agree with you that they do not take jobs, and the labor market does adjust to the number of people available to work. We have had a lot of immigration. The unemployment rate is quite low. It is somewhat more controversial. Do they affect wages? One concern that some people have had is that because many of the more recent immigrants have relatively low skills that they compete, to some extent, with low-skilled workers in the United States and may have some effect on their wages. Most estimates are that those are pretty small effects, but there may be some effects. So I certainly agree that immigrants have played a big role. They continue to play a big role, and we need to have a national policy on that. I think I would stop short of recommending a specific program. This is a very tough issue and one I think Congress really has to take the lead on about how many people and under what conditions we admit, but it is certainly the case today that immigrants are playing a major role in our economy. There is no question about that. " FOMC20070131meeting--435 433,MR. POOLE.," I think that the longer the forecast period and the more that it is a Committee forecast, the more likely it is that the FOMC may get pulled into that argument— whether we’re on this side or that side of the argument. I just raise the question because we ought to be sure we’re clear about that before we make our own forecast period too specific and too long." FOMC20071031meeting--14 12,VICE CHAIRMAN GEITHNER.," Dave, this is about the Greenbook forecast—I was going to say existentialism, but I am not sure that is quite right. [Laughter] Dave, is the Greenbook forecast something we should view as a modal forecast, as I think you implied, or the expected value of the range of plausible scenarios that might have—" CHRG-110hhrg38392--120 Mr. Bernanke," Well, as I was indicating before, what a superstar baseball player makes does not necessarily affect me. But even putting that aside, it is important that the mass of people see improvements in their living standards. That is very important, and I know of no other approach other than trying to make our economy more productive for the broad swath of society, and that involves research and development, education, saving--it involves doing all of the things that make an economy strong. Congress has a tremendous role here in making good economic policies that will strengthen our economy and will allow the benefit of that economic growth to be spread more widely. " FOMC20060920meeting--103 101,MR. STOCKTON., In some sense our forecast is below our models. Our models still say that the fundamentals in terms of cost of capital and income are reasonably supportive of residential investment. We thought we actually created some possibility of upside surprise with our forecast as well and not just downside in the adjustments that we made to our forecast. FOMC20081029meeting--165 163,MR. MADIGAN.," 5 I will be referring to the separate package labeled ""Material for Briefing on FOMC Participants' Economic Projections."" Exhibit 1 shows the central tendencies and ranges of your current forecasts for 2008; corresponding information about the Committee's most recent projections, those from June, is shown in italics, and Greenbook projections are included as a memo item. Your June projections regarding GDP growth and inflation for the first half of 2008 turned out to be quite close to subsequent BEA data releases; therefore, the revisions in your 5 The materials used by Mr. Madigan are appended to this transcript (appendix 5). projections for the year as a whole are almost entirely due to the changes in your implicit projections for the second half of 2008. As shown in the right column of the top panel, your GDP growth forecasts for 2008:H2 now range from minus 2� percent to minus � percent; compared with June, each of you has marked down your projection for second-half growth by at least 2 percentage points. As shown in the second panel, your forecasts of the fourthquarter average unemployment rate fall in a range of 6.3 to 6.6 percent, more than � percentage point higher than in June. In accounting for the sharp deterioration in the near-term outlook for activity, your narratives point to the intensification of the financial crisis and its impact on credit conditions and stock market wealth as well as the weakness of incoming data on consumer spending and labor market conditions. Your assessments of inflation in 2008 have also shifted significantly since June. The central tendency of your forecasts for overall PCE inflation during 2008:H2 (the right column of the third panel) is now about 1� to 2� percent, a drop of about 2 percentage points from June. In this regard, a number of you noted the implications of recent sharp declines in energy and commodity prices that were apparently triggered by the worldwide slowdown in economic activity. In contrast, your projections for core PCE inflation in 2008:H2 (the right column of the bottom panel) are a notch higher than in June. Exhibit 2 reports your projections for the next three calendar years. Most of you anticipate little or no GDP growth during 2009; as with your implicit forecasts for the second half of 2008, these projections are about 2 percentage points lower than in June. A few of you are projecting even weaker outcomes, with output declining about 1 percent, whereas a few others are projecting stronger economic growth of about 1� to 1� percent. The width of both the ranges and the central tendencies of your projections for real GDP growth for 2009 and 2010 has increased noticeably. Still, all of you anticipate that economic expansion will resume by 2010, and most of you expect a further pickup in growth during 2011. In the narratives accompanying these projections, a number of you said that you expect the pace of recovery to be damped by persistent credit market strains, ongoing adjustment in the housing market, and economic weakness abroad. Apparently, only a few of you assumed that additional fiscal stimulus would be enacted. Most of you project that the unemployment rate will peak at around 7 to 7� percent in 2009 and decline gradually over the subsequent two years. However, you generally expect that, even by the end of 2011, the unemployment rate will still be at or above 5� percent. Moreover, most of you anticipate that the unemployment rate in 2011 will remain well above your own projections of the longer-run unemployment rate that were provided in your trial-run submissions. The central tendency of your projections for overall PCE inflation is about 1� to 2 percent for 2009 and about 1� to 1� percent for 2010 and 2011--roughly the same as for your forecasts of core PCE inflation. About half of you projected inflation rates in 2011 close or identical to your own individual assessments of the rate of inflation consistent with Federal Reserve's dual mandate for promoting price stability and maximum employment, where we have again judged the latter from your longerterm trial-run submissions. But half of you are projecting that inflation in 2011 will be below your own individual assessments of the mandate-consistent inflation rate by about � to � percentage point, and in one case, by more than 1 percentage point, mainly reflecting the lagged effects of weak economic activity and the relatively sluggish pace of recovery. In your forecast submissions, several of you indicated that the appropriate path of monetary policy would involve less near-term easing than assumed in the Greenbook, and more than half of you expressed the view that policy tightening would need to occur several quarters earlier and at a substantially more rapid pace than in the Greenbook. Exhibit 3 presents your views on the risks and uncertainties in the outlook. As shown in the top left-hand panel, all of you now see uncertainty about growth as elevated relative to historical norms. As shown to the right, most of you continue to perceive the risks to growth as weighted to the downside even with the downward revision in your modal projections. Several of you pointed to the possibility that financial market turmoil might not subside as quickly as anticipated and to significant risks of an increasingly negative feedback loop between credit markets and economic activity. As shown in the bottom left-hand panel, most of you also continue to see an elevated degree of uncertainty about inflation. In June, most of you judged the risks to the inflation outlook as skewed to the upside, but as shown to the right, nearly all of you now see the risks to the inflation outlook as either balanced or tilted to the downside. Exhibit 4 summarizes the results of the trial run on longer-term projections. These projections were intended to represent values to which variables would converge over time, say five to six years ahead, under the assumption of appropriate monetary policy and in the absence of any further shocks. For real GDP growth, your longer-term projections have a central tendency of 2� to 2� percent and a range of about 2 to 3 percent. For the unemployment rate, your longer-run projections have a central tendency of 4� to 5 percent and a range of about 4� to 5� percent. For both variables, the central tendencies are very similar to those of the projections for 2010 that you made in October 2007, shown in the bottom panel, a point at which many of you viewed the modal outlook for 2010 as being fairly close to the balanced growth path of the economy. For PCE inflation, your longer-run projections have a central tendency of about 1� percent and a range of 1� to 2 percent. The range of these projections is identical to the range of two-year-ahead inflation projections that you made last October; the minutes from that meeting indicated that those projections were influenced importantly by your judgments about the measured rates of inflation consistent with the Federal Reserve's dual mandate of promoting price stability and maximum employment. The request for the trial-run projections suggested that convergence might typically occur over a period of five to six years. One of you noted that the convergence process this time will likely occur over an even longer period because of the severity of the economic crisis. However, apparently most of you thought that convergence would occur sooner than that, suggesting that the configuration of this trial run produces a good representation of FOMC participants' views of the steady state values of GDP growth, unemployment, and inflation. As usual, the staff will be preparing a summary of economic projections (SEP) and will be circulating drafts to you over the next few weeks along with drafts of the minutes. The published SEP, and hence the drafts, will not incorporate the longerterm projections from the trial run. The staff will provide to you separately a version of the SEP that has been modified to incorporate the longer-term projections generated by the trial run. The subcommittee will consult with the Chairman about next steps. One possibility would be for the Committee to discuss experience with the trial run at its December meeting and make a provisional decision at that time as to whether to proceed in January with regular longer-term projections; a final decision could be made in January. Thank you. That concludes our presentation. " FOMC20080318meeting--37 35,MR. STOCKTON.," Thank you, Mr. Chairman. As you know, we have made some very large changes to the economic projection in this round--so large, in fact, that we had to adjust the scale on the forecast evolution charts that we put in the back of the Greenbook. Obviously, the most notable change has been our adoption of the view that the economy is moving into recession. I thought it would be helpful to briefly review this morning our reasons for making that call at this time. In addition, I will lay out the rationale for the depth and duration of the weakness in real activity that we are now projecting. Finally, I will explain why, with so much more projected slack in resource utilization, inflation has, on average, been revised up from our January projection. We have noted on several occasions in the past few months that our decision to stick with a forecast in which the economy muddles through its current difficulties without falling into recession was a close call. Well, over the intermeeting period, we continued to accumulate a bleak array of economic indicators. Consumer confidence moved still lower and, in the case of the Reuters/Michigan measure, dropped to levels last registered in the early 1990s. Regional indexes of business sentiment continued to deteriorate noticeably, with steep drops in the measures reported for New York, Chicago, and Philadelphia. Although the weakness was less pronounced in the national ISM surveys, the composite indexes for both manufacturing and nonmanufacturing were below 50 in February. Small businesses--as reported in the survey conducted by the National Federation of Independent Businesses--and larger businesses--as captured by the Duke University Survey of Chief Financial Officers-- have turned very pessimistic. These indicators taken alone, or even in limited combination, might not be that troubling. But when viewed as a whole and especially when taken in conjunction with the many financial indicators that have been flashing recession signals for some time, the pattern of recent readings is disturbing. Furthermore, recession signals are no longer limited to surveys and financial indicators. Private payroll employment is estimated to have dropped 101,000 in February, and there were sizable downward revisions to earlier months that left employment showing declines in both December and January. Industrial production dropped 0.5 percent in February, and manufacturing IP fell 0.2 percent. The weakness in industrial production occurred not only in the series in which we use production worker hours to estimate output but also in series where we have measures of physical product. For both payroll employment and industrial production, diffusion indexes indicate that the weakness has been spread widely across industries. This morning's data on housing starts also suggest little end in sight to the ongoing recession in housing. Single-family starts fell more than 6� percent, to 707,000 units, in February, and permits dropped a similar amount. Both figures were very close to our expectations. Multifamily starts moved up to 360,000 units, but that figure follows some low figures late last year, and we wouldn't attach much signal to that reading. Moreover, while I certainly am not going to try to predict what the NBER will ultimately do, a number of the series consulted by the dating committee appear to have peaked late last year or early this year--at least on the currently published data. Real personal income, industrial production, payroll employment, and real manufacturing and trade sales all have local peaks sometime between October and January. All told, the evidence of a serious weakening of the economy appears to us more palpable now than it did in January. If one grants that the economy, from time to time, exhibits nonlinear behavior, then our forecast will need nonlinear changes to avoid making outsized errors. At this point, we've seen enough to make us think that recession is now more likely than a period of weak growth, and that is what we are forecasting. But having made that discontinuous change to our projection, I want to impress upon the Committee just how much this remains a forecast of recession; a lot has to happen that we haven't seen yet to be confident of this call. Indeed, there are several reasons to be skeptical that we have transitioned into recession. One striking feature of several surveys of business sentiment is that businesses appear more pessimistic about the overall economic picture than they do about the prospects for their own firms. Another cautionary reading comes from the motor vehicle sector. Sales have softened noticeably over the past couple of months, but they haven't tumbled as they might have if the economy had already moved into recession. In labor markets, initial claims for unemployment insurance, which had risen earlier in the year, have leveled off of late, with the four-week average running about 360,000 in recent weeks. That level of claims is not yet high enough to clearly signal the declines in private payrolls of between 150,000 and 175,000 that we expect will be occurring this spring. Finally, orders and shipments for nondefense capital goods flattened out late last year but as yet have not shown any signs of serious deterioration, which will be necessary shortly if our projected downturn in capital spending is to come to pass. For now, we are willing to treat these readings as suggesting that there is some upside risk to our forecast of a modest recession. One of the key features of past recessions, as viewed through the lens of our models, is a tendency to observe large negative residuals that are correlated across the major spending equations. We have built that feature into this projection. But this also remains a forecast because a pattern of correlated negative residuals is not yet clearly evident in the data. To gain some perspective on how the forecast would have looked had we not built in these recession effects, we showed an alternative scenario in the Greenbook that effectively removed these residuals. The result is a forecast that is similar to, though in the near term a bit weaker than, the one we showed in the January Greenbook largely because of higher oil prices and weaker housing prices. But we have marked down the baseline forecast considerably more than would be suggested by these factors alone. To be sure, we may have overreacted by moving to a recession call. But that possibility is counterbalanced by some clear downside risks even relative to this more pessimistic forecast. The recession that we are forecasting is relatively shallow. In our forecast, the depth of the downturn is limited in the near term by tax rebates, which provide a substantial boost to disposable income starting in May. This should help to buffer some of the drag on spending that is anticipated to result from declining employment, higher oil prices, and weaker household net worth. Moreover, domestic production benefits appreciably from the past and prospective decline in the exchange value of the dollar and the continued growth in the economies of our major trading partners--factors that help to provide a sizable boost to net exports this year and next. These influences result in a small upturn in real GDP in the second half, and the unemployment rate rises only 1� percentage points, to 5� percent. That is a small increase in unemployment even by the standards of the past two mild recessions. As I've noted, well-timed macro policies and substantial support from the external sector lead us to expect that this time will be different and that the unemployment rate will rise less than usual. But you should always be wary of forecasts that expect this time to be different. Another notable feature of our forecast is that, although the projected downturn in activity is shallow, the period of weak aggregate demand is lengthy, especially given the assumed low level of the real funds rate. For those of you so inclined, this might be a good time to check your Blackberries for e-mail or to get in a couple of games of BrickBreaker because I can assure you that I will not be offering much in the way of scientific insight on this issue. In our forecast, the growth of real GDP picks up next year for several reasons. Housing demand finally bottoms out, and accordingly, construction activity begins to arrest its steep decline. In addition, given our forecast of a flattening of crude prices, the drag from higher oil prices on consumer spending is expected to wane next year. Importantly, we also assume that there will be a gradual lifting of the restraint on spending as financial stress abates. The last influence is now assumed to lift more gradually than in our previous forecast and, along with an intensifying drag from lower house prices, accounts for much of the lingering weakness in this projection. Correspondingly, the unemployment rate falls to only 5� percent at the end of 2009. In our previous forecast, we had the effects of financial stress fading over this year, on the thought that, as it became apparent that the economy would avoid recession and that housing was bottoming out, risk spreads would narrow, credit conditions would loosen up, and spending restraint would ease. Obviously, in our current forecast, the economy experiences recession this year, and housing doesn't show much sign of stabilizing until next year. As a consequence, we don't begin to phase out the unusual restraint on spending resulting from financial stress until next year. This aspect of our forecast, even more than others, is largely guesswork. We just don't have much in the way of historical experience on which to calibrate the projection. In recognition of that uncertainty, we included in the Greenbook two alternative simulations. In the ""faster recovery"" alt sim, we assume a stabilization of housing later this year and a reversal of most risk spreads by the middle of next year. Under these assumptions, growth picks up more noticeably, and a tightening of monetary policy is required next year. Alternatively, one cannot rule out some further deterioration in financial conditions and an even longer period of subpar economic performance. In the ""greater housing correction with more financial fallout"" scenario, a steeper decline in home prices results in a deeper contraction in construction activity, a further widening of risk spreads, tighter lending conditions, and an additional deterioration in household and business sentiment. Although this scenario might sound extreme, it only pushes the outer edge of the 70 percent confidence interval for real GDP and unemployment. It is also sobering to recognize that this simulation results in a nominal funds rate path that skirts the zero bound. The bottom line: We know with probability 1 that the baseline forecast will be wrong. But with the downward adjustments that we have made to this forecast, we feel that there is significant probability mass on both sides of our projection. Despite marking down our forecast of real activity substantially this round, our projection of consumer price inflation, both headline and core, has been revised up in 2008 and is largely unchanged in 2009. Those revisions reflect marginally worse news on the incoming price data as well as further deterioration in some of the key determinants of price inflation. As for the news, our reading of the recent price figures is that core PCE prices probably did not rise as rapidly in January as is currently published but that they likely rose faster in February than might be suggested by a cursory examination of last Friday's CPI report. As we noted in the Greenbook, barring offsetting influences, we believe that the currently reported increase in core PCE prices of 0.3 percent in January will be revised down to 0.2 percent after the BEA incorporates the low reading on medical care services that was shown in the January PPI. As for February, the core CPI being unchanged was a favorable development. But a sizable fraction of the good news was in rents and medical care; rents receive a much smaller weight in PCE prices than in the CPI and, as I just noted, the PCE price index uses the PPI, not the CPI, for measuring medical costs. Incorporating medical care prices from this morning's PPI release suggests to us that core PCE prices rose about 0.15 in February. All told, we are projecting an increase in core PCE prices of 2.5 percent at an annual rate in the first quarter, 0.1 percentage point more than in January. We have also incorporated into this forecast a further jump in the cost of crude oil and higher import prices associated with the weaker dollar and more-rapid gains in commodity prices. Moreover, we have read the survey measures and TIPS spreads as suggesting that there may have been some deterioration in inflation expectations of late. Taken together, these less favorable developments more than offset the projected emergence of some slack in resource utilization. As a consequence, we are now projecting core PCE prices to rise 2.3 percent this year, up � percentage point from our January projection. Despite an unemployment rate that runs nearly � percentage point above our previous forecast, we have left unrevised our projection of core PCE prices in 2009 at 1.9 percent. Higher food and energy prices have resulted in a further upward revision to total PCE price inflation of nearly � percentage point, to 2.9 percent, in 2008. Total PCE price inflation for 2009 is unrevised at 1.7 percent. Before turning the floor over to Nathan, I want to let the Committee know that the three research divisions are undertaking a review of the structure of our policy documents. The Greenbook and Bluebook have grown in length and complexity over the past decade. Our objective in this review will be to improve the focus and flow of the documents and to eliminate the redundancy that has crept in over time so as to reduce the burden on you in reading the documents and the burden on the staff of producing them. We will, of course, consult with the Committee before implementing any substantive changes. Nathan will now continue our presentation. " FOMC20070131meeting--419 417,MR. PLOSSER.," Thank you, Mr. Chairman. I will try to be brief. I was impressed with President Yellen’s excellent presentation and the thoughtfulness and scope of what she talked about, and I agree almost 100 percent with everything she said. But I want to mention a few things that I think are important. There’s an old forecasting adage, if you’ve ever been in the forecasting business: If you can’t forecast well, forecast often. [Laughter] Now, that suggests to me that, if this exercise were only about the forecast, it might not be so important to do frequently. But the purpose of publishing this information on a more regular basis is not so much about the forecast as it is about communicating policy and the views of the Committee to a broader audience. Our forecast is almost a byproduct, but it provides, in my view, both the foundation and the context for our current thinking about current policy and future policy. That’s really the value of it to me. Providing a forecast and a narrative would provide a richer context. It would allow us to be perhaps a little more expansive about things in the narrative. I’ll come back to that in a second. We spend so much time around this table parsing words in our statements each time, and having a richer description of the context in which policy is being made and the views that are being expressed would allow us to get away somewhat from our focus on the language in the statement itself. It would provide us with some more flexibility, and we wouldn’t have to worry quite as much about every word being parsed for some new meaning. The purposes go beyond just the forecast and its part in this communication. Indeed, a broader principle is the transparency of the policymaking process. So let me go through the questions and provide for each of them a quick answer and perhaps a little nuance. I certainly agree with most people around this table that we need to have individual forecasts. I strongly believe in the “independent” approach. There is huge value to the diversity sitting around this table. I don’t think we want to put that at risk, so I’m very supportive of that. In terms of common assumptions, in particular on the conditioning variables, I don’t think there ought to be common assumptions. We ought to use appropriate policy. I have a little uncertainty in my own mind about whether that ought to be an explicit part of the forecast in terms of what we publish. I am of two minds on that issue. On the one hand, I’m sympathetic to the notion that you want to be very careful about imprinting in the minds of the public that the forecast is some kind of guarantee or commitment. I think that’s not a big problem; it can be overcome with some discussion and fan charts and other things. On the other hand, publishing it has some value. I think about the times this fall when we were sitting around this table talking about the weakness in the economy and housing and what we thought our outlook was. At the time, the markets were projecting that we were going to drop the fed funds rate to something like 4¼ by this spring, but I didn’t sense at the time that this group would have put as much probability on that occurring as perhaps the market was. If we were in the business of generating these forecasts, that disconnect wouldn’t have happened, or it would have been much milder, I suspect. There would not have been as much uncertainty nor as much movement in those interest rates had we been more forthright about what our thinking was going forward. So I think there are some benefits to reporting out the range of what people think is appropriate policy going forward, but I acknowledge it also has some risk. The narrative is terribly important for making this work. Indeed, that is where you are providing the richness. I think it ought to be a minutes-style narrative. I’m a bit torn as to whether or not individual Committee participants should have the opportunity to write a side bar if they are really uncomfortable with something. Certainly, if we allowed that, it should be done without attribution. But I believe that the issue here is more about timeliness and whether we can do this in a timely way to make it work, which is speaking to Rick’s concern. We just have to struggle with that a little and figure out what might work best. How frequently should the forecast be made? I lean toward four times a year. I think that’s a good frequency and puts the forecast roughly at every other meeting. At first, this will be very difficult to do, but if we get into a production cycle, I think it is certainly feasible. As to the issue of how many years the forecast should cover, I think that it should go a little longer than what we currently have. I lean toward three years. As we go out, all we have to do is just say something about what we believe the long-term trends are or, in some cases perhaps, what our objectives may be. Perhaps we want to get far enough out so that the long-term trend is revealed. This gets back to what issues and what variables we report. I never have liked the phrase “potential GDP” because I have never really understood what it meant or how to measure it. But I do use the word “trend” a lot. I’m not sure it’s a bad idea when you’re collecting the forecasts from the members, much as Vice Chairman Geithner did, to report what your view of trend is. We may or may not choose to publish that for some of the reasons that Rick perhaps suggested— although I’m less concerned about his concerns, I certainly understand them. But it would be terribly useful to gather that information and to share it—maybe only internally so that we have an idea of where people think the economy is in a long-run sense. The variables we ought to publish would obviously be real GDP, unemployment, and a measure of inflation (whichever one we decide seems most appropriate). I’d be okay with a trend estimate, although I don’t feel strongly one way or another. Producing a fan chart or some information about the range of what the Committee thinks is appropriate policy would be informative. In particular, I like Janet’s pictures because, as you notice, it has no line in it. There is no point forecast. As we convey uncertainty about the forecast, we want to do everything we can to steer people away from the notion of a point forecast on anything because they’ll latch onto that point forecast and disabusing them of that will be very difficult. Steering them away from a point forecast also helps stress the importance of uncertainty in our forecast going forward, and I think we need to convey uncertainty. I’d even be inclined to report, as these charts do, just central tendencies and not any medians or point estimates for any of the variables. I think that’s a terrific idea. Finally, I’d like to make a suggestion. It will be very difficult to design the details around this with the whole Committee. I think Governor Kohn alluded to this consideration in the beginning. So I would strongly support a motion that either the communications subcommittee or a subcommittee that they delegate to would come back to this group rather quickly with one or two well-thought-out, concrete proposals that we can discuss in detail and begin thinking about how we might produce one or two dry runs to work out the kinks. I think we’ll make much more and faster progress in getting an outcome that we are comfortable with if we have something concrete in terms of a proposal to talk about. That’s all I have. Thank you, Mr. Chairman." CHRG-111hhrg49968--103 Mr. Etheridge," Thank you. Let me just say, as a student of--not only a student, probably, but a world-renowned specialist in the Great Depression, what are your thoughts on avoiding these kinds of economic crises in the future? And are there lessons the Fed has learned from its role in the banking supervision that we have gone through so far that we, as a body, might pay attention to and help with? " FOMC20061212meeting--38 36,MR. STOCKTON.," Roughly speaking, if we had been held back at the June level, we would estimate that housing starts probably would have been about 100,000 units weaker than they currently are. Running that through the model suggests roughly 0.3 percent on the level of GDP. Whether all that would have played out by now is not entirely clear. In terms of broader economic consequences, one thing that we showed in an alternative simulation in the Greenbook was, if this unusually low term premium turns quickly and we get a rise of another 50 basis points there accompanied by some weakness in the stock market and some endogenous response on credit spreads, the effect would be pretty powerful. It results in a forecast of an unemployment rate rising to 5½ percent, even with your easing of monetary policy, according to the estimated Taylor rule, down to 4 percent for the fed funds rate. I think that those kinds of movements in long-term interest rates work powerful effects on our overall economic outlook." FOMC20050809meeting--167 165,MR. FERGUSON.," Thank you, Mr. Chairman. The incoming data show broad-based support for growth, with inflation—at least in the most recent readings—relatively well contained. Final demand seems to be robust, with consumers, housing, and to some degree business investment spending, all making contributions. No doubt some of these data have been helped by the surprising success of the latest set of incentives from the auto companies, which boosted consumer spending and led to an unexpected slowdown in inventory investment. However, underlying financial conditions, the creation of wealth and jobs, and both consumer and business confidence I think provide a more lasting, sustainable basis to growth going forward. While it’s hard to have a great deal of confidence in the saw-toothed quarterly pattern that we see in the Greenbook, I think the baseline forecast in the longer term is amply supported by the facts. And in my view, a continued execution of our announced policy of a gradual removal of accommodation is in order. However, there were a sufficient number of surprises in the intermeeting period—and, as August 9, 2005 73 of 110 examination of a number of issues. Given the time, however, I’m going to focus my comments on only one of those. I think the most important issue from a policy perspective is whether it is reasonable to accept, as a basis for today’s decision, the staff’s forecast of inflation stabilizing, albeit at the very upper end of what I believe is this Committee’s acceptable range. The baseline staff view of this relatively benign inflation dynamic can certainly be called into question, given a range of sources of uncertainty and inflation pressures. Those uncertainties and inflation pressures come from a number of factors: the mixed data that we’ve seen of late on labor compensation; the upward movement in the price of oil; the recent changes over the last several quarters in unit labor costs; and our new understanding that PCE prices were on a steeper upward trajectory and that structural supply-side growth may have been slightly less robust than we had thought before the NIPA revisions. To attempt to answer this question, I sought to validate the Greenbook inflation forecast, and I’d like to hand out some tables that indicate the results of this work.2 What I asked the staff to do was to assess the historical performance of several alternative measures of inflation as predictors of one-year-ahead inflation—CPI inflation in particular. And here I think I owe a slight apology to Gary, because I came to some statistical conclusions that were somewhat different from his instinctive conclusions. If you look at the table I’ve handed out, the first page shows what is called the root mean squared prediction error of alternative forecasts of one-year-ahead CPI inflation. The set of forecasts that I looked at is pretty obvious: the Greenbook, the SPF [Survey of Professional Forecasters] CPI forecast, the CPI random walk, and the median CPI random walk using the Cleveland median CPI. In the second to leftmost column you’ll see that over a long period— August 9, 2005 74 of 110 from the third quarter of 1981 to the first quarter of 2004—our Greenbook forecast has turned out, at least on this relatively simple measure, to have been the best of the forecasts. The random walk forecast tends not to be so good, but other forecasters externally have also done pretty well. You can look across the various periods and see that, by and large, the staff forecast tends to be the historical winner. Curiously, as you get to the far right column, which covers the period beginning in 1999, we can add in important information—the compensation from TIPS. Again, I think it gives a relatively good forecast of inflation. And then the one measure here that is not self-explanatory is the adjusted TIPS. There, our staff has adjusted the TIPS to eliminate the best estimate that we have of the liquidity premium and inflation risk premium based on a term structure model. And if you look at the adjusted TIPS, at least in the short period of 1999 to 2004, you can see that the adjusted TIPS measure tends to be somewhat better than almost any of the others. So, by and large, we’d say overall that the market seems to have a really good forecasting record in the short term. And in the longer term, our Greenbook forecast seems to be the best and is probably somewhat better than the random walk. Turning to the second page of the handout, given that background of what we can trust, I think the good news here—again, I had to do this on the CPI forecast—our staff’s CPI forecast seems to be pretty much in the middle. We are not an outlier. The other good news, particularly if one trusts the adjusted TIPS information, is that it also seems to be quite consistent with the Greenbook forecast. So I took this to basically say at the end—and I want to be relatively short here, given I’m the last speaker—that we can be reasonably confident in basing our policy today on the Greenbook inflation forecast. There clearly is an upside risk to that forecast, I think. But as both other forecasters and a variety of market-based indicators all signal, it would be very August 9, 2005 75 of 110 while there’s obviously some uncertainty, I’d say let’s build our policy approach around the baseline forecast, and let’s continue with the market-accepted approach that we’ve already announced of a gradual removal of our accommodation. Thank you, Mr. Chairman." FOMC20051101meeting--159 157,MR. MOSKOW., Maybe I misstated my question. I’m not talking about an inflation expectations forecast but the inflation forecast you have. Why not put that in the model? CHRG-111shrg55117--126 PREPARED STATEMENT OF SENATOR TIM JOHNSON Thank you, Chairman Bernanke for being here today. As the economy continues to undergo a period of stress and volatility, I look forward to hearing the Fed's economic forecast for the rest of 2009 and into 2010. The Fed continues to have a full plate as it looks for ways to address the problems plaguing our economy. I applaud your efforts to date to achieve economic stability. Unfortunately, I suspect we are not yet at the end of the road in terms the challenges facing our economy. I am committed to our Nation's economic recovery and to ensuring the safety and soundness of the financial sector without placing unnecessary burdens on the taxpayer. In the long run, the best way to protect taxpayers is to fashion a functional regulatory system that prevents situations like the ones we are currently experiencing from arising again. As the Banking Committee tackles financial regulatory restructuring in coming weeks, we will continue to look to your expertise. As many others have noted, the status quo is no longer an option. It is my hope that Members of this Committee from both sides of the aisle can construct a proposal that reflects the needs of our Nation's taxpayers, consumers and investors, and financial markets and institutions to achieve economic recovery and needed reform. ______ CHRG-110hhrg44901--51 Mr. Bernanke," Congresswoman, as I indicated in my testimony, we at this point are balancing various risks to the economy. And as we go forward, my colleagues and I are going to have to, you know, see how the data come in and how the outlook is changing and try to find the policy that best balances those risks and best achieves our mandate of sustainable growth and price stability. So I don't know how to answer beyond that, other than to say that we are going to be responsive to conditions as they evolve. I noted today the importance of not letting inflation from commodities enter into a broader and more persistent and more pernicious inflation. That is certainly an important priority. But in general, we are going to have to just keep evaluating the new information and see how it affects the outlook. Monetary policy works with a lag. We can't look out the window and do something that will affect the economy today. So the best we can do is try to make forecasts and try to adjust our policy in a way that brings the forecast towards the desired outcome. Ms. Velazquez. Well, Mr. Chairman, I understand all the steps and actions taken by the Fed. But it seems to me that the lending tools are proving to be ineffective at this point. Doesn't this prove that the current economic conditions have moved beyond a liquidity crisis that can be mitigated through Federal lending and is now proven to be a capital crunch? " FOMC20070131meeting--131 129,CHAIRMAN BERNANKE.," But the saving rate is not driving the consumption forecast. Rather, the consumption forecast is driving the saving rate." FOMC20060920meeting--142 140,MR. KOHN.," Thank you, Mr. Chairman. Whatever you want to call me is fine. [Laughter] I’m just glad to be here. [Laughter] I don’t think I can follow that up. Given the initial conditions—the doubling and more of energy prices over the past two years, the overexuberant housing market coming to grips with a renormalization of interest rates, a very low personal saving rate, and an uncomfortable increase in inflation this spring—a period of modestly below-trend growth and gradually ebbing inflation, as in the Greenbook forecast, is about as good an outcome as we can expect, as Dave Stockton noted. In that regard, several developments over the intermeeting period have made me a bit more comfortable with the plausibility of such an outlook. The weakness in housing has deepened and is more definitively leading to growth of output below potential. In fact, in my view the behavior of the housing market constitutes the main downside risk to sustained moderate economic growth. We’re in the middle of a housing adjustment, which has been hard to forecast, especially because it involves the unwinding of an unknown amount of speculative demand. With inventories rising and reports of price cuts getting greater prominence, the market isn’t yet showing signs of clearing and stabilizing. In the Greenbook forecast, residential investment, though weak, is supported by continued growth of income and relatively low mortgage rates, while house prices basically level out in nominal terms. As the Greenbook notes, however, this forecast leaves some aspects of the existing disequilibrium intact, most notably the high level of prices relative to rents. Also, the cutback in construction doesn’t completely offset the apparent excess building of the boom period. As a consequence, I see the housing forecast in the Greenbook as very far from the worst-case scenario that President Minehan characterized it as. And, we are just beginning to see the effect of the downshift in house-price inflation on consumption starting to play out. Outside of housing, however, recent developments should help to sustain continued economic expansion. Financial conditions remain quite supportive of both business and household spending. Long-term interest rates have fallen appreciably since midyear, and they are low in both real and nominal terms. Risk spreads are narrow, banks have not pulled back on business credit, and equity prices have risen on balance in recent months. Lenders and investors appear to remain confident that the economy will continue to expand at a decent pace. Higher levels of labor income in the first half of the year, along with a favorable effect on disposable income of a decline in energy prices, will help support consumer spending going forward. Economies elsewhere seem to be expanding at a solid clip. Moreover, they are probably less vulnerable to spillovers from a housing-led slowdown of growth in the United States than they were to weakness in 2001. That weakness was centered in a global market for investment goods and was reflected in global declines in equity prices. The less robust economy should present businesses with a more competitive environment in which it will be harder to pass through cost increases. In addition, the decline in energy prices, along with the leveling out of other commodity prices, will reduce cost pressures on businesses and should feed through in some measure to lower core inflation, especially as slower growth damps pricing power. The drop in energy prices has already restrained inflation expectations a bit. For all these reasons, I’m also a little more comfortable with the forecast of gradually ebbing core inflation. Nonetheless, I still see significant upside risk to such a path for inflation. In part, this reflects my uncertainty as to the reasons for the rise in inflation this spring and summer. Feed- through of energy and other commodity prices must have contributed to some extent, and we can see evidence of this in the greater price increases for some of the more energy-intensive sectors, such as for airfares. A portion of the pickup is in the rent-of-shelter category, likely from a shift to rental housing as expectations of house-price appreciation have been scaled back. But price increases have picked up in a number of other categories, and although energy costs probably accounted for some of this acceleration, we can’t dismiss the possibility that other forces were at work—for example, more general pressure of demand on potential output. A reduction of those types of pressures is still only a forecast. On the cost side, as many have commented, the compensation and unit labor cost data, while flawed in many respects, could be pointing to a risk that higher labor costs will persist, putting pressure on prices that might only be partially and reluctantly absorbed by profit margins. In sum, Mr. Chairman, I’m a bit more comfortable with something like the path for the economy and inflation in the Greenbook forecast, but uncertainties are quite high. They might even justify the “higher than usual” description. The downward path for inflation remains at risk, and as others have noted, the costs of exceeding that path could be disproportionate. Thank you." FOMC20070131meeting--437 435,MS. MINEHAN.," I know you don’t want to prolong this meeting, and I don’t either, but I’m interested in what you think it feels like to all of us and to the market to have a two-day meeting, to have a minutes-style summary of a range of forecasts come out, and then a week and a half to two weeks later have the minutes come out. How does that work? What is the incremental information that comes from those two things, since the minutes already have a range of information in them that, narratively anyway, goes through a forecast and people’s sense of where things are likely to go with regard to the forecast, which I presume would be what you would put into a narrative around the range of forecasts. It is certainly possible to do, but how does that work?" FOMC20060629meeting--20 18,MR. SLIFMAN.," The final exhibit presents your forecasts for 2006 and 2007. Compared with February, you have edged down your projections for the growth of real GDP in both years and raised your forecast of core inflation. The forecast for the unemployment rate is essentially unchanged. That concludes our presentation, and we will be happy to answer any of your questions." FOMC20070131meeting--362 360,MR. REINHART., No. The Chairman may choose to talk about the forecast in his testimony. So in some sense you really have two opportunities to talk about the Committee’s forecast. FOMC20070807meeting--83 81,MR. PLOSSER., They could be negatively correlated actually. Just because our point forecasts converge does not mean that our uncertainty about that forecast is decreased. FOMC20070509meeting--16 14,MS. JOHNSON.," The basic message from the rest of the global economy is that economic conditions are favorable and appear likely to remain so through the end of next year. Although small variations in the basically optimistic outlook are present, real GDP growth in the foreign economies seems poised to continue at an average annual rate of about 3½ percent throughout the forecast period. Inflation risks are present as slack has been reduced in several foreign economies. However, we anticipate that central banks abroad will respond further as needed such that inflation abroad will edge up only slightly through the end of 2008. In this forecast round, the staff had to contend with a move back up in global crude oil prices and further increases in nonfuel commodities prices—shocks common to the whole global economy. In addition, for the U.S. outlook, we needed to take account of the depreciation of approximately 2 percent in the foreign exchange value of the dollar over the intermeeting period, as Dave discussed. We have recently revisited the question of whether we could improve upon the forecast for crude oil prices embedded in market futures prices and have convinced ourselves based on empirical evidence that we cannot. As a result, our projections for future WTI spot oil prices and the average oil import price are shifted up and down over time by fluctuations in spot and futures oil prices. This has been an “up” forecast round. After reaching a peak around August of last year, global oil prices fell through very early this year and then reversed to trend back up, but not smoothly. The upward move of oil prices over the intermeeting period was apparently a response to the surprising degree of continued production restraint from OPEC and heightened concerns about supply from Iran, Iraq, and Nigeria. The strength in global demand for energy, too, no doubt provided support for continued elevated prices. In this forecast we also had to take into account a deviation in the usual price spread between West Texas intermediate and other grades of oil. Reduced refinery activity has led to an unusually large accumulation of crude oil stocks in the Midwest, the delivery area for WTI, and depressed its price relative to that for other grades. When we were finalizing the baseline forecast, spot and futures prices implied an increase to our projection for WTI crude oil in the current quarter of about $4.50 per barrel relative to the projection in the March Greenbook; however, this change understates a bit the upward shift in overall oil prices because of the change in spreads. These considerations led us to revise upward the average oil import price in the Greenbook for the current quarter about $6.50 per barrel. We expect that over the forecast period the relative prices of WTI and other grades will gradually move back toward normal, so our upward revision narrows somewhat in future quarters, particularly by the second half of 2008. The baseline forecast reflects the consequences of these higher oil prices for the U.S. economy and the rest of the world. Turning points in the ups and downs of oil prices have an uncanny way of happening at the time that we are finishing the Greenbooks, and such a turning point might have happened again. Since the Greenbook path was set, crude oil prices have moved back noticeably. If we were concluding our forecast today based on yesterday’s futures prices, we would show an upward revision in the near term of only about half that in the Greenbook. For 2008, our upward shift would be about two-thirds of that in the Greenbook. The effects of this more benign level for oil prices would be slightly positive for real GDP growth both in the United States and abroad. Such a lower projected path for oil prices would also slightly lessen the pressures on headline inflation rates that are a feature of the baseline forecast. Another element in the forecast worth a brief mention is the upward revision to both core import price inflation and core export price inflation for the second quarter, to annual rates of 4.5 percent and 5.5 percent, respectively. Prices for core imports and core exports accelerated in the first quarter as prices for food and industrial supplies, particularly fuels and metals, surged. Metals prices have continued to rise in recent weeks, and the increase, along with the recent depreciation of the dollar, led us to revise up our current-quarter projections. In constructing our forecast for these trade prices, we base our projection of the commodity-price component on market futures prices. Again, we have done recent work to see if a better alternative is available, but we have concluded that none is. Despite rapid increases in prices of various traded commodities over the past few years, the futures markets are implying a path through the end of 2008 that is about flat for an index of nonfuel commodities. In combination with our projection for only modest real dollar depreciation and no major changes in overall inflation rates here and abroad, such an outlook for commodity prices yields a deceleration in both core import prices and core export prices. Our forecast for the increase in these prices in 2008 remains low, at 1.3 percent. Although oil prices have been revised up this time, their projected path flattens in mid-2007. This outlook and the flat projected paths for commodity prices and the dollar imply a waning of the upward push to consumer prices that has resulted from rising oil and commodity prices. Consequently, in the Greenbook forecast, only limited further tightening by some foreign central banks is required to contain inflation. That events in these markets may surprise futures traders and us for yet another year with additional commodity-price increases is a major risk to our outlook for inflation. David and I will be happy to take any questions." FOMC20080318meeting--132 130,MR. ROSENGREN.," News of the problems at Bear Stearns and the very fragile situation in financial markets complicate our decision today. Federal funds futures indicate that the market is anticipating a reduction of at least 75 basis points and probably more than that. Normally the expectations of financial market participants would not factor heavily in my decisionmaking. However, given the fragility in the market and my own expectation that, even with this move, further easing will be necessary, I strongly prefer alternative A. While I view alternative B as a significant action, I would have concerns about likely market reaction given the gravity of the situation in financial markets and the possibility that a recession may not be mild, given falling collateral values and financial difficulties at many of our major financial institutions. A 50 basis point move would merely offset the increase in credit spreads that we have seen since the past meeting. In addition, the Boston forecast and the Greenbook forecast with a 50 basis point ease leave the unemployment rate well above the NAIRU but with inflation rates below 2 percent by the end of 2009. Easing less than 50 basis points at this meeting would seem entirely inconsistent with the economic and financial deterioration we have seen since the last meeting. " FOMC20080318meeting--67 65,MR. PLOSSER.," Thank you, Mr. Chairman. As anticipated, Third District business activity showed continued weakness in February and March. Reports from retailers, manufacturers, bankers, and other business contacts remain somewhat downbeat. At the same time, there has been little moderation in price pressures facing our firms and consumers. There is little new in the regional housing markets. So rather than dwell on housing, let me talk about some of the information that we have received since our last meeting. Banks in the Third District have generally been relatively unscathed by the toll on the financial markets. Many had not been in the subprime market and did not have instruments based on subprime. They do, however, hold a high proportion of commercial real estate and residential mortgage loans in their portfolios. So to the extent that the commercial real estate market slows as we expect, our banks are likely to be feeling the effects. Bankers, thus, have become somewhat more pessimistic over the past six weeks or so. They don't expect financial conditions to improve any time soon, and several noted signs of declining business loan demand, which they had not been seeing earlier. Bankers also report some deterioration in personal-loan credit quality and are expecting increases in credit card delinquencies. Despite these increases, these delinquencies and default rates so far remain well within historical norms. Manufacturing outlook activity in the District remains weak. Our March business outlook survey is confidential until we release it this coming Thursday. It will show a little improvement in February's dismal readings. Since the beginning of the year, the general activity index has been at a level typically associated with either a national recession or a substantial slowdown in economic growth. So despite the modest improvement, it doesn't move us out of negative territory. Responses to a special survey question in February indicate that the majority of our firms considers their inventories to be at an appropriate level, and firms are unlikely to substantially replenish these inventories until midyear or later. But it doesn't seem as though there will be more-dramatic reductions in inventories--as, for example, in the Greenbook's basic story, where there's a very large inventory correction, it appears. Despite the weakness in activity, there has been little moderation in price pressures in the District. The current prices-paid index in our business outlook survey continues to accelerate, and both the prices-paid and prices-received indexes over the past three months are at very high levels relative to the last twenty years. Firms in various sectors, not just manufacturing, were reporting significant increases in prices, particularly of imported inputs. Although our firms are expecting continued weak real activity, they expect prices to rise over the next six months. Indeed, the forward-looking price indexes in the survey are at very elevated levels, and the future-prices-paid index is at its highest level since the early 1980s. Our firms seem to be as skeptical as I am of the arguments of the critical link between inflation and resource utilization. Turning to the national outlook, I struggled coming into this meeting with a growing level of discomfort. There are four dimensions to my concerns: first, the outlook for growth; second, the outlook for inflation; third, the calibration of monetary policy given that outlook; and fourth, the turmoil in the financial markets. First, in terms of near-term economic growth, the outlook has deteriorated somewhat since our last meeting. I expected weak growth in the first half of the year, but the incoming data suggest that growth will probably be somewhat weaker than I anticipated. I and many private-sector forecasters, like the MA or the Blue Chip survey summaries, have responded to the incoming data with downward revisions to our forecast for certainly the first half of 2008. But our changes are considerably smaller than the revisions in the Greenbook's forecast, which have revised down personal consumption in 2008 from 2.3 percent in the January forecast to zero in the current forecast while incorporating significantly more monetary policy stimulus. I realize that the Board's staff has a good track record, but I am not wholly comfortable with the Greenbook's forecast, which I think incorporates a number of judgmental adjustments that are responsible for taking it pretty far away from where private-sector forecasts now are. Second, I'm just less comfortable with the inflation outlook. I've said before that, if inflation expectations become unhinged, we will face an even more difficult problem as monetary policy will feed more quickly and directly into higher inflation outcomes. The ensuing loss of credibility will be costly to regain. I wish we had the luxury of waiting for unambiguous evidence that expectations have lost their anchor. But if we wait until then, it will be too late. This means that we have to look for early warning signs so we can take appropriate action to ensure that expectations remain anchored, and I am concerned that we are seeing those warning signs. Despite last Friday's CPI numbers, headline and core inflation have been trending up. Oil prices are at record highs. Commodity prices continue to trend up, and the dollar has fallen sharply. Our business and consumer contacts are consistently stressing price pressures as a concern. These developments concern me partly because research indicates that inflation actually may have become less persistent since the 1990s, and I think we have to be careful not to interpret the lack of persistence independent of what monetary policy actions are taken. Moreover, inflation expectations measured by surveys and market-based measures have all risen over the last couple of months. Inflation risk premiums have risen, which could be an early warning signal of a waning credibility or commitment on the part of the Fed. The National Association for Business Economics survey in early March shows that a third of the respondents think that monetary policy is now too stimulative, and that is up from less than 10 percent just a few months ago. According to a special question on our November Survey of Professional Forecasters--I reported on this several meetings ago--half of those forecasters, 23 out of the 45, believe that the FOMC has an inflation target. Of those 23 forecasters, 20 believe that long-run inflation over the next ten years will be 50 basis points or more above what they view our inflation target is. I might be able to shrug off one or two of these, but the predominance of these signals has me concerned about the risk to our credibility. I'm also concerned that the public seems to perceive that the Fed has effectively set aside one part of its mandate, price stability, in our all-out efforts to promote economic growth. Said differently, it seems to suggest that not only are we incorporating new data into our loss function as our forecasts change but we are changing the coefficients on that loss function. I don't believe that we are necessarily doing that, and I don't believe that's the right way to make policy, but I do believe that ultimately it's up to us to make that clear to the public as best we can. Third, we have to calibrate the appropriate level of the funds rate and not just its rate of change. This is not an easy task, especially in the current circumstances. We have reduced the targeted funds rate by 225 basis points since August and 125 basis points in just the last six weeks. It is simply too soon for the economy to have felt the full effects of these rate cuts. While the recent deterioration in the outlook might suggest that we need easier policy, I believe that the recent increases in inflation expectations mean that the real funds rate has already fallen either below zero or close to zero depending on how we measure it. For example, the real funds rate is now minus 1 percent, which is below the more pessimistic Greenbook-consistent r* of minus 0.5 percent given in the Bluebook, if you measure the real rate as the nominal funds rate minus the Greenbook's one- quarter-ahead forecasted headline PCE. The Greenbook suggests that the real funds rate can be negative over the next two years and inflation will continue to decelerate as upside inflation pressure is offset by greater slack in product and labor markets. I am skeptical. This outcome is predicated on inflation expectations remaining well anchored despite aggressive and persistent easing for a sustained period of time. Given the current fragility of inflation expectations, this seems very unlikely to me. The alternative Greenbook scenario with more inflation pressure from oil and imported goods suggests a steeper policy path and higher inflation by 2010-12. Fourth and finally, like everyone else, I am very concerned about the developments in the financial markets. I've been supportive of the steps we've taken to enhance liquidity in the markets through the TAF, the TSLF, the PDCF, or whatever. " CHRG-109hhrg31539--249 Mr. Hensarling," Thank you, Mr. Chairman. And, Mr. Chairman, the good news is I think I am the second to the last. In listening to some of the questions and some of the comments on the other side of the aisle, it would lead us to believe that we were on the verge of a great depression. I think what I have observed in our economy is that we have more Americans working now than ever. We have created--we, the economy, capitalists have created over 5 million new jobs in the last several years. We have a lower unemployment rate than we had in the 1970's, 1980's, and 1990's. Homeownership is at an all-time national record. Household wealth is at an all-time national record. Inflation adjusted after tax income is up. And then I know that you do not have a perfectly clear crystal ball, and I understand that economic forecasting is an imprecise science, but if I heard your testimony right, barring unforeseen circumstances, I think you said employee compensation is likely to rise over the next couple of years. You predict a gradual decline in inflation in coming quarters and that the economy should continue to expand at a solid and sustainable pace. Given where we have been, given where--given the facts that are available to the extent that you can forecast, my precise question is, what is your opinion of this economy relative to U.S. history? And what is your opinion of this economy relative to the Western industrialized world, say the EU and Japan? " FOMC20051213meeting--38 36,MR. SANTOMERO.," David, could you give us a risk assessment on your consumer spending forecast? In 2006 and 2007, you have consumer spending growth of 3½ percent, while the housing December 13, 2005 18 of 100 with that forecast? You made reference to it in the formal comments, but I wonder if you are quite comfortable with the forecast or a little uncertain about it." FOMC20071031meeting--283 281,MR. LOCKHART., Is there an inconsistency in adjusting a forecast after the meeting when the minutes are the minutes of the meeting and the forecasts informed the judgments that were expressed in the meeting? FOMC20051101meeting--100 98,MR. STOCKTON.," On the house price front, obviously, there aren’t market signals. But we’ve confronted the very same problem of trying to forecast an asset price that we don’t have enormous confidence in. So the approach that we have taken is that we presented a few models at the special briefing last July—some models that rely more on the momentum in underlying house prices and other models that take seriously some sort of error correction to a rent-price ratio to bring that ratio back into equilibrium. And our forecast is a mix of those various approaches. I guess I’d plead guilty in the sense that our house price forecast, along with our rent forecast, does imply by the end of the projection horizon a little of what we view as the current over- valuation diminishing. But mostly that forecast is fairly neutral in that our assessment of over- valuation pretty much involves prices holding at that higher level going forward. It gets a little worse in the near term and then gets a little better a bit further out. But it is an element of the forecast that obviously is important and about which there is considerable uncertainty. November 1, 2005 26 of 114" FOMC20050202meeting--101 99,MS. JOHNSON.," No, no. You might think of our Greenbook forecast for the dollar as a technical assumption. We have adopted a “random walk” frame of mind when it comes to forecasting the dollar, based on two things. First of all, the research that we ourselves have done in the articles that members of the Board staff have written shows that a random walk assumption outperforms any structural model over long periods of time. Moreover, the profession has engaged for years in trying to forecast the dollar. And the random walk—that is, no change from today—in a statistical sense outperforms on average any of the alternatives that have been suggested. One possibility, an alternative assumption, might be to go with the implied futures rates that come out of trading. But those rates have been shown to be particularly bad forecasters. So there’s no real empirical support for making that alternative choice. We used to attempt to infer the consequences of what we knew—the “maintained” assumption of the federal funds rate, so to speak. That was based on the view that we knew something about the future course of policy that the market didn’t know; that is, we were conditioning the forecast on something that the market didn’t necessarily know, and we thought we would sense other forces, if you will, at work. So we had a somewhat more activist forecast for many years until we were wrong for such a long time that we gave up, basically. It troubles me in some sense that our forecast suggests that import inflation will drop from being a fairly significant number to virtually nothing—tomorrow—and will continue that way February 1-2, 2005 80 of 177 the dollar isn’t going to change much more. So my explanation is simply that we try to make that assumption very explicit to you. You understand that we have not taken a position on changes in the value of the dollar, which very much determines our import price forecast. And we let it go at that. We do not take a position on the dollar because our actual ability to tell you when the dollar is going to go up and when it is going to go down is just nonexistent." FOMC20060920meeting--88 86,MR. STOCKTON.," I am flattered that you asked, given that I am still trying to figure out what happened in the first quarter of this year. [Laughter] So let me answer your question first and then provide some of the caveats or background. Basically, we do construct something we call a Greenbook extension that goes beyond the current Greenbook horizon of 2008. We do that for two reasons. One is that we have to forecast long-term interest rates, and we also have to be thinking a bit about where the economy is going, and we use that extension to help inform our thinking. We also use it in some of the analytical tools that we provide to the Committee, such as the optimal control exercises that we report from time to time. There is a logic for the Greenbook’s current forecast period: Most of what we are doing in macroeconomic forecasting is trying to get some purchase with a few gross correlations in the data and their dynamics, and a forecast period through the end of 2008 pretty much lets those dynamics play out. Beyond that, the Greenbook extension is what I call a model-informed construction. I had actually hoped a few years ago that we could start presenting this more frequently. My model staff wisely persuaded me not to do it yet. The reason is that the longer-run extension—for example, of what the equilibrium real rate is going to be in 2009, 2010, or 2011—in a model as large as FRB/US often changes for obscure reasons. For example, it may change when we re-estimate the energy production equation. In that case, all of a sudden we may get a ¼ point change in the equilibrium real rate that takes us a week to figure out why it happened, and ultimately the explanation would probably seem unsatisfying to you. We have been working on a project over the past year to systematize the rules that we use in constructing that longer-term outlook so that we could present it to you and have more confidence that when we do that we could both understand it ourselves and explain it to you. So I think what you are looking for is something that is high on our agenda. Now, if we had to talk about 2009 and 2010, we are ending this forecast period with a modest output gap. That output gap would, all else being equal, be pushing inflation down from the 2 percent range with which we end up in this forecast to something below 2 percent. So you would be on track with that. But when you construct these longer-term ranges, the first thing you will encounter is the need for a dollar forecast. Over the length of the Greenbook period, Karen can talk about a dollar forecast that is roughly a random walk with a little bit of a nod in the direction of some depreciation. When we construct a ten-year extension of the forecast, we actually have to take a very precise stand on that. In these Greenbook extensions, right after the end of 2008, we basically have to build in something like a 4 percent real exchange rate depreciation of the dollar. Then in the extension, even though we are running with an unemployment rate of roughly 5¼ percent, we are not getting any further disinflation out of it because that output gap is just offsetting the inflation consequences of the anticipated dollar depreciation. So if I were to characterize the forecast a few steps beyond the end of the current Greenbook forecast, it would be one in which you have a positive output gap, maybe a 5¼ percent unemployment rate, and not really making much progress beyond the 2 percent inflation with which we end the forecast period." FOMC20051101meeting--95 93,MR. POOLE.," Secondly, and this goes in part to the question President Moskow asked, we have somewhat of a mixed situation in terms of the forecast. When I first came in 1998, there was a November 1, 2005 24 of 114 to go down, and many aspects of the Greenbook forecast were predicated on a decline in the stock market. Of course, eventually the stock market did go down, but it didn’t go down in 1998 or 1999. Now we have, I think, an appropriate standard type of assumption here. The stock market is forecast on a sort of equilibrium basis, and we’re not independently trying to have a stock market forecast. We do the same thing on oil prices. But we don’t do that on some other important parts of the forecast, such as exchange rates and the federal funds rate. To me, the most useful baseline forecast would be to put together the Greenbook on a consistent set of assumptions on those kinds of things. Then I’d value the staff input as to where they believe the federal funds rate, the exchange rate, and everything else will likely come out differently from the expectation in the market. But to me we have a somewhat muddled situation in terms of the internal consistency here. Dave Stockton and I have talked about this several times over the years, but maybe there could be a survey of the Committee on what we would find most useful as the assumptions for things like exchange rates, the stock market, oil prices—all of those things where there are market forecasts available. What would be the most useful to the Committee in terms of the baseline assumption for the Greenbook?" FOMC20070918meeting--101 99,MS. YELLEN.," Thank you, Mr. Chairman. Readings on core inflation during the intermeeting period have continued to be encouraging, and the downward trend has persisted long enough that I’ve lowered my inflation forecast slightly. With the weaker outlook for growth, I also see less upside inflation risk emanating from cyclical pressures. With respect to economic activity, I’ve downgraded my forecast for growth in the fourth quarter by about the same amount as Greenbook and lowered it only marginally, a bit less than Greenbook, in 2008. The downside risks to this forecast are substantial and worrisome. The downward revision to my forecast reflects three factors: first, incoming data bearing on the outlook; second, my assessment of the likely impact of the financial shock that’s been unfolding since mid-July; third, the offsetting effect of the policy changes I consider appropriate in response to the first two forces. My forecast assumes that the fed funds rate will fall to about 4½ percent in the fourth quarter. In other words, my forecast is premised on timely actions by the Committee to mitigate much of the potential damage. Let me begin by commenting on the economic data that we have received since early August. Some has certainly been positive. Growth in the second quarter was revised upward, suggesting more momentum heading into the current quarter, and most indicators of consumer spending and business fixed investment were also robust. Like most observers, I’ve concluded that these data taken together support a small upward revision in my estimate of third-quarter growth. However, recent data on housing and forward-looking indicators relating to this sector suggest even greater weakness in residential investment than we previously anticipated. Manufacturing activity recently turned down, and importantly to me, the August employment report showed a marked deceleration in payroll employment growth over the past three months, suggesting that the financial shock hit an economy possessing quite a bit less momentum than I had factored into my previous forecast. Moreover, survey measures of consumer confidence are down, and these results probably do incorporate early effects from the recent financial shock. Of course, the most important factor shaping the forecast for the fourth quarter and beyond is the earthquake that began roiling financial markets in mid-July. Our contacts located at the epicenter—those, for example, in the private equity and mortgage markets—report utter devastation. Anecdotal reports from those nearby—for example, our contacts in banking, housing construction, and housing-related businesses—suggest significant damage from the temblor. For example, a large furniture retailer with stores in Utah and Nevada has seen sales fall off, and he has tightened credit terms for his customers and has already frozen his hiring and investment plans. In contrast, our business contacts operating further from the epicenter appear remarkably unfazed. Luckily for them and for us, the financial quake has thus far produced at most minor tremors in their businesses. This is not surprising. It is still too early to expect the ripple effects to be noticed by our contacts or to show up in the spending data. We could take a wait-and-see approach to the financial shock, incorporating its impact on our growth forecasts only after we observe its imprint in the spending data. But such an approach would be misguided and fraught with hazard because it would deprive us of the opportunity to act in time to forestall the likely damage. This means we must do our best to assess the likely effect of the shock. The simplest approach is to rely on our usual forecasting models. However, as David emphasized in his remarks, the shock has not affected to any great extent the financial variables that are typically included in our macro models. Since we last met, there have been only small net changes in broad equity indexes and the dollar. Of course, risk spreads in credit markets are up across a broad range of instruments and for most borrowers, both corporate and households. But there has been an offsetting drop in Treasury rates so that key rates appearing in our models—the interest rate on conforming mortgages and the interest rate facing prime corporate borrowers—are little changed or even slightly lower. It is riskier corporate borrowers and households seeking nonconforming mortgage loans, including jumbos, that have seen their borrowing rates rise over the past few months. But importantly, it is the drop in Treasury yields, about 50 to 100 basis points since early July, that has thus far shielded so many borrowers from higher interest rates, and of course, this drop reflects the market’s expectations that the Committee will ease the stance of monetary policy rather substantially. As I noted, my forecast assumes that we will plan to ease by around 75 basis points by year-end in line with market expectations. Even under this assumption, I see movements in interest rates alone as adding to a modest tightening of financial conditions. But, of course, an evaluation of the likely economic impact from the financial shock must also take into account changes in credit availability and lending terms even though these variables rarely appear explicitly in forecasting models. It is apparent that the availability of lending of some types, including subprime and alt-A mortgages, has diminished substantially or disappeared entirely. Moreover, banks and other financial institutions are imposing tighter terms and conditions across a broad range of corporate and household lending programs. For example, FICO cutoffs have been raised and maximum loan-to-value ratios lowered in many mortgage programs according to our contacts. In part, these changes reflect the pressures that banks and other financial intermediaries are experiencing in the context of severe illiquidity in secondary markets for nonconforming mortgages and other asset-backed securities, asset-backed commercial paper, and term loans in the interbank market. Many of the liquidity problems now afflicting banks and other financial market participants will presumably be resolved at least eventually, but it’s hard to believe that markets will return to business as usual as defined by conditions in the first half of this year even after that occurs. For one thing, many of the structured credit products that became so widely used may prove to be too complex to be viable going forward, and this would more or less permanently reduce the quantity of credit available to many risky borrowers. Moreover, if the financial intermediation that was routinely conducted via asset securitization and off-balance-sheet financing vehicles ultimately migrates back onto the books of the banks, borrowing spreads and lending terms are likely to remain tighter given current limitations on bank capital and the higher costs of conducting intermediation through the banking sector. Most important, the recent widening of spreads appears to reflect a return to more-realistic pricing of risk throughout the economy; this development may be positive for the long run, but it will be contractionary in the short run. Similar to the Greenbook, we’ve incorporated these financial developments into our projection by revising down our forecast for residential construction and home prices. But as we all know, housing is a small sector, so a major question is to what extent the financial shock will spread to other parts of the economy. We see a large drop in house prices as quite likely to adversely affect consumption spending over time through a number of different channels, including wealth effects, collateral effects, and negative effects on spending through the interest rate resets. A big worry is that a significant drop in house prices might occur in the context of job losses, and this could lead to a vicious spiral of foreclosures, further weakness in housing markets, and further reductions in consumer spending. Several alternative simulations in the Greenbook illustrate some of the unpleasant scenarios that could develop. A final concern is that the uncertainty associated with turbulent financial markets could make households and businesses more cautious about spending, causing some investment plans to be put on hold and some planned purchases of houses and consumer durables to be deferred. So at this point I am concerned that the potential effects of the developing credit crunch could be substantial. I recognize that there’s a tremendous amount of uncertainty around any estimate. But I see the skew in the distribution to be primarily to the downside, reflecting possible adverse spillovers from housing to consumption and business investment." FOMC20070131meeting--415 413,MR. STERN.," Thank you, Mr. Chairman. In the interest of time, I’d like to be able to say that I agree with Governor X or President Y and just let it go at that, but there are some nuances that I feel compelled to cover, so I will. Let me just start out by saying that, while I certainly favor some changes to the production and publication of the forecast, I do think we need to proceed, at least in some areas, cautiously and conservatively. After all, we are the central bank. [Laughter] Beyond that, once we make these changes, we probably won’t be able to retract them; so we’d better make sure that we want to do them before we proceed. In that spirit, let me address the questions. Questions 1 and 2 fall into that category. I think that we ought just to continue what we’re doing now in terms of conducting a survey of individual forecasts and aggregating them. I have reservations about trying to come to common assumptions, for lots of reasons. Practically it would be very difficult, and I’m not sure at the end of the day that there is a big payoff. So I favor the status quo so far as those first two questions are concerned. Question 3 pertains to the narrative description, and there my answer is “yes”—the forecasts should be accompanied by a narrative description. That step is very important, and it feeds into question 4: Should the Committee jointly agree on the minutes-style description or delegate the release? We have a number of options there. As some people suggested, you could tie this in with the minutes in one way or another. That runs the risk of the forecast’s becoming stale by the time the public sees it. I’m perhaps a little less concerned about that than some others because the public will know when the meeting occurred. They know what information we didn’t have, and they presumably know we’re not clairvoyant. [Laughter] Let me put it this way: I am not clairvoyant. Some of you perhaps are, but if so, it escaped my notice. [Laughter] Another way of handling this would be to submit the forecasts with brief narratives in advance; then, of course, we’d have a pretty good jump on preparing the material at the end of the meeting. So if we’re concerned about timing and about forecasts becoming stale, we would have the advantage of having materials before the discussion at the meeting. We can find ways to get out the forecast and the commentary associated with it in a more timely way to the extent that we think doing so is important. Now, here a dry run or two might be very helpful, and I think it will turn out to be essential to changes that we might make. Question 5 is how frequently the forecast should be made. Here again, I’m not sure the current schedule is too bad. Adding a third forecast each year to fill in the hole in the fall and maybe to address a bit the issue that Bill Poole articulated about providing more information about how our views are evolving—that might work out. But this is another place in which I would be relatively cautious about being very ambitious right off the bat. Similarly, with how many years the forecast should cover: I think there are arguments for extending it beyond the current period, but again, I would want to do some dry runs and look very carefully at what we gain before we committed ourselves to going out three years or five years or whatever the period might be. As for the number of variables forecast, I think we need an inflation variable, a growth variable, and some sort of labor market variable, and I’d let it go at that. Putting out more things would only add to the confusion. We could always decide at some future time to put out a federal funds rate number, a year-end number or something like that, but I wouldn’t start with adding it right up front. Finally, should there be some attempt to convey formally the uncertainty surrounding the forecast? There my answer is “yes.” Whether we do it with fan charts or with some other approach is something that we can work out, but I think it is very important to do. I don’t think right now that market participants or the public more generally think that there is little uncertainty associated with our forecast, but it’s important to underscore the high degree of uncertainty associated with policymaking. Those are my views." FOMC20071211meeting--79 77,MR. STOCKTON.," The slowdown in the economy helps in the sense that we do think opening up an output gap is going to limit and eventually bring down some of those inflation pressures. In terms of the risks surrounding the forecast, I think an important element in the baseline forecast is that taking on futures markets for both energy and food—and those markets are expecting almost an immediate flattening-out and even oil prices coming down just a bit—is probably more important in some sense over the next year or so in terms of relieving inflation pressures. Certainly our experience in the past several years is that we don’t know any better way to do it. It’s not as though the futures markets have done a great job for us; they’ve always been forecasting that things were going to be flattening out right around the corner. So if you were skeptical about whether that was going to occur, you might be concerned about whether or not you could experience some continued upside surprises there. Now, we’ve been encouraged in looking at inflation expectations, because we haven’t yet seen any really broad-based deterioration, and we think things have to date been reasonably well contained. In our forecast, that continues. This forecast does not assume that there will be any deterioration of inflation expectations going forward. If we saw that, it would be at odds with what we’re seeing now and would probably lead us to revise up the forecast." FOMC20070321meeting--231 229,VICE CHAIRMAN GEITHNER., Considerable uncertainty has surrounded our forecast of inflation for some time. That’s how we refer to the fact that there are inflation risks. We have now changed the characterization of the statement to acknowledge the fact that the recent readings have been somewhat elevated. That implicitly acknowledges that there’s some uncertainty to our forecast. I don’t think it’s a justifiable change. I don’t think there is substantial increase in our uncertainty about the inflation forecast today versus January or even December. FOMC20070918meeting--53 51,MS. JOHNSON.," In the International Division, we, too, were challenged to assess the avalanche of events and information that arrived during the intermeeting period and to make our best judgment as to how these developments would affect the rest of the global economy and the U.S. external sector. One striking feature of the baseline forecast that resulted is the difference between prospects for the industrial countries and those for the emerging-market economies. For the industrial countries, the surprises in the latest data were generally negative, and considerable financial turmoil has been evident in the markets in the euro area, the United Kingdom, and Canada. In contrast, the most recent surprises in economic data for the emerging-market economies have generally been positive, and so far there has been little evidence of financial disruption in those countries. We have revised down total foreign growth a bit less than ½ percentage point for the second half of this year and ¼ percentage point for next year. This downward revision is due entirely to revisions to projected average growth in the industrial countries. The foreign industrial countries are largely being spared the direct effects of contraction in the residential construction sector so far. But they are vulnerable to negative effects on the pace of overall economic activity from increased volatility and impaired functionality in financial markets. As market participants have demanded higher returns for risky assets and have withdrawn from some exposures, many asset prices in Europe and Canada have fallen sharply. As in the United States, these developments have had implications for bank balance sheets and earnings, as banks have experienced calls on lines of credit or have taken other steps in response to funding difficulties of conduits and other entities sponsored by them. Some markets have experienced severe disruption, particularly European ABCP and a portion of the Canadian ABCP market. Although it is too soon for us to have actual data on the consequences of stresses being put on bank balance sheets, we think it is likely that some constraint on credit extension will result. In addition, business and consumer confidence could well be impaired by the general awareness of heightened risk and uncertainty as strains persist in financial markets. We have very little historical experience on which to base a projection of the magnitude of these effects. Our downward revision of the forecast for real GDP growth in the industrial countries in response to recent financial market events has been small, but we acknowledge that recent financial events have been severe and have lasted long enough that they likely will have some effect on domestic demand in the affected countries. Other channels of transmission from developments over the intermeeting period are more straightforward. The downward revision to U.S. real output growth causes us to lessen projected export demand growth in our trading partners; for Canada, this channel could be particularly strong. In exchange markets, the intermeeting period has seen upward pressure emerge on the euro, with the dollar-euro rate reaching new highs. This euro appreciation should weaken demand by other countries for exports from the euro area. The downward revision of real growth in the United States and in other industrial countries should, in turn, reduce demand for exports from emerging- market economies. Economic indicators of activity from months before August have also led us to revise down projected growth in the major foreign industrial countries. In Canada, both retail sales and real manufacturing shipments fell in June. In Japan, second- quarter real GDP growth has been revised to show a decline of more than 1 percent at an annual rate, and industrial production and real household expenditures fell in July. In the euro area, some moderation in expansion is implied by recent data: Real GDP decelerated in the second quarter, and a number of measures of business sentiment, some of which contain responses after August 9, have moved lower. Taking all this together, we revised down our outlook for real GDP growth in the foreign industrial countries, with the change for the second half negative ½ percentage point at an annual rate. Accordingly, we now expect that monetary tightening measures in those countries this year and next, which we and the markets had been projecting in August, will not occur except in Japan. The upward revision of our figure for average second-quarter real GDP growth in the emerging-market economies from 6 percent at an annual rate to about 7½ percent is indicative of the magnitude of positive surprises we received about activity in these regions. The news was broadly based across Asia, Latin America, and other areas. Importantly, at the time of the August Greenbook, we had already received data on China’s nearly 15 percent real growth in the second quarter, so the developments underlying this upward revision arose outside China. Our forecast calls for real growth in the emerging-market economies to slow to a more sustainable pace of nearly 5 percent over the forecast period from the very rapid second-quarter outcome. We judge that, going forward, the upward boost provided by faster activity earlier this year is about offset by the implications of the weaker outlook for the United States and other industrial country economies, and so our projection for real expansion in the emerging world is about unchanged from August. At this time, we do not see sufficient evidence of financial stress in these countries to warrant incorporating into the forecast restraint from credit channels or from confidence effects. We do recognize that there are risks to the moderately strong forecast we have for the emerging-market economies. On the upside, with the pace of growth so strong in China, we may once again find that the government is unable to put in place sufficient restraint to cause a discrete step-down in real output growth there. However, Chinese stock prices have continued to rise very sharply, and we see a possible downside risk to growth from a bursting of that bubble with consequent effects on real spending. It is also possible that we are underestimating the spillover of contractionary pressures from the industrial countries onto activity in the rest of the world. For example, one channel by which such forces could weaken activity in Mexico more than we now expect is through reduced remittances. With the U.S. construction sector particularly weak, earnings of immigrant labor and remittances to Mexico could be reduced, and the result could be a slowing of growth in Mexico by more than we have forecast. Another element of the forecast worth a brief mention is the price of crude oil. The price for spot WTI recently surged above $80 per barrel as recent data on U.S. inventories and some signs of hurricane activity led market participants to bid up prices for very near term oil. However, prices further out on the futures curve have moved down since August, and our overall path for the price of U.S. oil imports is little changed to down slightly by the end of 2008. With the futures curve showing pronounced backwardation, the spot price is very sensitive to unfolding news. Should a serious hurricane or some other factor threaten near-term production, we could see an outsized reaction in the spot price of crude oil. With the shock to the global economy this time arising largely in the U.S. economy, it is fitting that we might look to the rest of the world to provide some support to overall demand, some contribution to stabilizing global economic activity in general, and some help in damping rather than augmenting fluctuations in U.S. economic activity. As we now read the evidence, such an outcome is likely this time. Strength in the most recent data has led us to revise up projected real export growth in the third quarter. Although foreign GDP growth has been revised down a bit, thereby weakening exports, the dollar is on a path slightly lower than in August; and relative prices should provide a bit more boost to exports than we previously thought. All in all, the contribution to U.S. real GDP growth from exports should be somewhat more positive over the forecast period than we expected in August despite the global financial turmoil. If the Greenbook forecast is realized, net exports should make a positive arithmetic contribution to U.S. real GDP growth of about ⅓ percentage point during the second half of this year and about ¼ percentage point next year. Brian will now continue our remarks." FOMC20061025meeting--284 282,MS. BIES.," Thank you, Mr. Chairman. As you know, since we’ve started talking about this issue, I’ve been undecided—“open-minded” is perhaps another way to say it. Wearing my supervisor’s hat, I see that we’ve been talking to players in the markets about how important transparency is to the effective functioning of financial markets and to financial transactions. So it’s hard for me to give a rationale for why the central bank is not more transparent. Being part of a democracy means that for us as a central bank—especially since we weren’t directly elected by the citizens—transparency is very important. However, the unintended consequences of what setting a goal would mean have always held me back. That’s why I support the process that has been laid out here. We really do need to take the time to think through all the consequences and, as best we can, identify some possible unintended consequences. So the evolutionary approach—let’s look at it all together before we decide—I very strongly endorse because, at the end of the day, our credibility is paramount—it is something that we have to cherish as much as we possibly can. I also want to think a little more about the dual mandate issue as we go forward. I tend to believe that having a more explicit target and continuing to achieve low and consistent inflation will, in effect, support and encourage growth and full employment. So the issue may be one of communicating that relationship. I really feel strongly about this. I have no empirical basis but just fifteen years as a corporate CFO. One disconnect that you have as a CFO in the corporate world is that you live in a world of nominal, not real, rates of growth. You worry about growth of earnings per share, and you want to know what your top-line revenue is going to do, so you think about prices and output. Having a nominal anchor for inflation would actually support corporate decisionmaking, give people better discipline about pricing power versus riding the wave of inflation, alert them when inflation is below target, and make them understand that this could be a short-run downturn in top-line revenue growth. When I think back to the ’80s, a lot of companies thought top-line growth was stupendous, and it took their eyes away from really working and operating efficiently. So I think that having a nominal anchor would actually enhance the real-world tie between our role as the central bank and corporation decision processes. Again putting on my supervisory hat, I think that one of the critical things as we state this objective is that we clearly say how financial stability fits in. We’ve been talking about central banks moving more and more to inflation targeting, but they have also been focusing more and more on financial stability and the role of the central bank in financial stability. That is one of the implementation issues we need to think through. What is the framework in which we will look at financial stability, and where might it conflict with our price objectives and inflation objectives? Regarding how we would choose an inflation objective, I am very leery of one of the proposals in the staff memo to use longer-term forecasts. I agree with Governor Mishkin that we can improve the Monetary Policy Report, but making longer forecasts is fraught with a lot of risk, and I don’t really see there’s much benefit to it. After all, our objective is not to be the best forecasters in the world. It’s to control inflation. So I don’t think it adds a whole lot of value. As President Yellen said, everybody will be asking, “What are the underlying assumptions?” It will get us sidetracked away from our overall objectives. I prefer the alternative in the staff memo that the way forward is what we did years ago when we took the rates of growth and money supply, and we just surveyed all of us. Maybe along the lines suggested a bit earlier, we just say, “Here is the range of price objectives.” Just announcing a long-term forecast doesn’t clearly say what the objective is. If we want to set an objective, let’s set an objective and not just give a long-run forecast. Another part of setting an objective is spending a lot of time thinking about the time frame over which we are going to achieve it. Saying that this is our long-run objective is one thing. It’s very different to say how quickly we’re going to return to the goal when we move away from that goal. In the discussion around the table yesterday, many of us said that inflation, even in the forecast, is running a bit higher than our comfort zone. We know we’ve been above it for a couple of years, but with this forecast we’ll be above our comfort zones for five years. In effect, having an objective—and knowing what each other’s objectives are—would have changed the discussion we had around the table. If we really believe that we’re above our comfort zone, then how can we make the decisions we’re making? What is the path? That would have implications for the staff. If we really want to hit an objective, strategy, as President Plosser said, is the real issue. How do you execute? We can all set great goals, but it’s execution that matters. A nominal objective would force the staff to spend a lot more resources in talking about the path of policy and the way we would respond to variations around that path. That perhaps could actually improve decisionmaking. Finally, getting back to the transparency issue, I think an explicit objective would put good governance around us, particularly in the difficult times when we are varying from our objectives, because we would have to talk about the tradeoffs we have with our dual mandates or financial stability concerns or whatever is creating a long-run deviation from that path. So I come back to my thought that the effort to look at this is worthwhile, but I really encourage us to think about all the consequences as we go forward." FOMC20050202meeting--94 92,MR. STRUCKMEYER.," The final chart presents your economic projections for 2005 and 2006. As shown in the upper panel, the central tendency of your forecasts for real GDP this year is 3¾ to 4 percent. The unemployment rate is projected to be 5¼ percent, while the central tendency for core PCE inflation is 1½ to 1¾ percent. As indicated in the lower panel, you expect real GDP growth to slow to 3½ percent in 2006 and the unemployment rate to fall to between 5 percent and 5¼ percent. For core inflation in 2006, the central tendency remains at 1½ to 1¾ percent. Mr. Chairman, that completes our presentation." CHRG-111hhrg56847--201 The Cost of the Financial Crisis: The Impact of the September 2008 Economic Collapse By Phillip Swagel\1\ The United States pulled back from a financial market meltdown and economic collapse in late 2008 and early 2009--but just barely. Not until we came to the edge of catastrophe were decisive actions taken to address problems that had been building in financial markets for years. By then it was too late to avert a severe recession accompanied by massive job losses, skyrocketing unemployment, lower wages, and a growing number of American families at risk of foreclosure and poverty.--------------------------------------------------------------------------- \1\ Phillip L. Swagel is visiting professor at the McDonough School of Business at Georgetown University, and director of the school's Center for Financial Institutions, Policy, and Governance. This paper was prepared for, and initial results were presented at, the March 18, 2010 public event, ``Financial Reform: Too Important to Fail,'' sponsored by the Pew Financial Reform Project.--------------------------------------------------------------------------- This paper quantifies the economic and budgetary costs resulting from the acute stage of the financial crisis reached in September 2008. This is important on its own, but it can be seen as well as giving a rough indication of the potential value of reforms that would help avoid a future crisis. On a budgetary level, the cost of the stage of the crisis reached in mid-September 2008 is the net cost to taxpayers of the policies used to stem the crisis. This includes the programs undertaken as part of the Troubled Assets Relief Program (TARP), as well as steps taken by the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) to guarantee bank liabilities. Actions to support Bear Stearns and the two government-sponsored entities, Fannie Mae and Freddie Mac, were taken before the worst part of the crisis, but their costs continued past September and are considered by many to be part of the fiscal costs of the crisis. The costs of the crisis to society, however, go beyond the direct fiscal impacts to include the effect on incomes, wages, and job creation for the U.S. economy as a whole. The crisis reduced U.S. economic growth and caused a weaker job market and other undesirable outcomes. A key challenge in quantifying such a macroeconomic view of the costs of the financial crisis is to identify the particular effects of the crisis and to separate those impacts from other developments. The broadest perspective would look at the overall changes in the economy from the start of the crisis to the end, and perhaps even include an estimate of the long-run future impacts. Implicit in such a calculation would be a decision to include both the effects of the crisis itself and any offsetting impacts from policy responses such as easier monetary policy or fiscal stimulus. A broad accounting of the costs of the crisis could also include the decline in government revenues resulting from the crisis, enactment of policies such as the 2008 and 2009 stimulus packages, as well as the impacts of regulatory changes that came about in the wake of the crisis. Under such a view, the financial crisis had large and long-lasting impacts on the U.S. economy. The Organisation for Economic Co-operation and Development (OECD), for example, estimates that the financial crisis will lead to a 2.4 percent reduction in long-term U.S. GDP, anticipating that both the reduction in employment and the increased cost of capital resulting from the crisis will last far into the future.\2\--------------------------------------------------------------------------- \2\ OECD, 2010. Going for Growth, Chapter 1, Box 1.1, pp. 18-19, March.--------------------------------------------------------------------------- The approach taken in this paper is narrower: to distinguish and quantify costs incurred so far that are directly related to the crisis and, in particular, to focus on the impact of events from the collapse of Lehman Brothers in the middle of September 2008 through the end of 2009. This is the period in which the grinding slowdown associated with the credit disruption that began in August 2007 turned into a sharp downturn. This approach produces smaller estimates for the cost of the crisis than the broad view, because the calculations quantify the costs of the acute phase of the crisis between September 2008 and the end of 2009, and not the overall impact of events both preceding and following that time period. Both approaches are valuable, and this paper is best seen as a complement to the literature on the overall cost of financial crises. This distinction is revisited in the conclusion. The results in this paper complement economic research by Reinhart and Rogoff (2009) that assesses the broad overall costs of banking crises across countries.\3\ Reinhart and Rogoff find that deep economic downturns ``invariably'' follow in the wake of crises; they quantify the average impact across countries on output, asset prices, the labor market, and government finances. Their results are also discussed below.--------------------------------------------------------------------------- \3\ Carmen M. Reinhart and Kenneth S. Rogoff, 2009. ``The Aftermath of Financial Crises,'' American Economic Review, vol. 99(2), pages 466-72, May.--------------------------------------------------------------------------- The cost of the crisis as measured here includes both the fiscal cost and the effects on economic measures such as output, employment, wages, and wealth. The difficulty in quantifying these economic impacts is to isolate the effects of the most acute stage of the crisis--the severe downturn in consumer and business spending that took place following the failure of Lehman Brothers in September 2008. The U.S. economy was already moving sideways in the first half of 2008 and most forecasters expected slow growth to continue for the balance of the year and into 2009. But the events of the fall and the plunge in economic activity that resulted were unexpected. This paper isolates the impact of the acute phase of the crisis by comparing the Congressional Budget Office (CBO) economic forecast made in September 2008, just before the crisis, with actual outcomes. The approach is to compute the difference between the decline in GDP in late 2008 and 2009 and the forecast published by CBO in its ``Budget and Economic Outlook: An Update,'' published on September 9, 2008--the Tuesday before Lehman filed for bankruptcy on Monday, September 15. The difference between actual GDP in the five quarters from October 2008 to December 2009 and the CBO forecast made just on the cusp of the crisis is taken as the unexpected impact of the crisis on GDP. This GDP impact is then used to calculate the impact of the crisis on other measures, including jobs, wages, and the number of foreclosures. The accuracy of CBO economic forecasts is similar to that of the Blue Chip consensus.\4\--------------------------------------------------------------------------- \4\ Congressional Budget Office, 2006. ``CBO's Economic Forecasting Record,'' November 2006.--------------------------------------------------------------------------- While this approach works to isolate the impacts of events from September 2008 forward, it is necessarily imprecise because it is impossible to know a) how accurate the CBO forecast would have been absent the crisis; b) whether the relationships between growth and other economic variables such as employment changed during the crisis; and c) the impact of other events from September 2008 forward that are not related to the crisis. Moreover, the calculations in the paper start with the fourth quarter of 2008 and thus do not attribute to the crisis any output or jobs that were lost in the two weeks of September immediately following the collapse of Lehman Brothers (these are still counted and appear in the charts below, but not as part of the cost of the post-Lehman crisis). The results in the paper should thus be taken as providing a rough approximation of the impact of the crisis. This is hugely meaningful, however, with American families suffering thousands of dollars of losses in incomes and wages and enormous declines in the value of their assets, including both financial assets, such as stock holdings, and real estate properties, such as family homes. These losses run into the trillions of dollars and on average come to a decline of nearly $66,000 per household in the value of stock holdings and a loss of more than $30,000 per household in the value of real estate wealth (though the inequality in wealth holdings means that the losses will vary considerably across families). These impacts on incomes, jobs, and wealth are all very real effects of the crisis. Finally, the paper looks briefly at broader impacts on society, notably the effect of the crisis in boosting foreclosures and potential impacts on human factors such as poverty. direct costs to taxpayers of financial interventions A host of government interventions were aimed at stabilizing banks and other financial sector firms, ranging from loans from the Federal Reserve to the outright injection of public capital into banks through the Treasury's Troubled Assets Relief Program (TARP). The direct budgetary cost of the crisis is taken to equal the expected net losses of these programs. The fiscal impact of the crisis considered here does not include the lower revenues and increased government spending that followed the crisis. Instead, the focus is on the costs of interventions undertaken in direct response to the acute phase of the crisis that began in September 2008, notably the cost of the TARP and related programs to guarantee bank liabilities put into effect by the Federal Reserve (Fed) and the Federal Deposit Insurance Corporation (FDIC). These costs are tallied in Tables 1 and 2, below. These cost estimates are from the January 2010 CBO estimate of TARP commitments and expected losses, and the February 2010 estimate by the Congressional Oversight Panel of the Fed's commitment to several programs run jointly by the Treasury and the Fed (the table provides references to the sources). The TARP authority was part of the Emergency Economic Stabilization Act of 2008 (EESA) enacted on October 3, 2008; this was used by the Treasury Department for a variety of purposes, including capital injections into banks, guarantees for assets of certain banks, foreclosure relief, support for the AIG insurance company, and subsidies to prevent foreclosures. CBO estimates that $500 billion of the $700 billion capacity of the TARP will end up being used or committed, with programs now in existence having a $73 billion net cost to taxpayers. As shown in Table 1, the TARP was used to support a range of activities, including the purchase of stakes in banks under the capital purchase program (CPP); special assistance to Citigroup, Bank of America, and AIG; support to automotive industry firms; support for programs to boost securitization of new lending through the Term Asset-Backed Securities Loan Facility (TALF) run jointly with the Fed; the Public-Private Investment Partnerships (PPIP) to deal with illiquid ``legacy'' assets such as subprime mortgage-backed securities; and the Home Affordable Program aimed at reducing the number of foreclosures. TARP assistance to banks on the whole is projected to generate a $7 billion profit for taxpayers (even though some banks that received TARP funds have failed or stopped paying dividends to the Treasury). Other programs, notably aid to auto firms, AIG, and homeowners at risk of foreclosure, are projected to result in substantial losses of TARP funds, with an overall net cost of $73 billion. As part of the Congressional budget process, the CBO estimates as well that there could be future uses and losses involving TARP resources, but they would not be directly related to the crisis of September 2008. In addition, the Federal Reserve lent $248 billion as part of TARP-related programs to support AIG and to foster securitization through the TALF. These Fed loans are generally well-secured--indeed, Fed lending related to AIG is now over-collateralized (the TARP having replaced the Fed in the risky aspect of the AIG transaction)--but it is possible in principle that there could be future losses and thus further costs. table 1: direct costs of the tarp ($ billions) Sources: Congressional Budget Office, ``The Budget and Economic Outlook: Fiscal Years 2010 to 2020,'' January 2010, Box 1-2, pp. 12-13, and TARP Congressional Oversight Panel ``February Oversight Report,'' February 10, 2010, pp. 176-177. Treasury commitments and costs or profits are from the Congressional Budget Office; Federal Reserve commitments as of December 31, 2009 are from the Congressional Oversight Panel February 2010 report. The $68 billion reported by the Congressional Oversight Panel represents the amount of AIG-lending extended by the Federal Reserve, but not the net cost of this lending. The Federal Reserve Bank of New York reports that the outstanding balance of Federal Reserve lending related to AIG as of September 30, 2009 totaled $36.7 billion with a fair market value of $39.7 billion for the collateral behind the lending, implying that the lending is overcollateralized on a mark-to-market basis. In effect, resources from the TARP replaced part of the initial Fed lending to AIG, leaving the TARP with losses and the Fed's remaining loans over-collateralized. Table 2 also shows certain direct budgetary costs related to the crisis that commenced before September 2008, notably Federal Reserve lending related to the collapse of Bear Stearns in March 2008, and cost to the Treasury of support for the two housing-related GSEs, Fannie Mae and Freddie Mac. These are not directly the result of the September 2008 stage of the crisis, but are shown since they are closely related to those financial market events. The financial rescue of Fannie Mae and Freddie Mac cost taxpayers $91 billion in fiscal year 2009 (October 2008 to September 2009), according to the Congressional Budget Office, and CBO forecasts a total cost to taxpayers of $157 billion through 2015 (these figures are from Table 3-3 in the CBO January 2010 Budget and Economic Outlook). These costs are related to the broader financial crisis, since the activities of the two firms underpinned parts of the housing market that were at the root of the crisis. There is a sense, however, that these costs were the result of losses that largely predated the events of September 2008--namely losses on mortgages guaranteed by the two firms, and losses on subprime mortgage-backed securities they purchased prior to the failure of Lehman Brothers. While the costs grew as a result of the September 2008 crisis and the subsequent economic collapse, it is likely that much of the losses were built into these firms' balance sheets before September 2008. As shown in Table 2, Fed lending related to Bear Stearns involves a loss of $3 billion on a mark-to-market basis--this is the net of the $29 billion in non-recourse lending from the Fed minus the estimated value of the collateral behind those loans as of September 30, 2009 (the most recent date for which estimates are available). table 2: other financial commitments related to the crisis ($ billions) Sources: FDIC: TARP Congressional Oversight Panel ``February Oversight Report,'' February 10, 2010, pp. 176-177. FDIC Temporary Loan Guarantee Program is the amount of senior bank debt covered by FDIC guarantees. Federal Reserve purchases are from www.federalreserve.gov/monetarypolicy. These figures are total (gross) amounts of liabilities guaranteed by the FDIC and assets purchased by the Federal Reserve; they do not provide the net cost or gain to taxpayers. The FDIC and Federal Reserve programs are all likely to make positive returns. Treasury costs for GSEs are from Congressional Budget Office, ``The Budget and Economic Outlook: Fiscal Years 2010 to 2020,'' January 2010, Box 3-3, p. 52. The Federal Reserve Bank of New York reports a fair market value of $26.1 billion for the collateral behind the $29.2 billion loan balance related to Bear Stearns as of September 30, 2009, implying a $3 billion loss on a mark-to-market basis. Other monetary policy actions undertaken by the Federal Reserve in the fall of 2008, such as programs to support commercial paper markets and money market mutual funds, are not included in this tally. These might well have positive budgetary impacts as the Fed collects interest and fees from users of these liquidity facilities. Similarly, the stimulus packages enacted in early 2008 and early 2009 were both arguably brought about because of the impact of the financial crisis on the economy, but these did not directly address financial sector issues and are not included here. In sum, the direct budget costs from efforts to stabilize the financial system following the events of mid-September 2008 are meaningful--with net costs of $73 billion and hundreds of billions of public dollars deployed or otherwise put at risk of loss. These figures, however, are only a modest part of the cost of the financial crisis. The larger impacts are those that affected the private sector as a result of the significant decline in economic activity that followed the crisis. These are tallied by calculating the impact of the September 2008 financial crisis on output, employment, wages, and wealth. economic costs: lost wages, incomes, jobs, and wealth The U.S. economy was already slowing in the first half of 2008, as the slide in housing prices that began in 2006 and the tightening of credit markets from 2007 both weighed on growth. High oil prices added another headwind in 2008. The economy entered a recession in December 2007; while this was not yet announced when the crisis became acute in mid-September 2008, it was clear that growth would remain subdued even under the best of circumstances while the U.S. economy worked through the challenges of housing, credit, and energy markets. Even so, the financial crisis in September 2008 clearly exacerbated the pre-existing economic slowdown, turning a mild downturn into a deep recession. In effect, the events of September and October 2008 were a severe negative shock to American confidence in the economy, and in the ability of our government and our political system to deal with the crisis. All at once, families and businesses across the United States looked at the crisis and stopped spending--even those who had not yet been directly affected by the mounting credit disruption that started in August 2007 put a hold on their plans. Families stopped spending, while firms stopped hiring and paused investment projects. As a result, the economy plunged, with GDP falling by 5.4 percent and 6.4 percent (at annual rates) in the last quarter of 2008 and the first quarter of 2009--the worst six months for economic growth since 1958. Assessing the economic costs associated with the acute phase of the crisis in September 2008 requires separating the impacts of the events of fall 2008 from the pre-existing economic weakness. While this is not possible to do with precision, one practical approach is to take as a baseline the GDP growth forecast published by the CBO on September 9, 2008--just before the crisis. The difference between actual GDP, and the CBO forecast for GDP in the balance of 2008 and over all of 2009, is then taken to reflect the ``surprise'' impact of the crisis. This is an imperfect measure since there is no reason to expect the CBO forecast to have been completely accurate had it not been for subsequent events such as the collapse of Lehman. With these caveats in mind, the September 2008 CBO forecast remains plausible as a guide for what would have happened absent the financial crisis of September 2008. The CBO forecast 1.5 percent real GDP growth in 2008 as a whole, followed by 1.1 percent growth in 2009. With the first half of the year already recorded, 1.5 percent growth for the year as a whole implies that CBO expected GDP to decline at a 0.25 percent annual rate in the second half of 2008.\5\ That is, CBO expected growth to be weak and even slightly negative in the latter part of 2008 but then pick up in 2009--indeed, the CBO forecast implies quite strong growth by the end of 2009.--------------------------------------------------------------------------- \5\ GDP data for 2008 have been revised since the CBO forecast was made; the implied negative GDP growth of 0.25 percent at an annual rate is computed using the GDP data that were available to the CBO in September 2008.--------------------------------------------------------------------------- Figure 1 plots actual real GDP against GDP as implied by the CBO forecast from September 2008 and the CBO's calculation of potential GDP--the level of GDP that would be consistent with full utilization of resources.\6\ As shown on the chart, GDP plunged at the end of 2008 and into early 2009, falling by 5.4 percent and 6.4 percent in the last quarter of 2008 and the first quarter of 2009, against CBO expectations of a nearly flat profile for output over this period. The difference between the CBO forecast and the actual outcome for GDP comes to a total of $648 billion in 2009 dollars for the five quarters from the beginning of October 2008 to the end of December 2009, equal to an average of $5,800 in lost income for each of the roughly 111 million U.S. households.--------------------------------------------------------------------------- \6\ The CBO forecast uses the growth rates in the September 2008 CBO forecast, adjusting the past levels of GDP for subsequent revisions to GDP data that were known prior to September 2008.--------------------------------------------------------------------------- figure 1: impact of the crisis on economy-wide output Note: GDP as plotted in the chart is in billions of 2005 (real) dollars at a seasonally adjusted annual rate. The dollar figures in the boxes, however, are translated into 2009 dollars. The hit to GDP was matched as well across the economy, with declines in jobs, wages, and wealth. The next step is to translate the unexpected GDP decline into an impact on the labor market. To calculate the impact on employment, a statistical relationship is estimated between percent job growth in a quarter and real GDP growth over the past year. The four-quarter change in output is used to capture the fact that the job market is typically a lagging indicator, responding after some delay to an improving or slowing overall economy. The relationship is estimated as a linear regression for quarterly data from 2000 to 2007, capturing a complete business cycle. This regression provides an empirical relationship between GDP growth and job growth--an analogue of what economists term ``Okun's Law.'' The estimated regression is not a structural model, but an empirical relationship that can be used to back out employment under different GDP growth scenarios. The GDP figures corresponding to the CBO forecast are then used to simulate the level of employment that would have occurred with the CBO forecast made before the September 2008 crisis. Figure 2 shows the impact of the acute stage of the crisis on employment: 5.5 million jobs were lost in the five quarters through the end of 2009 as a result of slower GDP growth compared to what would have been the case under the CBO forecast made in September 2008. Slow growth in the first three quarters of 2008 had left employment 1.8 million jobs lower than potential, and the CBO forecast for continued weak growth in the rest of 2008 and 2009 would have meant job losses until the last quarter of 2009, but at a much more moderate pace than actually occurred. Under the CBO forecast, employment by the end of 2009 would have been 4.0 million lower than with growth at potential, but the additional negative shock to GDP from the crisis knocked off another 5.5 million jobs, leaving employment at the end of 2009 9.5 million jobs lower than the potential of the U.S. economy. figure 2: impact of the crisis on employment Note: Employment in thousands. Figure 3 shows that the GDP hit and job losses correspond to lost wages for American families--a total of $360 billion of lost wages in the five quarters from October 2008 through December 2009 as a result of slower growth following September 2008. This equals $3,250 on average per U.S. household. Wage losses are calculated by taking actual wages with the lower growth and adding back both the wages for the jobs that would have existed with stronger growth and the increased wages per job for all jobs had growth not plunged in the fall and dragged down average wages. The additional wage growth per job is calculated using the trend wage growth before the crisis. figure 3: impact of the crisis on wages Note: Wages in billions of 2009 dollars. The value of families' real estate holdings declined sharply over the crisis as well, with a loss of $5.9 trillion from mid-2007 to March 2009, or a loss of $3.4 trillion from mid-2008 to March 2009. These correspond to wealth losses of more than $52,900 per household in the longer period, or $30,300 per household for the shorter one. The modest rebound in the housing market in the latter part of 2009 has meant that the wealth loss from mid-2008 through the end of 2009 is $1.6 trillion, or $14,200 per household. Unlike the economic variables of output, employment, and wages, the wealth measures are not adjusted for the unexpected impact of the events of September 2008. This is because market-based measures of asset values in principle should already reflect the expectation of slower growth from the perspective of mid-2008. The unexpected plunge in the economy in late 2008 and into 2009 would not be reflected in asset values, however, making these valid measures of the impact of the acute stage of the crisis on household wealth. Figure 4 shows that the financial crisis exacted an immense toll on household wealth. The value of families' equity holdings fell by $10.9 trillion from the middle of 2007 to the end of March 2009--the longest period of decline in the value of stock holdings. This equals a loss of $97,000 per household. Looking at the decline in the value of stock holdings only from the middle of 2008 to the end of March 2009 gives a loss of $7.4 trillion, or about $66,200 per household. The measure of stock market wealth includes both stocks owned directly by families and indirectly through ownership of shares of mutual funds. Data on wealth holdings are from the Federal Reserve's Flow of Funds database and are available quarterly. The wealth declines are thus measured starting from the end of June 2008 since the next quarterly value is for the end of September of that year and thus after the acute stage of the crisis had already begun. Stocks have rebounded over 2009, with the value of household equity holdings at the end of the year back to the same level as at the end of June 2008. figure 4: impact of the crisis on household wealth Note: in billions of dollars. Table 3 summarizes the economic impacts of the acute stage of the crisis that began in September 2008. By all measures, the acute phase of the financial crisis had a severe impact on the U.S. economy, with massive losses of incomes, jobs, wages, and wealth. table 3: economic and fiscal impacts of the crisis the human dimension of the crisis Beyond dollars and cents, the financial crisis had substantial negative impacts on American families both at present and, likely, for decades to come as the hardships faced by children translate into changed lives into the future. The poverty rate, for example, increased from 9.8 percent in 2007 to 10.3 percent in 2008, meaning that an additional 395,000 families fell into poverty. There is not a simple relationship between economic growth and poverty, and poverty data are not yet available for 2009, but the weaker growth that resulted following the events of September 2008 surely sent thousands of additional families into poverty. And the crisis will have attendant consequences for other economic outcomes including the future prospects for employment and wage growth of those facing long spells of unemployment. While it is not possible to count all of the ways in which the crisis affects the United States, a glimpse of the human cost of the crisis can be seen in the number of additional foreclosures started as a result of the severe economic downturn that began in September 2008. Millions of foreclosures were already likely even before the acute part of the crisis--the legacy of the housing bubble of these years was that too many American families got into homes that they did not have the financial wherewithal to afford. For other families, however, a lost job as a result of the severe recession translated into a foreclosure, and this can be estimated using a similar methodology as for the economic variables above. figure 5: impact of the crisis on foreclosure starts With the economy projected to remain weak in the second half of 2008 and into early 2009, and with many people deeply underwater with mortgages far greater than the value of their homes, there would still have been millions of foreclosure proceedings started. But the weaker economy following the acute phase of the crisis worsened the problem, layering the impact of an even weaker economy on top of the already difficult situations faced by many American families on the downside of the housing bubble. conclusion The financial crisis of 2007 to 2010 has had a massive impact on the United States. Millions of American families suffered losses of jobs, incomes, and homes--and the effects of these losses will play out on society for generations to come. This paper quantifies some of these impacts, focusing on the aftermath of September 2008 and attempting to isolate the effects of the crisis from other developments. The result was hundreds of billions of dollars of lost output and lower wages, millions of lost jobs, trillions of dollars of lost wealth, and hundreds of thousands of additional foreclosures. An alternative perspective would be to look at the overall impacts of the crisis from start to finish. This would be a broad view but a less well defined calculation: one could calculate economic impacts, for example, from the start of the housing bubble or from its peak. Or one could seek to exclude the offsetting impact of monetary and fiscal policy measures taken in response to the crisis and attempt to isolate the impact of the crisis alone. These are different (and difficult) calculations to make, but some evidence can be garnered on the broader impacts of the crisis from start to finish. The International Monetary Fund, for example, estimates that U.S. banks will take total writedowns of just over $1 trillion on loans and asset losses from 2007 to 2010, including $654 billion of losses on loans and $371 billion of losses on securitized assets such as mortgage-backed securities. The policy response to the crisis has involved massive fiscal costs, with U.S. public debt up substantially due to lower revenues and higher spending in response to the crisis, and this increase is forecast to continue under current law over the years to come. The declines in output and asset values and increases in U.S. public debt mirror the experience of other countries. As discussed by Reinhart and Rogoff (2009), banking crises across countries lead to an average decline in output of 9 percent, a 7 percentage point increase in the unemployment rate, 50 percent decline in equity prices, 35 percent drop in real home prices, and an average 86 percent increase in public debt. Figure 1 of this analysis provides evidence connecting the results of this paper to this broader literature. One measure of the overall economic impact of the crisis is the output gap between actual and potential GDP. In 2008 and 2009 combined, this gap comes to $1.2 trillion, or $10,500 per household. This is a loss of nearly 5 percent of potential GDP in total over the two years--less than the 9 percent average loss across countries found by Reinhart and Rogoff, but the costs of the crisis calculated in this paper cover only part of the crisis and only through the end of 2009. As shown in Figure 1, GDP looks to remain below potential for years into the future, implying higher overall costs of the crisis. The financial crisis of the past several years has had a massive economic cost for the United States--trillions of dollars of wealth and output foregone, millions of jobs lost, and many hundreds of thousands of families suffering hardship. These costs demonstrate the importance of taking steps to avoid future crises, and the value of reforms that help achieve this goal. " FOMC20050809meeting--121 119,MS. MINEHAN.," For a variety of reasons, I’ve had some inclination to look over the August 9, 2005 30 of 110 interesting, and I think there are a number of ways one can look at data in this area and separate out cyclical and trend developments. Looking at the forecasts we have and the important impact of the labor force participation rate, I’m wondering what your band of uncertainty is regarding your projection on the trend rate. I, for one, would hope that what we’re seeing in the early years of this century is not indicative of future female labor force participation. Maybe there is an economic reason for why that pattern of female participation is occurring, but I have yet to see one that really strikes me as reasonable. So, I’d like to know what your range of uncertainty is." FOMC20060131meeting--34 32,CHAIRMAN GREENSPAN.," So it’s not terribly dissimilar to ours. But what I think is really quite fascinating is that these relationships are largely demographically driven. In other words, the question is essentially that, if we’re heading into a society in which an ever-increasing proportion of the people are retired, then you have some real pressure to fund—which we don’t do but everyone else should. Let’s put it this way: Every pension theoretician will tell you there is no problem with pensions. All you have to do is make the appropriate maturity matches. And if you get a big surge in potential retirees, the demand for longer-term issues goes up, which we take as a given. But this is the first evidence—at least that I’ve been able to see—that this is an overwhelming force because, irrespective of the other forces that drive the long-term rates, the spread between the thirty-year and the fifty-year is really quite pronounced. And it is suggesting that it cannot be an economic forecast. We have enough trouble forecasting nine months. [Laughter] But to draw the distinction between thirty years out and fifty years out, I submit, is a wholly random variable. And so it has to be the demographics. And what the demographics are telling us is that the issue is large enough to essentially dominate the longer end of the markets. This suggests to me that the thirty-year, which we struggled to get rid of and is now coming back, may not turn out to be the longest maturity we’re eventually going to sell because the evidence suggests that there is a very heavy demand in thirty-year forwards, all of which will tend to depress the thirty-year yield if we don’t have a greater maturity. And there will be market pressures to de- link that whole thirty-year plus back onto the issue. I was wondering whether or not this subject is engaging the Street because I’ve been puzzled by the tranches of the thirty-year issue, which mature from 2020 on, when the fiscal problems in the United States seemingly mount potential instability—which is another way of saying that these pressures may overwhelm the economics. At least they are doing so in Britain. And the question is, do you think we’re going to be replicating Britain’s experience?" FOMC20060510meeting--104 102,MS. MINEHAN.," Thank you very much, Mr. Chairman. Current economic conditions are fair to good in New England. Consumers report rising confidence, at least in the current situation. Manufacturers report solid domestic and international demand. Business confidence is also good relative to the current situation. Unemployment claims and online job postings suggest continuing positive employment momentum. Northern-tier tourism was hurt by lackluster winter weather, but reportedly tourism in Boston has been quite strong. And even with the poor winter season, tax revenues have grown considerably above budget in all but Rhode Island. On the not-so-hot side, residential real estate markets apparently have slowed, particularly at the high end, with rising inventories of unsold expensive homes. Reportedly, however, more moderately priced homes continue to sell, though transaction volumes for the region as a whole are trailing off. Average selling prices for single-family homes continue to increase according to conventional home price indexes, the last ones of which we had for the final quarter of last year. More-recent anecdotes also suggest that they have been increasing. However, the rates of increase are down to single digits. To some contacts, the market, though slower, seems healthier and more realistic. From a wide range of contacts I have spoken with since the last meeting, I want to highlight three concerns. First, rising costs for energy, transportation, and raw materials are pushing price increases. These are more likely to be tolerated by customers than in the recent past. And firms that say they are unable to pass on such increases report that they expect considerable bottom-line deterioration as a result. Second, skilled labor across a wide range of industries is harder to find and expensive, though planned overall wage increases do not seem to be larger than a year ago. So there is some issue here of skilled labor versus unskilled labor differentials. Finally, there is a general worry, despite pretty good current economic conditions, that energy and energy-related costs will eat into consumer demand and, combined with the flattening in housing markets, will affect growth prospects. Now, on the national scene, our forecast is just about the same as the Greenbook’s. Growth slows for the rest of this year to next and in ’07 is slightly below potential. Unemployment rises slightly, even with continued pretty good job growth. Inflation first rises and then falls. It’s the same general forecast we’ve had for a while. But the question is where the risks to this forecast are. To me they seem to have risen, perhaps on both sides, but I’d say they’re a bit tilted to higher price growth. Q1 growth was clearly above expectations. Some of this was frontloaded into January. April employment was on the slow side; there is some evidence of slowing in housing markets, though prices continue to rise; and household wealth, including stock market wealth, is rising as well. The longer end of the yield curve has turned up, tightening financial conditions somewhat, though corporate profits remain strong and credit spreads remain narrow. It’s possible we’re seeing consumer spending slow, but business spending has strengthened. Thus, while the best guess is that the trajectory for growth is downward, how much and how fast remains uncertain and is a part more of the forecast than of the current picture. On the other hand, although incoming core inflation data have tracked only a bit above what we had expected, I’m not comfortable with what might be called the inflation atmosphere. With inflation compensation and inflation expectations rising, the dollar falling, and gasoline prices around $3 a gallon, it seems to me that inflation risks really have tilted somewhat. I know that each of these may turn out to be transitory. It’s also true that, as yet, indications of wage pressures have been mixed, and while productivity growth has been trending lower, it remains quite healthy. The global competition that characterized much of the past ten years remains healthy, and profit margins are wide enough on average to absorb the rising input costs related to a growing world. Still, anticipating core PCE price growth at 2½ percent, as the Greenbook does for this quarter, makes me at least pause. Given the six-month and the three-month rates of growth in core PCE, a slowing in rates of price growth, while expected, still is only part of the forecast. In sum, although the forecast is rosy—perhaps a bit too rosy—risks to the realization of that forecast appear to have risen. Some of these may be on the downside, but we are also at a point where estimating the economy’s remaining capacity is difficult, and the atmosphere of the inflation picture has changed. So though I don’t want to overreact or be accused of doing so, I am less sure than I was at our last meeting about both where we are and where we need to be." FOMC20060328meeting--163 161,MR. KROSZNER.," Obviously, from the remarks that we heard earlier today and yesterday, there is an enormous amount of strength and resiliency in the economy. Clearly, the economy has rebounded from a temporary slowdown in the fourth quarter. The specifics that I have heard from each of the Districts confirm the broad Greenbook view that this is going to be a pretty strong quarter. I particularly like the quotation from President Fisher that it will be “blowing and going” during this quarter. A forecast of 3¾ percent real GDP growth for 2006 with perhaps a bit of slowing in 2007 seems quite reasonable given the data that we have in hand. Consumption remains solid, and despite some less-sanguine reports at the end of last week about some orders, business investment still appears to be reasonably strong. Since there seems to be much agreement with the central tendency of the forecast, rather than review my reasons for supporting it—and I support most of the reasons that people put forward—what I want to do is focus on a few potential risk factors going forward. Not that I necessarily think that these things are likely to happen, but as Dave Stockton mentioned yesterday, there are a number of uncertainties in the forecast, which we need to focus on: First, with respect to housing; second, with respect to energy and commodity prices; and, third, with respect to expectations in the yield curve and the term premium issues that the Chairman asked us about yesterday. We have been receiving some mixed signals with respect to the housing market, although the components that tend to have the most information for assessing the future direction of the market, permits and sales of new single-family homes, suggest some considerable cooling from the very hot period in 2005. The evidence that I have from talking to property developers in the Chicago area and a bit in D.C. seems to be consistent with this evaluation, particularly in things like the condo market. We see a lot of slowing there, particularly in the Chicago area—at least from what I have heard anecdotally. Not only are we faced with the forecaster’s typical dilemma of trying to predict a trend break or a turning point, but we also have relatively few experiences in the United States over the last few decades of a downturn in the housing market. So the key concern is going to be the effect on wealth and on consumption and obviously also on the construction market. In the Greenbook, I believe the direct contribution of wealth to real PCE growth was approximately 1 percent in 2005, and the forecast is about ¾ percent in 2006, with at least half of each of these increments due to housing wealth. So, obviously, we have to be very sensitive to the concerns there. In some countries, such as the United Kingdom and Australia, even some relatively moderate downturns or slowdowns in the housing market seem to have been associated with some fairly important GDP effects. President Stern yesterday made an important point of what’s driving what. Many of the discussions about the housing market suggest that there will be some sort of exogenous shock that somehow may send the housing market down, as opposed to the housing market’s being part of the broader economy in which there are consumption demands for investment and in which houses are an asset as part of a portfolio. It is important to put housing in that context. In the other countries where we have seen downturns and GDP effects, it is hard to pull out what part was due to housing’s lead as opposed to housing’s just being one of the factors affected by a general economic downturn. So with those caveats in mind, and obviously we have to be careful about extrapolating from other countries’ experiences, I do think we should be mindful of the potential risks that are there. Second, energy and commodity prices: So far we have been very fortunate in seeing little, if any, of the run-up in energy and commodity prices feeding through to core measures of inflation, and from what I can tell in the discussions relating to the Greenbook, this has been a bit of a surprise to the staff and a bit of a surprise to the Committee. Now, this may well be due to a confluence of very fortunate factors that perhaps could be reversed in the near term, or it may be due to some longer-run changes, which President Fisher discussed. We had some discussion of this yesterday. So, as you know, productivity growth and international competition could be important factors, but at this point I do not feel that I understand enough whether this situation is just temporary and we are lucky or whether it is part of an ongoing process. And so I think we just have to be mindful of the potential risk there. And obviously with the uptick in forecasts for growth outside the United States, which could be associated with an increase in demand for energy and raw materials, further upward pressure could be put on those prices. Finally, inflation expectations in the yield curve and term premiums: Fortunately, generally the market-based and survey-based measures of inflation seem to be fairly steady, reasonably well contained. I share Kevin’s concern that some of these expectations being above 2, 2½, even in some cases closer to 3 may be a bit of a challenge, but broadly the numbers that we have been seeing around 2 seem to suggest that inflation expectations are well anchored. And it seems that one of the great achievements of this body that I have now been very fortunate and very honored to become part of is the reduction of inflation uncertainty and the reduction of inflation expectations. And these reductions, I think, help us at least in part to understand the very low term premiums that we have been seeing in the United States. But we must also recognize that we have been seeing lower real and nominal rates and generally lower term premiums around the world. In talking to market participants, I hear much less of a fear of an inflation spike in many countries around the world—not that there was a fear of an inflation spike in the United States—but I think a greater certainty about the direction and focus of the FOMC and a greater trust is extremely important. This gets back to a point that President Lacker made yesterday about the incredibly important role of expectations. What we do has to be seen not just in terms of the traditional backward-looking role of thinking about how the higher cost of capital could affect choices that people make, but also about our credibility in going forward. Choices that we make may have opposite effects on interest rates than what we have seen in the past. Raising interest rates in the short-term may have a damping effect rather than an increasing effect on longer rates. If you look to forecasts of economists outside this room and the System, you also see a fair amount of optimism, suggesting growth in the future. So the lower real and nominal rates in the longer-term markets do not seem to be due to concerns about significant slowing of the economy but to differences in views about inflation uncertainty and the level of inflation going forward. So, particularly since some of our measures—of core PCE, core CPI—are at or toward the upper end of the range of where I would feel comfortable (and, I believe, from what I have heard, a number of others around the table would feel comfortable), we have to be vigilant about that. Maintaining our credibility and the good work that this Committee has done is something that I want not to become dreaming the impossible dream but something that is the reality and that we can continue. Thank you, Mr. Chairman." FOMC20080430meeting--145 143,MR. EVANS.," Thank you, Mr. Chairman. I have a couple of questions, unfortunately. I am very sympathetic to your point about how difficult it is to understand what the relationship is between the equilibrium fed funds rate and where we are with respect to financial stress. Actually, my question is for the Greenbook team--if you could remind me again, within the Greenbook-consistent measure, how do you deal with these? You have add factors in your forecast. Presumably, they're related to the financial stress. I know that they are acting as if there is a higher interest rate at work. We also have the role of the lending facilities, which perhaps have relieved a bit of that stress. I am not quite sure how that plays out here, so if you could, please clarify that as best you can. Again, in chart 6 there is no role for the inflation preference, right? This is all about how long it takes to get back to potential over three years with this interest rate. The Board staff was very helpful over the weekend, when I asked a question about chart 7 and the fact that the funds rate took off from a higher level. If you add that type of analysis in there, it seems as if it comes down a little to what your inflation preference is. For the 1� percent inflation rate, you might want to stick where you are; if it's 2 percent, you would move down a bit. Again, that is taking it as given that you can interpret these at face value, if you will. I have another question about the fed funds futures market and Bill Dudley's chart about how the dealers seem to have slightly different expectations and whether or not that teases out anything about what Governor Kohn was talking about, because that's a very interesting observation. You know, there is much more weight below the market. " FOMC20060808meeting--161 159,MR. MOSKOW.," Thank you, Mr. Chairman. I’ll comment on just three areas, in the spirit of being general here. First, on the goals—I thought the goals that you put into the document you distributed were very good. They were very well stated and had an appropriate balance. I didn’t think that they constrain open discussion at the meetings. The communication of uncertainty and conditionality is difficult, but part of our goal should be to do it better. Second, on the quantity of information and the forward-looking content—that whole series of questions that you asked—I’d divide my comments into two parts. One, if we do go with some type of quantitative guideline, we will need to release more information. We’d need something like an inflation report, maybe quarterly, such as other central banks have, just to explain and elaborate on the guideline and how the economy was doing versus that quantitative guideline. I don’t think we could just stay with the twice-a-year report that we give now in detail. Third, we should talk about longer-term forecasts than we do now. That’s an important part of this. In fact, if this Committee decides not to go with quantitative guidelines, we could accomplish many of the objectives by just having longer-term forecasts for the economy. If we did these longer-term forecasts, we’d have to address many of the issues that are discussed in the sections here—the policy assumption question, for example. We now do that based on appropriate policy, but we could do that in different ways. But the longer forecasts would allow us to convey policy goals, to discuss expected paths to achieving those goals, and to take into account the range of opinions regarding the paths and goals without necessarily having us agree to a quantitative guideline. At this point, I’m agnostic on the question of whether we should have a quantitative guideline. I should say that I really haven’t decided yet and that the topic is for further discussion. In any case, longer-term forecasts would be one option to consider if we did not go with a quantitative guideline. Of course, if we did go with a quantitative guideline, we could also have longer-term forecasts. But I think the longer-term forecasts would help us improve our formulation of monetary policy, either with or without a quantitative guideline. I want to mention just one other point about the policy conditioning. I hope someone could do research on the Bank of England approach. Don, I know you’ve been there. They present a forecast conditioned on the market expectations for policy interest rates. They also do an alternative based on an unchanged rate path. They’ve given us an example of one case in which the forecast based on the market showed that inflation would be outside the guideline when they published it, and the market immediately reversed its view as to what the Bank of England was able to do on policy without the Bank’s saying anything. Just the publication of that forecast itself accomplished a lot of their objective. Of course, we’d have to be explicit about the technical details underlying the market expectations of the forecast, but that’s sort of a technical part of this. We’re off to a good start, and I particularly like the goals that you set forth." FOMC20050202meeting--158 156,VICE CHAIRMAN GEITHNER.," We haven’t changed our view of the national outlook significantly since the last meeting. Our forecast is quite close to the Greenbook in all components, and quite close, I think, to the central tendency of the rest of your forecasts. I don’t have anything material to report about the economy of the Second District that I think has relevance to the national outlook. On the assumption that monetary policy follows a path close to that now priced into markets, we expect growth to be above potential over the forecast period, at slightly above 3½ percent, with core PCE inflation staying around 1½ percent. We think the distribution of probabilities around that forecast is roughly balanced, and we have somewhat more confidence in our forecast this time than we did at the last FOMC meeting. At the margin, we see less downside risk to the growth forecast than we have over the past few meetings. The resilience of the expansion in the face of recent shocks, the breadth of underlying strength in the main components of GDP except net exports, the fundamental sources that seem likely to underpin a continuation of recently strong consumer spending and investment, the survey- based measures of consumer and business confidence, the anecdotal reports of somewhat diminished business caution, and the moderate pace of the expansion so far all seem to add to the arguments in February 1-2, 2005 111 of 177 There is some talk among people who run major global corporations in New York about fragility remaining in the outlook, about a world of lower growth and higher volatility, about more lurches in the outlook for economic activity and asset prices. But I think the overall tone is a bit more positive; it has become progressively more positive over the last few months. On the inflation outlook, we face diminished risk of a significant decline in inflation from current levels and somewhat higher risk of some acceleration of inflation from these moderate levels, although the recent news, of course, has been reassuring. As productivity growth slows, resource utilization increases, and unit labor costs accelerate, we lose some of the cushion that has supported what has been a very benign performance of inflation recently. Profit margins are substantial enough to absorb significant acceleration in labor costs and other costs, but firms seem to be reporting increasing pricing power still. With the markets apparently confident that we will continue to move the fed funds rate closer to equilibrium—whatever that is—we’ve been successful in keeping inflation expectations stable at relatively low levels. This forecast, of course, looks implausibly benign. It’s hard to imagine that the path of the economy between now and the end of 2006 will materialize as the consensus not just around this table but among private forecasts seems to envision. The confidence around this view, which is evident in low credit spreads—low risk premia generally—and low expected volatility, leaves one, I think, somewhat uneasy. The general reduction in fear and uncertainty that now prevails has the effect of making everything look better. But, of, course it also may increase our vulnerability to some adverse shock and could magnify the effects of some types of shocks. The greatest risk to the forecast, I believe, involves this combination of very low risk premia with our large growing external imbalance, uncertainty about the prospects for a meaningful improvement in the fiscal baseline, and uncertainty about the sustainability of high structural productivity growth. Together, these factors increase the probability of some unwelcome surprise— some unwelcome shock to asset prices which, of course, could feed into a substantial slowdown in February 1-2, 2005 112 of 177 Obviously, it would not make sense for us to use our monetary policy signal to reintroduce more cautious risk premia and greater uncertainty. But we probably need to be careful over time, to the extent that it is possible, to avoid doing things that reinforce an unhealthy degree of confidence in the future path of the fed funds rate or leave that path less responsive to changes in the data and the outlook. Monetary policy should, in my view, continue to be directed at moving the fed funds rate higher toward a level more comfortably in the range of equilibrium and at convincing markets that we will continue to move the funds rate higher at a pace determined by our evolving view of the outlook—that is, sufficiently fast to keep inflation expectations stable at low levels. I don’t know whether that path will end up being steeper or softer than what is now priced into markets. As we move today, I think the signal in our statement should try to be neutral to the expectations now prevailing about the near-term path of monetary policy. Thank you." FOMC20070131meeting--355 353,MR. MOSKOW.," I have just a factual question. On the existing Monetary Policy Report, you described it as the Chairman’s view. I looked at the existing report. It has a table with the forecast and then a few paragraphs describing that forecast." FOMC20070131meeting--395 393,MR. MISHKIN.," First of all, I want to deal with the general question that Cathy alluded to at the outset. I am strongly supportive of more-effective reporting of a forecast for several reasons. One is that it helps the market to understand our actions better, and I think that has a high value. It can be part of the process of anchoring inflation expectations, which I think is a key to successful monetary policy. Very important also is that it indicates a degree of openness and allows public discourse about our views; that has political benefits in terms of showing that we’re accountable to the political system. So I answered this question very much in the affirmative. One issue is what the research has said about this. President Fisher is absolutely right: These issues are subjective. The research staff said that there is no strong evidence, and the reason is that it’s almost impossible to get and, in terms of econometrics, it’s very difficult. The literature in the area of transparency is, in fact, somewhat unsatisfying because it’s very hard to quantify anything. In terms of research strategy, it frequently draws people to do case studies, and I am one of the criminals involved in that activity. The Chairman has also been involved in doing some work on case studies that we did together. Part of the reason is that you can look at the details and deal with this. If you get involved in evaluating monetary policy, which I did for Sweden recently, you get to talk to wide elements of the society. In the Swedish case, there was tremendous support for this degree of openness, and it was felt to be politically very valuable by some surprising groups. The labor unions were extremely supportive, for example, of this kind of openness and, believe it or not, of inflation targeting—which was somewhat of a surprise. So let me turn now to the issues that we have to discuss. I want to provide an analytic framework in which to think about this, at least for myself. I think about seven basic principles that are key in terms of how we might go about providing more information about forecasts. So here are the seven principles, and I’ll discuss them each in turn. First, we need to allow for the diversity of views. Second, this process needs to be efficient. Third, it needs to be timely. Fourth, it needs to be relatively frequent. Fifth, it needs to explain the forecast—that is, we need to tell a story, a good narrative, about it. Sixth, it needs to emphasize uncertainty. Seventh, we need to stress that the forecast period is longer than the policy period. Let me go into each of these one at a time, and then you’ll see that it leads to particular answers to the questions, at least from my perspective. The first principle is the need to allow for the diversity of views. I strongly believe, particularly now that I’m involved in this process, that the diversity of views is the strength of our monetary policy process. In fact, I take the view that people have very different jobs here. I’ve been on both sides of the fence—maybe, Janet, you have been more so because you are a president. I was just an executive vice president of a Bank. But Bank presidents bring different information to bear than the governors, and this difference helps us make better decisions. So I believe in this kind of diversity. Another very positive aspect of diversity is that we have a set of staffs. We have the Board’s staff, and then we have twelve other staffs that actually act as a check and balance on each other. Again, that has value. Finally, I believe that committees can make better decisions than individuals. Alan Blinder has a study on this topic that I thought was really quite interesting. The second issue is efficiency. Any forecast process has to be workable in finite time, and that’s really critical. I sometimes get nervous when Dave starts twitching at me, but you don’t want the forecast process to overwhelm the staffs. I’m very sympathetic. Having been in research at a Federal Reserve Bank, I have been on the other side of the fence, and so I really understand their pain. As for timeliness, there are important advantages to getting out the forecast quickly. When I said “forecast,” I didn’t mean just the forecast; I include the narrative, too, because you’ll see that I think the narrative is important. The key reason for timeliness is to give the forecast and the narrative more impact. The quicker you come out with them, the more impact they have. In particular, the environment for getting this information out is much more controlled than that for speeches or even testimony, and I think that’s the value. So quicker is much better. Timeliness also makes the forecast and the narrative less likely to be stale. The longer the interval between the policy meeting in which you make a decision and the release of the forecast and the narrative, the more likely they are to be obsolete. One danger is that data could come in and make the forecast look silly. So there’s an issue about our looking good. The faster we come out with a forecast, the better off we are. The fourth issue is frequency. The key here is that the forecast and the release need to be done often enough so that markets get the information they think they need to understand what’s going on. Fifth, a narrative is important so that markets, the Congress, and the public not only see our forecasts but also understand them. To be understood, the forecasts need a story behind them. I strongly believe that we need to write up a good story and that a good narrative can help us obtain public support for our policy actions—which is, again, a critical factor. Sixth, it’s really important to make sure the public and the markets understand the high degree of uncertainty that we face. Forecasts are tough—not just long-term forecasts but also short- term forecasts. David is, of course, nodding his head on this. The key reason that emphasizing uncertainty is important is that it can lessen public criticism when we miss—which we surely are going to do at times. We’ve actually been very good relative to others, but we’re going to make mistakes. At least, if people understand the degree of uncertainty, that will help. When you make clear the uncertainty, you make it easier for people to understand why there’s a diversity of views in this Committee. It’s not because the participants don’t like each other, and it’s not because we frequently fundamentally disagree. It is because we have different uncertainty in views of the economy, and that’s actually exactly what is indicated by the fact that forecasts are very uncertain. Also, information uncertainty is important information for the markets. We want to help the markets figure out what we’re doing and what’s going on, and we don’t care just about the first moment but also the second moment and even sometimes the third moment. Finally, the issue of the horizon—I think we need a long horizon. When you look at the literature on optimal policymaking, what comes out very clearly is that the horizon that you have to think about in terms of the paths of the variables we care about is further out than the policy horizon, which I would say would be about two years. Any sensible way of thinking about how we think about policy will typically involve periods that are longer than the two years it takes to affect output or inflation. We need to express the recognition of that because doing so will clarify that, when we have paths in our forecasts, we can then talk about how they are consistent with our ultimate objectives. To give you an example: If inflation is substantially above our comfort zone, getting inflation down in a two-year period may be too costly. As a result, we may have to talk about a longer period to assure the public, the Congress, and the markets that, in fact, we’re doing something sensible. So we need to go to a longer period than we have now. We see this clearly in the Bluebook’s optimal paths. I have some issues about their taking as long as they do to get to the inflation objective—ten years—and about how we build expectations, but they do indicate that a period longer than two years is absolutely necessary for thinking about policy. Let me now use these principles to talk about the eight questions that were posed to us by the subcommittee. First, should the forecast be a joint forecast? I answer very strongly “no.” The process for doing that would be way too cumbersome and inefficient. No matter how charming or colorful it would be, it would be a nightmare." FOMC20050630meeting--321 319,MR. FERGUSON.," I’ll continue to plow that ground just for one minute. I’m struck a bit by the fact that the stories on the run-up in commodity prices and oil prices are all about China and India. You have a forecast here where China’s growth falls off fairly dramatically. Growth in the rest of the world I would describe as maybe more of a downside risk. You point out the uncertainty in Europe and Japan and you’ve even marked down economic growth in the United States. Yet your commodity prices tend to be rather flat. All this run-up was associated with China, India, and global growth. You have global growth dampening, but we don’t seem to recover much in the way of these commodity prices—oil being one, but others in general. I’m obviously missing something. What is it?" FOMC20050630meeting--366 364,MR. STERN.," Thank you, Mr. Chairman. Anecdotes from our directors and others, incoming data on the regional and national economies, and the results from running our forecasting models all appear to me to be consistent with real GDP growth of 3 percent or more. Personally, like many others, I expect growth of around 3½ percent—the kind of expansion we have been experiencing. I’ve been struck most recently, as I reviewed the latest anecdotes and the incoming evidence on the economy, by the breadth of the positive reports, though of course much of what we have been seeing is a continuation of what has been going on for some time. So I’ll just cover the positive things very, very quickly: sustained strength in home prices, sales, and residential construction activity; incipient improvement in nonresidential construction activity; expansion in manufacturing in the aggregate; moderate gains in employment; continuing increases in consumer spending; and a positive situation with regard to capital spending. As Sandy Pianalto just noted, there are parts of our economy—what I guess I would call “old industrial America”—such as domestically owned automobile producers and their suppliers, and though not industrial, the hub-and-spoke airlines, where there are lots of problems. But it seems to me that the forecasts adequately allow for those circumstances already. So, to me, the economy and the economic expansion appear to be on solid footing. As to inflation, I have not changed my forecast, but I must admit I am a little less comfortable about the situation than I was formerly. That’s partly because we’ve gotten a little more inflation this year and last year than I had earlier anticipated. But also, as I listened to Dave Wilcox’s attribution analysis, I got a little nervous. I’ve had a lot of experience doing those kinds of June 29-30, 2005 131 of 234 the underlying dynamics or interactions of the price performance. So I’m a little more concerned than I was formerly that inflation, if not tilted to the upside, is at least getting locked in at a somewhat higher rate. Having said all of that, it seems to me that as far as policy is concerned we have been on the appropriate course and we should continue on that course. I think the policy implications are really rather straightforward." FOMC20060920meeting--99 97,MR. STOCKTON.," Part of the difference stems increasingly from our more pessimistic take on potential output. Many of those outside forecasts have the unemployment rate rising to 5 percent, and we have it rising a bit more. Some of that difference is greater cyclical weakness that I would attribute to the depth of the housing downturn that we are forecasting. But some of it is just that we see potential output as very weak as well. That exaggerates or has the potential to create a GDP illusion in comparing the forecasts, where we look much, much weaker even though our output gap isn’t that much larger. For what it is worth, in the past week I have seen more people who do a serious tracking of the economy moving toward our outlook rather than away from it. So it wouldn’t surprise me if more outside forecasters weren’t showing not something as weak as maybe 1½ percent in the second half but something 2 percent or below." CHRG-110shrg50369--28 Mr. Bernanke," Well, that is another way to put it. But, yes, inflation expectations essentially are measured many different ways, and I think the evidence is that they remain pretty stable. If you look at forecasters' long-term inflation expectations, consumer surveys, and even the financial markets, they show that inflation expectations remain reasonably well anchored. But it is certainly something we have to watch very carefully. Senator Shelby. Do you believe that setting a Fed funds rate target lower than the inflation rate--that is, a negative real rate of interest--can be an appropriate response to an economic slowdown? In other words, how long can the Fed run a negative real rate before inflationary pressures grow to dangerous levels? " FOMC20051213meeting--57 55,MR. LACKER.," I share President Poole’s longing for more understanding of the productivity forecast. My understanding is that what you call “structural” is essentially a moving average. I’m interested for this forecast, since there is such a big markup in that, to know the extent to which the December 13, 2005 24 of 100 average that had some recent upside data come into it. And the description about how you’ve altered your forecast included a reference to a technical factor that I think went over my head. Can you help us with that?" FOMC20080109confcall--26 24,MS. YELLEN.," Thank you, Mr. Chairman. I agree with both the concerns that you expressed and the analysis that you offered. Based on the data we now have in hand, I support a 50 basis point reduction in the federal funds rate in the near future. I think a very good case can be made for moving down 25 basis points today, and it would be my preference. According to what Bill Dudley said, markets apparently do attach some probability to a move of that magnitude before the January meeting. I could also support a 50 basis point move today, but I am concerned that it might be taken as a sign of panic by the Committee and somehow wrongly indicate that we have inside information showing that things are even worse than markets already think or, alternatively, be seen as an overreaction to the employment report. But if we don't move today, I do think we need to take decisive action in January, and I hope you will give a strong signal that we will do so in your speech. I agree with the staff's assessment that the outlook for economic growth has weakened since December, and I also see the downside risks to the forecast as having increased since then. We have revised down our 2008 forecast also because of the sharp increase in energy prices and the deterioration we have seen in financial conditions just since December. It is good that conditions in money markets have improved somewhat, but equity prices have fallen very substantially--I guess around 6 percent since our last meeting. Credit spreads are up, and borrowing rates for many borrowers are higher in spite of a decline in Treasury yields. I also find the labor market developments worrisome. I try not to put too much weight on any single monthly observation, but I find it entirely believable and consistent with everything else we are seeing that we have entered, at best, a period of slow employment growth. It is something that we have been expecting all along. It helps to resolve some of the puzzles we have been discussing about why labor markets have been so strong relative to goods markets. It is true that consumer spending has been amazingly robust so far, but I find it unimaginable that it can continue when slow growth in disposable income is added to everything else that is weighing on households, particularly rising energy prices, accelerating declines in house prices, and falling stock prices. It seems to me that, with the stagnant or contracting labor market, the odds of a recession--and, as you argued, a potentially very nasty one--have risen. I am also very worried about the possibility of a credit crunch if higher job losses begins to make lenders pull back credit. It is true that on the inflation front the recent news hasn't been particularly good. It certainly is true that there are upside risks. But I do take comfort from the fact that inflation compensation has remained well behaved and that we already have slack in the labor market and more seems likely to develop. I support a significant rate cut not only because of the downgrade to the economic forecast since December but also because I think the stance of policy even now with the actions we have taken--I agree with you--is still within the neutral range. Given current prospects and the asymmetric nature of the risks, particularly the high tail risk associated with the credit crunch, I believe that policy should be clearly accommodative. So having revised down my forecast, I would support a significant funds rate cut as a way to catch up with where policy should be. " CHRG-109hhrg23738--162 Mrs. Kelly," Thank you. Mr. Davis? Mr. Davis of Alabama. Thank you, Madam Chairwoman. Chairman Greenspan, I certainly--like, I think, every one of my colleagues today--wish you enormously well and a lot of good fortune in the remaining part of your career and your life. For those of us new members who have been here, like Mr. Hensarling and myself, you have been a living seminar on economic policy, and we appreciate your playing that role. " FOMC20071031meeting--168 166,MR. PLOSSER.," No, I am just saying that the communication of that rationale is tricky, and I did say that people are making their best efforts to make their forecast. I explained my view of how I discipline my forecast and how I discipline my policymaking." FOMC20060131meeting--80 78,VICE CHAIRMAN GEITHNER.," Nathan, if you look at the differences between the Greenbook forecast of the path of the external balance and those of other forecasters, can you summarize for us what the major sources of differences are? Are they about the exchange rate assumption, or are they about something else?" FOMC20071211meeting--58 56,MR. STOCKTON.," In the forecast, in fact, we do square the labor market with our forecast of weak GDP with basically flat labor productivity. Now, that’s coming on the heels of a quarter in which we had a 6 percent increase in nonfarm business labor productivity. That’s a huge gap, and I don’t think in some sense that the level of productivity that we’re forecasting here is at all at odds with the basic trend that we’ve been seeing. Now, when you ask me what we know about inventories and net exports, I’ll let Nathan speak to the net export side of things. On inventories we know virtually nothing at this point, and this forecast is actually predicated on non-motor-vehicle inventory investment stepping up. We have some offset in some sense built into this forecast on the non-motor-vehicle side, that there will be some, we think, unintended accumulation of inventories in the fourth quarter. Obviously the standard error around our forecast is very large, and it includes much higher numbers on inventories, which if that were to be the case, would obviously not bode well for activity going forward because we certainly don’t see inventories currently as so lean that they need to be rebuilt. As I indicated on the final sales side, at this point we do have, I think, enough data in hand to make us pretty comfortable with the notion that there’s going to be a considerable slowing in final demand in the current quarter. Nathan, do you want to say anything?" FOMC20081029meeting--184 182,MR. PLOSSER.," I have a question. As you characterized the forecast in the Greenbook, it is really the result of very large adjustments to the financial constraints piece--in fact, they're about double what they were in the September Greenbook--and those adjustments or factors really account for a large portion, maybe not all, of the downward revision in the forecast. Now, one of the inputs in the financial factors are spreads of various kinds in the VARs that you used to estimate those. But those spreads we've learned are very, very volatile. They can rise very quickly, as we've seen. They also can fall very quickly sometimes. Spreads have actually come down a little in the last few days, which is the good news. If our facilities are successful, they actually may fall further--knock on wood; that would be very nice. But I get a little nervous making our forecast be driven so much by something that's potentially very, very volatile. Now, we get a bit of a picture of this--and I want to applaud the staff--in I guess it was exhibit 5, where you were comparing the baseline forecast and the two alternative scenarios, particularly the one in which you get quicker recovery in the financial sector. I thought that was a very useful exercise, and I really appreciate it. My interpretation or intuition is that the ""more rapid financial recovery"" scenario is what the forecast would look like had we not done the additional add factors in October and instead held them to what they were in September. That suggests that the real data, whether on spending or other things, have driven the forecast down a little, but not a whole lot. In fact, in that scenario, you imply that the funds rate would actually be held constant at 1� percent. So, in looking at those two scenarios and trying to parse out how much risk or how much probability to attach to them, what is the staff's view? Obviously here's what you thought the baseline would be, but if I ask you what you think the probabilities are on some of these different scenarios--in particular, I'm interested in this sort of faster recovery--do you have any sense of what the probabilities of these two different outcomes might be and how one might think about that? They imply very different paths for the funds rate and very different forecast profiles, but their differences depend on variables that are very, very volatile. So can you give me some probabilities of how you think about those two scenarios? " FOMC20061025meeting--34 32,MR. STOCKTON.," I’ll turn your question around and address the trend aspect first and then discuss a bit how the cycle gets overlaid on this. Our forecast is based on some research that we’ve been doing in the past several years that was recently presented at the Brookings Panel on Economic Activity. It’s based on a very detailed decomposition of the labor force by cohort, gender, and age. The downward tilt in our projected trend in labor force participation is driven principally by two factors. One is the end of the large uptilt in the participation of women in the labor force. For a long time, women’s participation had been driving the upward trend; that continued rise offset the downward trend in the men’s participation in the labor force, which actually has been a long, ongoing trend that we expect to continue. Now the labor force participation of the entering cohort of women looks a lot like women exiting. We’re not getting any further upward press there, but we are seeing some continued downward press from men. Second, the labor force is aging, and it’s aging within this forecast frame. In 2008, we’re at the front edge of the baby boomers who are eligible at age 62 to collect Social Security payments. Bill Wascher is here if you want him to add anything about the details of his research—but when we run that model, it projects a pretty steep trend in labor force participation. Now I will get to your question about all the dynamic feedbacks. I think we would admit that this work does not have all the general equilibrium effects, the potential ways in which employers and employees might respond going forward over the longer haul to the big demographic changes that are at hand. So, any substantial changes in the incentives that employers are providing for older workers to stay in the labor force longer, if they occur, are really not built in here in any significant way. I feel pretty darn comfortable with this forecast over the time frame for which we’re doing it, which is through 2008. I think that these demographic factors will, in fact, be felt and that the labor market institutions will probably not adjust quickly enough to overwhelm the downward demographic tilt. But if we go out a lot further, we have more thinking to do about how those adjustments might occur and whether the steep downward trend that we are currently projecting would continue. As you are probably aware, in trying to model labor force participation, real wages and various other things that make a lot of sense to economists don’t always show up strongly in those models. So in this forecast we’re letting the demographics drive the trend in labor force participation. On top of the demographics is the cyclical behavior of labor force participation. We now think the labor force participation rate is probably a bit above its trend. Given the cyclical behavior of participation, we think that is not unreasonable to think that labor force participation has probably already overshot its trend—admittedly, just a bit—when the unemployment rate is below the NAIRU. So the employment dynamics and the labor force dynamics that we have going forward are driven both by the labor force participation rate returning to its trend and that trend continuing to decline. As we discussed at the last meeting, those things together produce a very small increase in overall employment growth. Also, as I think we mentioned last time, we recognize that we’re out of the consensus on this piece of the forecast. Again, I haven’t seen anything over the past year or two to make me more uncomfortable. If anything, I’ve become more comfortable with that view, given the behavior of the labor force participation rate and the unemployment rate in this period as labor markets have tightened up. As I said last time, however, if we changed this aspect of our forecast going forward and went back to a forecast of just a flat labor force participation rate, we’d obviously raise employment growth and the growth of potential output. But we’d also raise the growth of projected actual output, and thus this change wouldn’t affect our forecast of the output gap much at all going forward. So this has a big effect on the top-line GDP but not on the GDP gap. Thus if we make a mistake here, it will not have significant policy consequences because with demand and supply revised up by similar amounts, you don’t have to have a higher interest rate to choke off that demand." FOMC20051101meeting--161 159,CHAIRMAN GREENSPAN.," If you put in an inflation forecast, you’ve just targeted inflation to a point, not a range. That’s what will happen. We’ll be locked in to explaining why we didn’t move on either side of the forecast. I think it’s very tricky." FOMC20060920meeting--32 30,MR. REINHART.," President Lacker, the thing to point out in the staff forecast for CPI inflation is that they are forecasting declines in the CPI in September and October. That’s reflected in the shift in the bars at the left in that box in the Bluebook. So it really is at the very front end." FOMC20080430meeting--53 51,MR. STOCKTON.," Nathan and I thought that we would alter slightly the structure of our briefing today so as to focus a bit more closely than usual on the global and domestic outlooks for inflation. I'll start with a brief review of recent economic developments and our outlook for economic activity in the United States. Nathan will then discuss trade and foreign activity before turning to global commodity markets and our forecast for import prices. I will then explain how both foreign and domestic influences are shaping our outlook for U.S. inflation. Brian will conclude by presenting your forecasts. Let me turn first to the domestic economy. From a forecasting perspective, this intermeeting period turned out to be reasonably tranquil, at least by the standards of the past nine months. The incoming data were very close to our expectations and required few adjustments to either top-line GDP or to the individual components of spending. As we noted in the Greenbook, we continue to think it likely that the economy is in recession; and, with the data evolving pretty much as we had expected, we have seen little reason to back away from that call. Readings from the labor market support the view that, at the very least, a pronounced deceleration in aggregate activity is under way. Private payrolls fell about 100,000 in March, the third consecutive month with a drop of that magnitude, and the unemployment rate moved above 5 percent. Moreover, a notable weakening of labor markets is signaled by most of the indicators that we monitor. Surveys of hiring plans have continued to move lower; there are fewer job vacancies; businesses report that jobs are easier to fill; and household attitudes have continued to sour, including their views of the labor market. In the past, such a configuration of readings has been a reasonably reliable indicator of cyclical downturn. The spending data also have been consistent with our forecast of a marked weakening in aggregate demand and activity. After posting modest gains last year, consumer outlays and business equipment spending appear to have been at a near standstill since the turn of the year. Meanwhile, housing continues its steep descent and looks to be on track to subtract about 1� percentage points from the growth of real GDP in the first half of the year--close to our March projection. Moreover, while we had anticipated a sharp deceleration in nonresidential construction in response to more-difficult financing conditions, that sector now appears to be turning down earlier and more sharply than we had projected. Finally, much as we had been expecting, weak domestic demand is receiving some offset from ongoing solid gains in exports. All told, we estimate that real GDP rose at an annual rate of � percent in the first quarter, just a few tenths above our March forecast. As you know, tomorrow morning, the BEA will release its advance GDP estimate for the first quarter. For the second quarter, we are projecting real output to decline at a 1� percent annual rate, a few tenths weaker than our March forecast. On net, the outlook for activity in the first half is basically unchanged from the time of the last meeting. Looking further ahead, our medium-term forecast also hasn't changed much over the past six weeks. The stock market is more than 5 percent higher than we had anticipated. But the favorable effects of that development on activity are nearly offset by the adverse effects of lower house prices and higher oil prices. Consequently, the GDP gap at the end of next year is unchanged from the March forecast. Our basic story remains the same. The contraction in activity that we are projecting over the first half of the year is expected to be relatively mild because of the boost to spending and activity from the tax rebates and because export demand remains solid. In the second half, real GDP turns up, but I wouldn't really term this a recovery. After all, real GDP is projected to grow less than 1 percent at an annual rate, employment continues to decline, and the unemployment rate runs up to 5� percent. But we see a number of factors fostering a more noticeable acceleration of activity to a pace above its potential by 2009. First, the contraction in residential investment abates. Second, the drag on consumption growth from the rise in oil prices wanes. Third, financial conditions stabilize and then begin to improve, gradually reducing restraint on household and business spending. Finally, we assume that monetary policy remains accommodative. With the growth in real GDP running 2� percent next year, about � percentage point above the pace of potential, the unemployment rate drops slowly to 5� percent. Obviously, there are large risks on both sides of our projection. On the upside, we could just be flat-out wrong about an imminent contraction in aggregate activity. Claims were running about 360,000 at the time of the March FOMC and are now averaging about 370,000. While that increase suggests some further softening in the labor market, the level of claims seems lower than would comfortably fit our forecast of payroll employment declines averaging about 160,000 over the next few months. Likewise, industrial production has weakened but hasn't dropped off much. Because we don't expect manufacturing to be at the epicenter of this business cycle, we aren't looking for a plunge, but we are forecasting more noticeable declines than we've seen to date. In addition, although last week's numbers for shipments of nondefense capital goods in March were close to our forecast, the orders figures were firmer than we had expected. In sum, while the data have not pushed us away from our recession forecast, they haven't convincingly confirmed it yet either. More broadly, with bond spreads down, the stock market up, and market expectations for the path of policy revised higher, the situation certainly looks less menacing than at the time of the March meeting. But while we would agree that the risk of a very bad tail event seems to have declined, we are not ready to join others in heaving a sigh of relief just yet about the modal outlook. For one, we still see no signs of a bottom in housing. New homes sales--we received the numbers after the projection was completed--declined more than 8 percent last month to a level that we thought would be the bottom in the second half of this year. A second concern centers on consumption. With oil prices running around $115 per barrel, consumers will be facing sizable further increases in gasoline prices over the next few months from already elevated levels. Also, given the steep declines in employment that we are projecting, incomes and income uncertainty will be taking a hit. We've taken those factors on board as best we can, and we are counting on the tax rebates to provide a powerful offset, but we can't rule out a more adverse reaction to what will be an accumulation of bad news. Furthermore, while there has been improvement in the general tenor of financial markets, I suspect that we've only begun to see the effects of tighter credit conditions on borrowing and spending. That restraint could prove larger and more persistent than is implicit in our baseline forecast. Finally, the mild downturn in activity that we are projecting also suggests some downside risk. Our projected rise in the unemployment rate of 1� percentage points from its low point last year to its high point at the end of this year is small--smaller than occurred in either the 1990�91 recession or the 2001 recession. This time could be different, but as I noted in March, that argument should always give you pause. Nathan will now continue our presentation. " FOMC20070321meeting--259 257,MR. HOENIG.," Thank you, Mr. Chairman. I, too, want to thank the staff for really a great piece of work and a lot of coordination, which made this possible. First, I want to say at the outset that I do not want to move forward at this point in providing a numerical definition of the Committee’s inflation objective. Second, regarding the enhanced use of a survey of economic projections, I support the release of increased information on the economic outlook along the lines suggested in the memo. To be a little more specific, I would like to assure everyone that I believe it is important to maintain a clear commitment to price stability. That’s not what I’ve been disagreeing with at all. However, in looking at the benefits and costs of adopting a numerical inflation objective, I believe the practical benefits are relatively small at this time and the costs are relatively larger than the benefits. Therefore, I suggest that we not do it. Regarding the benefits, there appears to be little difference in economic performance of inflation-targeting and non-inflation-targeting countries that we are looking at. Also, I have not seen convincing evidence that inflation expectations are better anchored with an explicit numerical objective than with our current methods of communicating and acting toward an environment of stable prices or at least low inflation. In contrast, I think the costs at this time are a little higher. The political implications are important. I think about the law of unintended consequences or some of the longer-term reactions—and not just those of the Congress but also the public more generally. We have a commitment to a dual mandate. If we also have a commitment to a specific price target, I think that over time the arguments will mount—and I would understand them mounting—that we need a specific target for output. Then we’re going to get ourselves trying to balance this out, and frankly I think it will be difficult. So that is why I’m very reluctant to have a numerical target put forward when we have a dual mandate that suggests otherwise in terms of balancing. Now, if we do go forward, where do I come out in terms of the numerical objective? I would go with both a core PCE and a core CPI. Despite the general superiority of the PCE, and ignoring the difficulties in pricing its nonmarket components, the CPI has advantages in communicating to the public, which others have mentioned. Also, TIPS-derived measures of inflation expectations are based on the CPI. Now, I would prefer a point goal of 2 percent for the core CPI and 1½ percent for the core PCE, and I would specify a flexible time horizon. I agree that longer is better, and I won’t put a number forward at this point. Turning to the group questions, I would not support trying to achieve a consensus on the inflation objective. I do not think we can choose an inflation objective that binds future Committees. We don’t have a statutory mandate, and people’s opinions will change as personalities and experience change. Thus, we would need to revisit this issue on an annual basis, and I think that would be difficult. It seems to me that the consensus view is the de facto inflation objective. For this reason, given my earlier comment, I would prefer simply surveying Committee members on their views about what constitutes price stability. Finally, if we go this route, I would recommend that we publish simply the range and the central tendency of the members’ objectives. As I have already said, I support the proposed trial run. I thought the summary of the economic projections provided in Vince’s memo was good and useful, and I think we should go forward with that. The more difficult issue for me is how to convey the forecast uncertainty. While it is important to convey the uncertainty surrounding the forecast, I would not combine members’ central tendency forecasts with the FRB/US confidence intervals. I think you’re mixing things here, both in terms of what you’re trying to talk about and then who is talking about it. Is one the Committee’s, and is the other the staff’s? Is one referring to one thing or to something else? I think you will create confusion over time, and so I would be reluctant to go down that path, Mr. Chairman. Thank you for the opportunity to comment." FOMC20070321meeting--105 103,MR. LOCKHART.," Thank you, Mr. Chairman. Thank you for the earlier welcome. Over the intermeeting period, aggregate economic activity in the Sixth District showed signs of slowing. Manufacturing activity appeared to soften, with the majority of reports suggesting declining orders. Retail reports pointed to a slowing pace of sales. The BLS employment data revisions for 2006 supported the view that Florida’s economy has decelerated considerably in the wake of the housing downturn. Sales tax data suggest that retail spending in Florida actually declined in late 2006. Recovery on the Gulf Coast of Mississippi and Louisiana continues to proceed more slowly than hoped. The immediate post-hurricane boost to spending has waned, and the problems of housing and insurance availability remain largely unresolved. The biggest concern for the Sixth District continues to be in real estate markets. As stated at the last meeting, it appears to be too early to suggest that the region’s housing situation has stabilized or that the housing sector’s drag on the District has ended. Reports indicate that many areas in Florida are experiencing dramatic declines in sales of single-family homes and condos, even while new product continues to come onto the market. As a result of this oversupply, construction plans have been cut back. In January, permit issuance for single-family homes in Florida was 57 percent lower than a year earlier. For the rest of the United States the decline was 25 percent. Permits for multifamily development declined 40 percent versus a 7 percent decline nationally. This situation is most extreme in Florida. Interestingly, we do hear anecdotal reports of improved potential buyer traffic in Florida, but that improvement is not translating into sales. Buyers appear to be expecting lower prices. In the other states in the District, single-family permits were down 19 percent in January, less than the decline nationally. Regarding the region’s exposure to nonprime and subprime mortgages, the concern is again mostly in Florida. According to the Mortgage Bankers Association, over 9 percent of mortgages serviced in Florida in the fourth quarter of 2006 were subprime ARM loans; this exposure was second only to Nevada, which was at 13 percent, and compares with 6½ percent nationally. In contrast, the exposures of the other states in the District were all at or below the national level. Reports from banking contacts suggest that delinquency rates on nonprime ARM loans in Florida will continue to trend higher this year. Reduced access to credit for nonprime borrowers will slow the absorption of the current oversupply of housing product and will put downward pressure on house prices. Also, the boom in condo conversions and condo construction in 2005 and 2006 drained the supply of apartments in many areas in the District, and landlords have been able to increase rental prices as a result. Turning to our perspective on the country as a whole, much of the slowdown in real activity that occurred in the second half of 2006 reflected weakness in the housing sector. If weakness remains contained within the housing sector, the outlook, although subdued, is acceptable in our view. Much of the recent moderation in real activity is consistent with what we had forecast several months ago. Realization of this moderation does not in itself imply that we should revise our outlook. Some professional forecasters continue to anticipate that real GDP growth will rebound to close to its trend rate of 3 percent for the rest of 2007, in effect discounting any drag from prolonged weakness in residential investment. The Atlanta Fed staff forecasts for real GDP growth are consistent with these optimistic commercial forecasts. The current Greenbook forecast implies a slightly weaker outlook from extended weakness in residential investment and weaker growth of consumer expenditures, perhaps incorporating some signal from the recent financial distress in subprimes. Despite slight differences in these forecasts, the outlooks do not suggest recession at this point. Measured core inflation remains in excess of 2 percent. Our staff consensus forecast sees core inflation continuing in the range of 2 to 2½ percent for all of 2007. This forecast is a bit less favorable than the Greenbook forecast, but we have no sense that the inflation outlook has deteriorated significantly. The implications of the outlook for real output and inflation are that current policy is set about where it should be. The U.S. economy has performed about as expected. Financial market turbulence and subprime mortgage distress raise potential concerns that should be monitored, but for now it seems that the outlook has not substantially changed. Thank you, Mr. Chairman." FOMC20050630meeting--404 402,MR. MOSKOW.," Mr. Chairman, I support your recommendation on both the language and the increase in rates. I would just add two points. One, in the go-round there was a clear concern that core inflation forecasts have gone up, and a number of people said that the forecasts were now in a range that was at the upper end of their comfort zone. I’d be delighted if the forecasts come down, but I think that’s a low probability. Second, to Ned’s point about the tautology, I can assure him of one thing: At some point the balance of risk statement will come out. [Laughter]" FOMC20080625meeting--75 73,MR. ROSENGREN.," Thank you, Mr. Chairman. Despite some encouraging data recently, the Boston Fed economic outlook continues to see the economy growing below potential over the next several quarters, further weakening in labor markets, and core PCE trending down in response to excess capacity. Overall, our forecast has not changed significantly since our April meeting. I view recent strength in consumer spending indicators as largely borrowing from the second half of this year. This view is supported by the assessment that, apart from the fiscal stimulus, consumption fundamentals--income, wealth, and employment--remain on the weak side. Taking on board some of the increase in the May unemployment rate, our forecast has the unemployment rate peaking at a slightly higher rate than at the last meeting. In this respect, we are similar to many other forecasters. The May Blue Chip forecast had unemployment peaking at 5.6 percent. The June Blue Chip forecast for unemployment peaks at 5.7 percent. While the Greenbook has the unemployment rate peaking at 5.7 percent, as it did in April, it has the unemployment rate at 5.6 percent at the end of 2009--0.1 percent higher than the April Greenbook. So at least as measured by the unemployment rate, there seems little improvement in the outlook since the April meeting. As in the Greenbook, residential investment in our forecast continues to be a drag on the economy in 2009, and consumption holds up primarily as a result of the fiscal stimulus package, which is in part offsetting the negative impact of significantly higher oil prices on consumption. A major uncertainty remains whether further home-price declines will have a more negative effect on residential investment and consumption than we currently have in our forecast. Similarly, I would view financial market conditions as not having changed significantly since our April meeting. The three-month LIBOR�OIS spread remains quite high by historical standards at roughly 70 basis points, where it has been trading since the April FOMC. The Dow Jones, S&P 500, and Nasdaq indexes have all declined since our April meeting. Investment banks, such as Merrill Lynch and Lehman Brothers, are now trading substantially below where they were trading at our April meeting and below where they traded during the middle of March when Bear Stearns experienced difficulties. Stock prices for large regional banks have declined as they have needed to increase loan-loss reserves, raise new capital, and reduce dividend payments. I continue to be concerned that we have more, significant difficulties ahead for many financial institutions. First and second mortgages and home equity lines of credit are deteriorating at many banks as falling home prices and job losses create problems that have now spread to some prime residential products. I would characterize financial markets as remaining fragile. The past two TAF auctions still produced stop-out rates above the primary credit rate, and financial markets remain susceptible to event risk. The recent flurry of articles on Lehman before their announcement of their capital infusion highlights continued concerns about investment banks, despite our new liquidity facilities. As a result, I continue to view the downside risk of further financial shocks as being significant. Core PCE inflation has trended lower during this quarter, bringing the four-quarter change for the past year to 2.1 percent. Given that the Boston Fed forecast expects significant excess capacity over this year, we forecast that core PCE inflation will be slightly below 2 percent in 2009. If food and energy prices stabilize, we expect total PCE to converge to core PCE. We have experienced significant food and energy shocks, and oil prices continue to be higher than our expectations. I would be quite concerned should the serially correlated surprises in food and energy become embedded in inflation expectations and wages and salaries. But a critical element to my forecast is that total PCE inflation converges to core PCE as wage and salary increases remain largely unaffected by the supply shocks. In the data to date, wage and salary increases have not trended up in response to the supply shocks, and my expectation is that excess capacity in labor markets and continued competition from abroad make it unlikely that the relative change in food and energy prices will become embedded in labor contracts. For the intermediate term, I remain focused on core PCE rather than total PCE for several reasons. First, monetary policy is unlikely to have much effect on food and energy prices, which are responding, among other developments, to the impact of natural disasters such as flooding in the Midwest and manmade disasters such as ongoing political difficulties in Nigeria and the Middle East. Second, statistical evidence provided by our research department seems to indicate that over the past 20 years, when total and core inflation diverge, total has tended to converge to core and not the opposite. Third, while inflation expectations are difficult to model, the lack of an upward trend in wages and salaries seems consistent with worker expectations being driven by core rather than total inflation. While the supply shocks may have increased the upside inflation risks, the downside risks to the economy and financial markets remain quite elevated. In my view, we need more time and data to determine with greater confidence which of these risks poses the greatest danger to the economy. In terms of the options, I am comfortable with either 1 or 3. I have a slight preference for option 1. It is not that difficult for us to extend our forecast out five years. I actually think it would be easier to explain to the public than option 3, and I think explaining to the public is one of the main goals of expanding the forecast. But I could be happy with either option. " FOMC20050202meeting--154 152,MR. KOHN.," Thank you, Mr. Chairman. My forecast for economic activity in 2005 and 2006, like the rest of yours, was for growth a little faster than the trend rate of growth in potential. That reflects my judgment that the forces that had been holding back the economy in recent years have largely dissipated, allowing the effect of relatively stimulative financial conditions to continue to show through and raising the level of production relative to potential. My projection for growth in 2005 and 2006 is in line with the rate of growth in 2004. Yet energy prices, whose rise must have damped growth to some degree in 2004, are expected to be flat or somewhat lower. In addition, financial conditions have eased since the middle of the year, with bond rates and the exchange rate lower and stock prices a little higher. So, as I thought about my projection, the logical question seemed to be whether we were on the verge of a much stronger pace of economic growth. Although that’s a possibility, I see several factors that should keep growth to a moderate pace. Monetary policy and fiscal policy are at the top of the list. On the fiscal side, the partial-expensing provisions probably brought forward some capital expenditures from 2005 to 2004. For monetary policy, I assumed a continued gradual withdrawal of monetary stimulus along the lines built into the staff’s forecast or the market’s. That should lead to rising real intermediate- February 1-2, 2005 106 of 177 investment spending directly, take something off the increase in house and equity prices—holding down gains in wealth—and support the dollar. Of course, that hasn’t been the experience over the last six months or so, as President Lacker just pointed out. But longer-term real rates have fallen to such a low level that I find it difficult to believe they won’t rise from here, provided moderate growth is sustained. Indeed, I see an important downside risk to the forecast from the possibility of a sizable jump in longer-term real interest rates, which could have a pretty serious effect on house prices and consumption if it results from an unwinding of special factors or from a revision of unreasonably low expectations rather than from an unexpectedly faster pace of economic activity. Until those rates ratchet higher, however, their low level, along with the basically sideways movement of equity prices since late last year, would seem to suggest that caution among savers and spenders has not dissipated entirely. At the very least, the behavior of bond yields and stock prices seems inconsistent to me with a new more ebullient attitude that would presage boom-like conditions. In addition, the behavior of the trade deficit is likely to be damping the growth of demand on U.S. resources for a while. The staff forecast, which has net exports making a modest net negative contribution on average over the next two years, is itself premised on a pickup in foreign demand—a pickup we don’t yet see in the data. This suggests to me another source of downside risk. Over the long haul, as people become more reluctant to send us growing proportions of their savings, the deficit will have to fall. That will put considerable pressure on productive capacity in the United States, but it’s not at all clear when that will begin to happen. Finally, in making my forecast of real growth, I took account of my serial forecast errors. I’ve been overpredicting growth since I got on the Committee, so I used a sophisticated algorithm to compensate for this propensity: I decided what I really wanted to forecast and I took a little off! February 1-2, 2005 107 of 177 My projection for core PCE inflation for 2005 and 2006 that goes with this path of output is slightly higher than the staff forecast. I gave some weight to the market-based core PCE numbers, which have been running higher than the total core PCE, but that forecast remains below 2 percent, and it is stable at that level. For inflation, the question I wrestled with was: Why not further increases this year after the acceleration of 2004? In that regard, the recent data from the last part of 2004 have been supportive, I think, of a stable inflation forecast. With these data, every broad index of core inflation—from GDP prices to the CPI to PCE—grew less rapidly in the second half of last year than in the first— and significantly less rapidly, by at least ½ percentage point. This pattern is not consistent with accelerating prices. It reinforces the hypothesis that a good portion of the pickup in core inflation in the first half of 2004 was attributable to special factors: a reversal of the unexplainable undershoot in inflation in 2003 and the pass-through of higher energy, commodity, and other import prices from late 2003 and early 2004. At least in terms of energy prices—not imports, which are a big question mark—I think these upward pressures should not be a factor in 2005. In labor markets, increases in measures of compensation also slowed from the first half of the year to the second. Now, this is particularly noteworthy in that one might have expected the previous run-up in energy prices and the strength in productivity increases in recent years to put upward pressure on compensation gains. As a consequence, I think I’m a little less concerned than some others of you that slack has already been absorbed. I can only explain the recent pace of compensation data if appreciable slack is persisting in labor markets to balance these other upside pressures. In this environment, continued intense competitive conditions are likely to limit labor cost increases and the ability or willingness of firms to pass through shorter-term increases in unit labor costs into prices and thus risk market share. Finally, inflation came in lower in the second half of 2004 than I had expected. My projection was at the low end of our collective central tendency, so most of you were a little higher February 1-2, 2005 108 of 177 decline in the unemployment rate. But energy and import prices rose more than I had anticipated. Consequently, I also wondered whether at midyear I had given enough weight to the factors restraining inflation—slack, elevated markups, and stable inflation expectations. To be sure, slack should be diminishing, businesses will try to resist any squeeze on markups, and the economy may be closer to potential than it appears right now. If the dollar declines substantially, import prices will increase, reducing foreign competitive pressure. Or if trend productivity slows more than projected, firms could be more insistent and more successful in passing through costs than is consistent with keeping inflation in check. Still, for now, I think low, stable inflation is the most likely outcome for the next few years, provided policy continues gradually to firm, as slack slowly diminishes and output grows at a moderate pace. As for the balance of risks, I’ve always thought that that phrase applies primarily, or first and foremost, to the most likely path for inflation and output relative to our objectives at the assumed path for policy. And, in that context, the risks still seem to me to be balanced. The fact that I found myself asking these particular questions about the outlook suggests, perhaps, a slight skew to the distribution around these modal outcomes. But I think we should await further developments to assess whether those skews will become large enough to influence the central tendencies, the balance of risks, and the path on which we remove policy accommodation, or whether, as the market and the staff expect, we actually will need to slow the pace of tightening in the future. Thank you, Mr. Chairman." CHRG-110hhrg46594--323 Mr. Perlmutter," What is your forecast for this quarter? " FOMC20070131meeting--387 385,MS. YELLEN., Or our own forecasts. FOMC20070131meeting--386 384,MR. KOHN., Or our own forecasts. FOMC20070509meeting--57 55,MS. MINEHAN.," Thank you, Mr. Chairman. Conditions in New England seem broadly supportive of the continued expansion of the region at about the pace of the nation as a whole, perhaps because the pace of national activity has slowed somewhat and so the region seems to be lagging less, though I do think there is a bit of a brighter tone to economic activity. I certainly do not want to overemphasize that, however, as concerns do linger about the strength of job growth and the housing market, among other things. Two matters came up in our rounds of gathering data and anecdotes around the region. First, although growth in overall labor costs in the region is moderate relative to that of the nation, concerns continue about the cost and availability of skilled labor. Respondents are also increasingly concerned about other input costs—oil, copper, zinc, other metals, and chemicals—and report that they are attempting to pass on higher costs within the supply chain or directly to consumers and are succeeding in many cases. We have not heard much locally yet about the effect of three dollars a gallon for gasoline, and I am hoping the refinery outages that apparently caused this uptick prove temporary enough not to dent regional demand or to increase price pressures. However, the general rise in primary energy costs is not particularly reassuring. Second, while the residential real estate data for the region continue to be downbeat in terms of permits, starts, year-over-year sales, and price trends, anecdotes—particularly as they regard high-end markets, as I noted before—offer some hope that the spring picture for sales of existing homes will be brighter when all the data are in. I had a comment in here about spring weather; but that turned yesterday, so I won’t make that comment. [Laughter] The incoming data since the last Committee meeting contained some pluses and minuses that, by and large, offset one another. Thus our forecast in Boston, which is quite close to the Greenbook and similar to other forecasts around the table, has not changed an awful lot. In short, the economy appears to have made what one hopes is the final step-down in overall growth from its unsustainable momentum of only a year or so ago and is in the process of settling in at a pace that will gradually accelerate over this year to slightly below potential in ’08 and ’09. This forecast assumes that the effect of the housing bust begins to subside by midyear and that business and consumer confidence remains strong enough to support continued hiring, consumption, and business investment. It also assumes that strength in the rest of the world buoys corporate profits and foreign consumption of our exports and, combined with a slowly declining dollar, adds at least marginally to U.S. growth. All of this occurs with a continuation of very accommodative financial markets that both sustain household wealth and ease borrowing costs and provide a haven for foreign investment flows. Finally, the current boost in energy costs proves temporary, and inflation subsides gradually as unemployment moves up slightly, reflecting the output gap created by a year or more of slightly sub-potential performance. Looking at the data we received on other projections through ’09, our forecast fell within the central tendency in all the areas, but I think that we see inflation as somewhat more persistent than others do—along the lines of the Greenbook. In fact, this forecast sounds pretty good to me as an outcome if it works out this way, and I have even begun to think, versus where I was at the last meeting, that the risks around both sides of this forecast may be a little smaller. On the growth side, the big question involves spillovers from the housing bust and possibly the problems with subprime adjustable-rate mortgages, but we have been expecting to see spillovers for some time, and they are yet to emerge in any real way. They still might, and we, like the Greenbook authors, have marked down our forecast for residential investment in ’07 based on incoming data. But I am inclined to think that broader market and economic spillovers get less likely over time. In fact, as I noted before, maybe there is some leveling-off in sales of existing homes if we smooth through the month-to-month variation in the data. Credit restraints could well damp the participation of subprime borrowers in home purchases, but low mortgage rates ought to support prime borrowers, and we see evidence for this in discussions with local banks and certainly all the advertisements in newspapers and on television that are focusing on the theme that now is the time to borrow because mortgage rates are low and maybe they will not stay that way for long. So we think—I think anyway—that we have some reason to believe that, through this year, home buying may help keep home prices and equity positive or perhaps neutral contributors to household wealth. Indeed, assuming that gasoline prices edge off their current high levels and that equity markets continue on an upward pace, there is at least some possibility on the upside for consumer spending. Another aspect to the growth forecast that concerned me at our last meeting was the unusually slow pace of business investment in equipment and software. Given the underlying fundamentals of robust corporate profits, cash reserves, and a declining user cost, especially for high-tech goods, we would have expected faster growth. I am still concerned here, especially as such spending patterns could augur poorly for continued hiring, but I find the most-recent data on orders and shipments and the ISM survey encouraging, although as President Moskow mentioned, one should not take a lot of confidence from a single month’s data. So all in all, it seems, to me anyway, that the downside risks around growth in our forecast are a bit less. On the inflation front, I remain concerned that the forecast is just a bit too perfect. Without too extended a growth slump, unemployment rises slightly, and inflation falls slowly. We have not done the work that San Francisco has on slicing and dicing productivity, and I found Janet’s comments very interesting. I also am very much in agreement with her and others’ perspective that the level of underlying structural productivity growth may not be declining to the degree that the Greenbook authors seem to think it might. However, if what seems to be a cyclical low continues, unemployment could well be sticky. Both the recent increase in energy and raw material costs and the burgeoning growth in the rest of the world could increase resource pressures at the same time that the dollar continues its slow decline. All of this taken together could be a recipe for accelerating rather than decelerating inflation. As I’ve noted before, I really have no problem with stable inflation around its current low level. What does concern me, however, is the potential for acceleration. In that regard, the recent small moderation in core data was welcome, though certainly not sufficient to ease this concern entirely. In sum, I remain ready to bet on the baseline forecast. I think it is about as good as we can hope for. There continue to be risks on both sides, but at this point I would not weigh them equally. Being wrong on the inflation side could be a more difficult place to be. That is, if growth falters, it is clear what to do; but if inflation should accelerate, it might take a while and be quite costly to remedy. Thus, I would continue to favor policy that incorporates a bit of insurance. But we will get to that later. Thank you." FOMC20070131meeting--433 431,MR. POOLE.," May I raise a very quick question? From time to time, the politics of budget deficits get all tangled up with differences between CBO and OMB forecasts of the economy. Do we know whether Fed forecasts have ever been dragged into that argument?" FOMC20081029meeting--207 205,MS. YELLEN.," Thank you, Mr. Chairman. In the run-up to Halloween, we have had a witch's brew of news. Sorry. [Laughter] The downward trajectory of economic data has been hair-raising--with employment, consumer sentiment, spending and orders for capital goods, and homebuilding all contracting--and conditions in financial and credit markets have taken a ghastly turn for the worse. It is becoming abundantly clear that we are in the midst of a serious global meltdown. Like the Board staff, I have slashed my forecast for economic activity and now foresee a recession with four straight quarters of negative growth starting last quarter. I wish that I could claim that I place a lot of confidence in the sobering forecast, but I am sorry to say I can't. In fact, I think we will be lucky if the adverse feedback loop that is under way doesn't wrench us into a much more pronounced and more protracted downturn. The outlook for inflation has shifted markedly, too, with the days of heightened upside inflation risks behind us. In fact, I am concerned that beyond next year we run the risk of inflation falling below the level consistent with price stability. Even before the extraordinary deterioration in financial market conditions over the past few weeks, there were numerous signs that the economy had weakened dramatically. I won't recite the litany of disappointing data but instead try to touch upon some high, or I guess I should say low, notes based on what my contacts tell me. They are consistent with President Fisher's observations. Consumer purchases of durable goods, especially motor vehicles, have been particularly hard hit by the one�two punch of tight credit and reeling consumer confidence. The mood on showroom floors is downright grim. One auto dealer in my District reports that he is now experiencing the worst period in his thirty-plus years in the business. A home appliance retailer adds that he has never seen more uncertainty and gloom from both the retailers and the vendors. This sentiment is echoed by a large retailer who says simply, ""The holiday shopping season is going to stink."" Businesses are under siege from weak demand, high costs of borrowing, curtailed credit availability, and pervasive uncertainty about how long such conditions will last. Our contacts report that bank lines of credit are more difficult to negotiate. Many have become more cautious in managing liquidity and in committing to capital spending projects that can be deferred. They are even cutting back trade credit to customers. Even firms that are currently in good shape report that they are hunkering down, cutting back on all but essential spending, and preparing for the worst. Our venture capital and private equity contacts tell us that they are instructing their portfolio companies to cut costs, put expansion plans on hold, and draw down existing credit lines. The market for commercial mortgage-backed securities has all but dried up, and lenders have also become less willing to extend funding. With financing unavailable, I am hearing talk about substantial cutbacks on new projects and planned improvements on existing buildings, as well as the potential for distress sales of properties whose owners will be unable to roll over debt as it matures. The deterioration in overall financial conditions since the September FOMC meeting is truly shocking. Even with today's 900-point increase in the Dow, broad indexes are still down about 20 percent, and the latest data suggest house prices in a freefall. Baa corporate bonds are up about 200 basis points since our last meeting, low-grade corporate bonds are up a staggering 700 basis points, and to top it all, the dollar has appreciated nearly 10 percent against the currencies of our trading partners. The sharp deterioration in financial and credit conditions will weigh heavily on economic activity for some time. In addition, prospects for the one remaining cylinder in the engine of growth--namely, net exports--are bleak owing to the slowdown in global demand and the appreciation of the dollar. We now expect real GDP to decline at an annual rate of 1� percent in the second half of this year and to register two more negative quarters in the first half of next year. That forecast is predicated on cutting the funds rate to � percent by January, as assumed in the Greenbook, and also is premised on another fiscal package. An absolutely critical pre-condition for the economy to recover next year is for the financial system to get back on its feet. In that regard, I have been greatly heartened by the important actions that the Treasury, the FDIC, the Fed, foreign governments, and other central banks have taken in recent weeks to improve liquidity and inject capital into the financial systems. But we are fighting an uphill battle against falling home prices, an economy in recession, and collapsing confidence. It is not clear whether these steps will reopen credit flows to households and businesses, especially those with less than sterling credit. Under the Greenbook forecast we will see further large declines in housing prices over the next two years. Banks and other financial institutions will likely suffer larger losses than many had anticipated, and that will mute the impact of recent capital injections. The interaction of higher unemployment and rising delinquencies raises the potential for even greater losses by banks and other financial institutions and for an intensification of the adverse feedback loop we have worried about and are now experiencing. Such a sequence of events plausibly could lead to outcomes described in the ""more financial fallout"" alternative scenario in the Greenbook. There are considerable downside risks to the near-term outlook as well. As I mentioned, the most recent economic data have consistently surprised on the downside, and I see a real risk that the data may continue to come in weaker in the near term than the Greenbook has assumed. For example, a dynamic factor model that my staff regularly uses is much more pessimistic in the near term than is the Greenbook. This model aggregates the information contained in more than 140 data series. Based on the most recent economic and financial data available, this model predicts that real GDP will fall 2� percent in the fourth quarter. The model's pessimism reflects the combination of the recent weak data releases for the month of September, followed by the abysmal data that we have available so far for October, including financial market prices, regional business surveys, and consumer sentiment. Turning to inflation, the most recent data have been encouraging. Looking forward, the sharp decline in commodity prices, especially oil prices, will bring headline inflation down relatively quickly. More fundamentally, the considerable slack in labor and product markets will put downward pressure on the underlying rate of inflation over the next few years. A number of my contacts already report that their businesses are working on lower margins in the more challenging economic environment. I expect headline PCE price inflation to decline to about 1� percent in 2009 and core PCE price inflation to be 1� percent next year. I expect both inflation rates to edge down to 1� percent in 2010. Given the sizable downside risk to the forecast for growth, the risks to the inflation forecast are likewise weighted to the downside. In conclusion, I think the present situation obviously calls for an easing of policy, as I assumed in my forecast. Given the seriousness of the situation, I believe that we should put as much stimulus into the system as we can as soon as we can. " FOMC20050809meeting--76 74,MR. SANTOMERO.," David, I thought your discussion of the details of the Greenbook forecast was very enlightening. I want to congratulate you for the presentation. The implications for inflation that flowed from that were clearly stated. The question I have is whether the confidence band around your forecast for inflation has changed very much. Is it as symmetric as it was?" FOMC20050630meeting--354 352,MR. SANTOMERO.," Thank you, Mr. Chairman. Economic conditions in the Third District softened somewhat in late spring, but this appears to be temporary and our business contacts continue to expect gains in line with recent trends. Retail sales fell in May. For many area retailers, this was attributed to cold and rainy weather in the early spring, and early reports in June suggest that sales have picked up with the return of warm weather. The outlook for auto sales, however, remains subdued. Earlier in the year, dealers had been optimistic that auto sales would improve. Now they expect fewer sales this year than last. Manufacturing activity in the District also weakened in June. After showing a sizable rebound in April, the index of general activity weakened in May and turned negative—with a reading of minus 2.2—in June, which is consistent with flat manufacturing activity. The indexes on new orders and shipments remained in positive territory, and our respondents did not expect this lull June 29-30, 2005 112 of 234 As part of the Board staff’s survey, we polled the District’s business contacts, including those in manufacturing, retailing, and services, on their plans for capital spending over the next 6 to 12 months. About half of our firms reported that they planned to maintain capital spending at current levels. Plans for increased spending were more prevalent among nonmanufacturers than manufacturers, while planned reductions were scattered across both types of firms. Activity in other sectors of the region continued to expand in the intermeeting period. The downward trend in nonresidential construction appears to have bottomed out, and commercial real estate leasing activity has been rising. There have been six consecutive quarters of positive absorption. The pace of home sales has risen since the winter and was about steady during May, at a very strong pace. House-price appreciation continues to be strong. Regional employment continues to grow, although not as strongly as in the first quarter. Employment rose in each of our three states for the first two months of the second quarter. The three-state unemployment rate declined from 4.8 percent in the first quarter to 4.5 percent in April and May. Business contacts continue to report that it is difficult to find employees to fill openings. One of our contacts says the labor shortage in southern New Jersey has reached crisis proportions. One pharmaceutical firm in the District is bringing in workers from its plant in Seattle, while a large energy company in our District is trying to attract skilled labor from as far away as Alabama. Other companies report that it’s taking much longer to hire people than was true a year ago. Price pressures in the District continue to build but at a slower pace than earlier this year. The current and future price indexes in our manufacturing survey moderated in June, but remained at relatively high levels. A special manufacturing survey question in May revealed that nearly half of our participants had raised prices of their product lines since the beginning of the year, and about June 29-30, 2005 113 of 234 of the goods they are purchasing have been roughly steady, fuel surcharges are common on goods shipped to them. In summary, economic conditions in the Third District softened a bit in the late spring, but indications suggest that this is temporary. Regional business contacts remain upbeat and generally expect an improvement in the region’s economy in the months ahead. My assessment of the economic conditions in the nation is similar to what it was last month. The expansion continues with the fits and starts one expects to see as the economy approaches a sustainable growth rate and full employment. The revised data suggest that there was not much, if any, soft spot in the first quarter. While some of the recent monthly data have been on the soft side—for example, May employment growth and retail sales—these follow months where the data were on the high side. Payroll employment has averaged 180,000 per month this year, consistent with our forecast. Although the second quarter is likely to be softer than the first quarter, averaging through the monthly volatility shows an economy that is growing near its potential and is close to full employment. Higher oil prices will likely have some dampening effect on economic activity and put some upward pressure on inflation, but the effects need not be strong enough to divert the expansion. The economy has proved quite resilient as the price of oil increased from $30 a barrel at the beginning of 2003 to over $60 a barrel more recently. I’d like to compliment the Board and Reserve Bank staff on the housing price discussion. I found myself somewhat comforted by the analysis showing rather benign effects, at least at a macroeconomic level, from the potential drop in real estate values. And I also wanted to June 29-30, 2005 114 of 234 review the various potential explanations for the decline in long rates as short rates have risen and to think about their different implications for monetary policy. That said, I find the arguments that lower long rates might be signaling a persistent economic slowdown unconvincing. None of the forecasters we poll is predicting such a scenario. For example, our most recent survey of professional forecasters suggests sustained output growth over its forecast period. I find the explanation that focuses on an increase in demand for long-term debt relative to supply more interesting. But as the staff points out, the reason for the outsized demand would be relevant, as would information concerning its expected persistence. The implication for monetary policy would presumably depend on the source of the demand and its perceived persistence. Putting the pieces together, our forecast is similar to that in the Greenbook. We both see the economy expanding at near potential and closing in on full employment. The major difference is that the Greenbook projects a decline in core inflation between this year and next, while we are projecting a rise in core inflation; hence, my question earlier. We think there is less slack in the labor market, so we expect growth in hourly compensation to run above productivity gains and to accelerate modestly in 2006, leading to a modest rise in unit labor costs. This rise in unit labor costs translates into a slowly increasing core inflation rate. We also anticipate some depreciation of the dollar, which will cause a modest rise in import prices, and we anticipate some pass-through from the energy price increases into core inflation. I believe inflation will remain well contained over the period, provided we remain focused on our goal of price stability. Consistent with all of that, our forecast incorporates a steeper path for the fed funds rate than does the Greenbook. Given my assessment of economic conditions and the forecast, I believe it’s June 29-30, 2005 115 of 234 last meeting, it seems likely that we will continue to raise rates until we actually come to what we perceive to be the end. Given the underlying strength of the economy, the potential for increased inflation, and the fact that policy remains accommodative, I do not think we’re at the end of the tightening cycle. Regarding the language, I’ll leave the specifics to the policy discussion. But our discussions last month persuaded me that we have sufficient flexibility with the current language and that the time to make significant changes may be when we pause and feel uncertain about the future direction of policy or when we think a significant change in policy is required. Thank you, Mr. Chairman." FOMC20050630meeting--324 322,MR. LEAHY.," These forecasts are based on the futures quotes. There may be some differences in view between our forecast for China compared with what the futures markets are thinking. They might be a bit more upbeat about the outlook for China. But we do have a little downward tilt here, and I think it’s consistent with some slowing in China." CHRG-109shrg30354--85 Chairman Bernanke," I wish I could, Senator. The forecasts are made under that assumption, and each person who is submitting their forecast makes their own assumption about what that would be. So what I take this to be is really a summary view of what we can achieve, where we should be heading with policy. Senator Sununu. If everything goes perfectly? " FOMC20061025meeting--177 175,MR. REINHART.," I think, actually, that the chart I had in my briefing that showed the nine primary dealers’ forecast of real GDP tracking above the Greenbook forecast suggests that they may have moved it down but they haven’t moved it down as much as the staff." FOMC20070807meeting--55 53,MR. MOSKOW.," Thank you, Mr. Chairman. Conditions in the Seventh District have changed little since our last meeting. We continue to lag the nation largely because of difficulties in the auto industry. Our contacts thought that the U.S. economy had softened a little since June but that international sales continue to be strong. They also voiced continuing concerns about input cost pressures. There is no good news to report on residential construction. Some of my contacts again pushed back their expectations on when housing markets would begin to improve and are now saying later in 2008. We did hear some upbeat comments from our directors about nonresidential construction in the District, but manufacturers of heavy equipment indicated that they were seeing less demand for products that are used in nonresidential construction. We also heard some less-optimistic reports about consumer spending. A major shopping center developer and operator scaled back his expectations for the second half of this year and now thinks that spending will be softer than in the first half. In addition, a large national specialty retailer saw a broad-based slowing in its sales over the past six weeks. Still, no one was overly pessimistic. In our own forecast, we assume that the weakness in consumption relative to trend during the second quarter was largely transitory, perhaps a reaction to the run-up in gasoline prices. Regarding the motor vehicle sector, the major topic of discussion is the current labor negotiations and the possibility of a strike in September. I get the sense that the odds of a walkout are small because both the automakers and the UAW think that a strike would be very damaging. As our director who heads the Michigan AFL-CIO noted, a strike would be mutually assured destruction. The UAW realizes that the negotiations are occurring against the backdrop of very bad economic conditions in the traditional automaking regions. For example, since 2000, Michigan has lost 400,000 jobs. That’s an 8½ percent decline in employment. A strike would be seen as just adding to these economic woes. So from all my discussions with management and labor, my impression is that the climate for change underlying these negotiations is stronger than it has been in the past, but I am not sure how big a move the UAW leadership thinks it can get approved by its members. Of course, the major development affecting the forecast since the last round is the turmoil in credit markets that we were talking about earlier. Our director who runs a major private equity firm made a number of interesting comments regarding the difficulties that banks were having selling off loans that had been made to risky borrowers with extremely beneficial terms, such as covenant-lite and an option to accrue interest charges. The bottom line is that he thought that after the current shakeout there would be fewer buyouts and that pricing and terms would become more reflective of risk. Going forward, it seems likely that the market will favor so- called strategic buyers, the nonfinancial firms that are looking for acquisitions that would directly enhance the efficiency and scale of their business operations. So while we are concerned about the negative implications of tighter credit conditions, markets may now do a better job in pricing the tradeoff between risk and return, which is a positive development. So how might these financial developments affect the real economy? If sustained, the fallout of credit market jitters on the stock market and other assets would weigh on spending through the standard wealth-effect channels. With regard to the credit markets themselves, the key question is how many of the deals that are now being canceled or scaled back would have resulted in an expansion of business activity as opposed to simply transferring ownership. Given the modest changes in interest rates on higher-rated debt, continued growth in C&I lending, and ample internal funds of nonfinancial firms, the cost of capital for most investment projects probably has not risen substantially. So the first-order effects on spending will likely be limited. Of course, this could change quickly in the current volatile markets, and we will need to monitor these developments carefully, or should I say you will need to monitor these developments carefully. [Laughter] However, right now, putting all these factors together, we view the developments in credit markets as a risk to the near-term forecast but not a reason to lower the outlook for growth very much. That said, we, like the Greenbook, have marked down our assumptions concerning potential. We now see potential as a bit above 2½ percent. However, relative to potential, our forecast for real activity is not much different from last round. We see growth averaging close to potential in the second half of ’07, which is stronger than the Greenbook, but running a touch below potential in ’08 and ’09, which is similar to the Greenbook. Our inflation forecast also has not changed much since June. We still see core PCE prices increasing a shade below 2 percent by 2009. But I must say I remain concerned about the inflation forecast. The standard list of upside risks—the lack of resource slack, cost pass- throughs, inflation expectations—these could break the wrong way and require a policy response. So, if potential output growth is, in fact, significantly lower than our earlier assessment, then you could face some challenges in calibrating policy as the economy and economic agents adjust to the lower trend in productivity growth." FOMC20060328meeting--64 62,MR. STOCKTON.," And by having the actual participation move sideways to meet our trend that is moving down, we were trying to convey in essence that some implicit tightening is going on there. So, in fact, we felt quite comfortable with what I recognize was a somewhat adventuresome forecast for the trend participation rate, which was to have it go down as much as we do in this projection. But it looked pretty good over the past year as a forecast. Even as the unemployment rate has come down, we really have not seen much of any recovery in participation, which makes us a bit more confident, or at least a bit more comfortable with our forecast, that participation is not going to be headed up significantly." FOMC20061025meeting--189 187,MR. PLOSSER.," That’s right. [Laughter] Well, you’ve got to take it when you can, right? Inflation continues to be higher than I’d like to see, and I still believe there are larger risks on the inflation side than on the growth side. Growth will be slower in the third quarter—we have all acknowledged that. But we also discussed around this table the fact that even the Greenbook is now predicting a somewhat larger bounceback in the fourth quarter; indeed, I remain optimistic that in general the bounceback is going to be somewhat quicker than the Greenbook’s forecast. We’ve had some good news on inflation: It seems to have stabilized somewhat. But given our earlier pause, extending the pause seems the prudent thing to do from my perspective. If growth as forecast by the Greenbook into the next several quarters remains significantly below trend, actually holding rates steady for a while would be an implicit firming of policy, which may have the desirable effects on inflation that we might need to have in order to bring down inflation. However, if growth bounces back more strongly than the Greenbook forecasts, which I believe is a likely outcome, we may have to consider additional increases in the fed funds rate going forward. Thus, from that standpoint, I really don’t view the prospective policy path as particularly symmetric. I believe that the path more likely would be to hold it fixed and allow a weakening economy to somewhat firm policy and do our inflation work that way; or if growth responds more quickly, we may, in fact, have to engage in more firming policy. As regards the language, I’m a little torn. I’m a bit with President Minehan. I kind of like B, I kind of like B+, but I also worry a bit about the language and the implications it has for the market. I actually find myself in agreement with Governor Kohn on many of his points. I like his prospective change to section 2, getting away from what we think are somewhat unusual factors in the third quarter and not emphasizing that quarter too much. Of course, you might do that by just leaving section 2 almost as it was last time. The only difference is that you’re making a statement that going forward the economy seems likely to expand at a moderate pace. The first sentence in section 2 of our last statement, or the only sentence in section 2, really conveys almost the same thing that I think Governor Kohn was trying to achieve, but I’m certainly happy with section 2 as suggested by Governor Kohn. I believe it’s clearly premature to send any signal whatsoever that a rate cut is being contemplated in the near term, which I think is how the language of alternative A, section 4, would be read. I think that any change in the risk assessment language that would lead market participants to lower their expected path of the fed funds rate would in my opinion be counterproductive. I also think that mentioning the possibility that the slowdown in economic growth will become more pronounced, again as section 2 of alternative A seems to suggest, would be very misleading and would be inconsistent, as has been noted, with some of the optimism expressed around the table yesterday. Thus Friday, when the advance estimate of the third quarter is released, language A would be read as our expecting growth to be less than 1 percent going forward, and I think that’s really not what any of our forecasts are suggesting. I believe there is a greater likelihood that growth will be higher rather than lower in the coming months than the Greenbook shows; and unless we see evidence that economic growth is weakening significantly compared with our forecast, lowering the fed funds rate just will not be a very likely outcome. I think we should be reluctant to suggest in our statement that we are now more inclined to lower rates. For those reasons, I really don’t favor the language in alternative A. Relative to alternative B, the language in B+, as I have suggested, accurately reflects the view that many of us around the table have—that the data we have seen actually have truncated some of the tail on the downside and that the risk of a really bad outcome has somewhat diminished over the past few weeks. But I’m afraid that trying to use B+ to fine-tune expectations too precisely may create more problems than it solves. So I tend to favor keeping the language as constant as we can. Thank you, Mr. Chairman." FOMC20080625meeting--98 96,MR. MISHKIN.," Thank you, Mr. Chairman. Well, we have seen recent data that actually have been stronger than expected. Also as time goes on, there seems to be a lower probability of financial meltdown and these adverse feedback loops that we've all been discussing. But I don't think we want to become too sanguine about the current data because some very negative things are going on that might tell us that this is just very temporary stuff. In particular, it's really remarkable how weak consumer sentiment is. There is also a huge hit from energy prices, and it's going to get worse. One thing in the Greenbook is that the very low margins that we've had in refining are going to increase, so we're going to see gasoline prices that are well over $5.00 a gallon, according to the kind of numbers you're coming out with, and that is going to be a major contractionary hit to household spending. Luckily I don't drive much anymore--I'm down to less than 600 miles a year right now--so maybe that is okay, but unfortunately I'll get back to driving more in the future. In any case, I do think that what the Greenbook has done is reasonable in terms of changing the forecast. They have a stronger first half, but the longer-run forecast, particularly regarding the output gap, is really not very different, and I think that's a reasonable forecast. My baseline is somewhat less optimistic because I feel that the ""delayed credit recovery"" alternative scenario was actually a nice one to put in this Greenbook, and I was glad to see it because it is very close to the way I am thinking about the situation right now. I think there's going to be a much slower recovery of financial markets than was in the Greenbook baseline because two things have to occur for us to get back to normal underwriting. This, of course, doesn't mean what we had before, which did not have serious enough underwriting standards, but something we think is realistic given the kinds of risks in the economy. Financial institutions have to have enough capital just to make loans--so there's the direct effect that we think about. But also the securitization market is clearly very impaired. Eventually it will come back, but it will need new business models to solve the agency issues that have led to all of the heartache that we've seen recently. When I think about how that is going to happen, I think the large financial institutions have to play a key role because you need somebody who will originate these loans and then will have the incentives to make sure that the agency problems are not severe. Only when that's done can they be sold off, and that requires that there is recourse, which requires that they have plenty of capital. Of course, it is a very slow process for them to build up capital in the current environment. So given that situation, I think the idea that the financial markets will be back to normal over the next year or two is a little optimistic. It's going to take a long time for this to get worked out. So the bottom-line scenario is one in which we're going to have strong headwinds for quite a time, and that's going to be important in terms of our monetary policy stance. When I think about inflation, as you know, I put a lot of emphasis on long-run inflation expectations and on expectations about future economic slack in the economy. At this point, I do not see a major change and deterioration in long-run inflation expectations. I'll explain that in a second. I should emphasize that I say that is true so far. But an issue is whether that will change, and that's going to be very important in terms of how we manage monetary policy. The first things I look at when I think about long-run inflation expectations are, of course, the surveys of consumers. As you know, I've always been a little skeptical of them, but I think that my views are very similar to the ones that President Yellen mentioned. I have a slightly different explanation using behavioral economics. Behavioral economics tells you that surveys will rise a lot with what happens currently and overreact and that's exactly what should happen because it's a framing issue. You see very high headline inflation. You're going to raise expectations of inflation one year out. But it's very natural that you're going to raise them for the longer term, and they'll come back down when headline inflation comes down. So I really am not as concerned about the survey expectations being a long-run problem as long as inflation comes back down. I think there are good indications that it will, given that headline is so much higher than core and that core has actually stayed very stable. The other things that I look at, and look at much more seriously, are the Surveys of Professional Forecasters (which have basically moved up a bit but not very much and have not gotten much out of the range in which they have been in the past) and then information from financial markets, that is, inflation compensation. Again, that has not risen recently, and actually it's better than it was at its peak. So I don't see a huge problem there. What this tells me about the inflation forecast is--you know, I'm a 2 percent kind of guy on PCE, and I'm still a 2 percent guy--that even though headline inflation is very elevated, we're going to see over the forecast period that inflation will come back down to around the 2 percent level both on the headline and on the core. However, though my baseline on this is that inflation will return to a level that, by the way, I am comfortable with as an inflation objective, I do very much worry that inflation expectations could be more fragile in the current environment. So it's not that I think we have to do something now. But we do have to be extremely vigilant to see whether inflation expectations are actually starting to move in an undesirable direction, and if so, we will have to take action. The challenge may be that we have to take action when unemployment is still rising, but what is key is that we have to be aware of that. My modal forecast is that it isn't going to happen, but I think we have to be ready to deal with it and deal with it quickly. As you know, I'm not a believer in gradualism in circumstances such as we are in currently, and I think this applies to dealing not only with financial disruptions but also currently with inflation expectations. We have to be willing to move very quickly in that context. Let me turn to the issue of long-term projections. You will not be very surprised to know that, in fact, I'm a supporter of this. This Committee has actually been well served. Even though it is not my normal personality--as you know, I like to move fast on things--we have moved in an evolutionary process in terms of communications, and I think that has worked quite well for us. This is just an obvious next step. Our communication strategy in terms of the long-run projections now has an important flaw in that we are not providing the information that we intended to provide, and it needs a fix. We now realize that that's the case. It's particularly relevant concerning information about potential output growth and the NAIRU. I do share the concerns that President Lacker mentioned on these, and I have talked about this in many speeches. I think this can be handled by speeches--in particular, by the Chairman emphasizing these issues going forward. So I don't see it as a huge problem, but it is something that we have to deal with. In any case, we need to clarify what our projections mean. We're not providing information that we should. We have to fix it, and there's no reason not to. I think it's a minor change. I do not think that there will be much reaction by the markets or in the political sphere on this. I agree completely with Governor Kohn that, relative to the other problems that we are dealing with, this is very small potatoes; but I think it is good to show that we're still sticking to the basic things that we need to stick to and that, in this very complex environment, we can do the things that need to be done on communication strategy. That argues that we should be doing this and even doing it right now. Regarding the issues that you raised about going more to the full Monty on this kind of stuff, I do agree with Vice Chairman Geithner that now is not the time to do that. I should mention that I will be giving a speech in which I will be advocating going to an explicit inflation objective, but that's because I'm leaving the Board, and I have to say what I think. But there's an issue in terms of what this Committee should be doing, and I am sympathetic to Vice Chairman Geithner's view that this is not what we should be doing for the Committee right now. On the other hand, I'm a free individual now. In going back to be a civilian, I can say what I want. In terms of my preferences, I really don't feel strongly. There are a lot of issues here. When I first thought about it, I preferred an option like 3 because I didn't want to give the impression that we're great at forecasting five years out, and I think that's really the strongest argument for it. But I do understand how we articulate that is a little tricky, and I think that's something that we have to think about. It might be clearer to do something along the lines that President Bullard discussed, as arguing it that way, but maybe we can do it in some other way. I think that's exactly why the staff can have some extra work for themselves to think about the best way to describe this, but I think something along the lines of providing information that we actually are putting in our projections right now, where we have a little section that says, ""What are your long-term assumptions?"" and we put them down. Somehow we need to convey that information to the public. Then the question is, What's the best way to do that? You can have all the wonderful arguments that we have over the statement each period. We'll get something like that going, and I think we'll figure it out. Thank you. " CHRG-111shrg49488--34 Chairman Lieberman," Right. Let me ask Mr. Green, Dr. Carmichael, and Dr. Clark, from outside the United States looking in--acknowledging that we have heard some mixed testimony here on the question I am about to ask--and based on your experience, obviously, what role do you think the fragmented nature of our current structure played in the extent of the current economic crisis here in the United States? Can you make a judgment on that, Mr. Green? " FOMC20071031meeting--19 17,MR. STOCKTON.," Well, I should get the facts before I answer your question in terms of exactly how this compares with both the 2000 period and the 1990 period. We could certainly do that and circulate it to the Committee. Obviously, in our forecast we have credit growth decelerating not just because overall activity is decelerating but because we think there will be some important restraints on credit availability going forward. Most of that, of course, is on the mortgage side, but some of it is on the business credit side as well. That said, we are not forecasting a deep credit crunch. If you were more concerned that that was what you were facing, I don’t think this forecast is consistent with it. This forecast is consistent with some unusual restraint on the availability of credit, principally on the mortgage side but more broadly elsewhere, but not truly a deep or strong headwind type of episode in which there is substantial impairment going forward. As I noted at the last meeting, even the restraint that we do have on the credit side fades over the coming year." FOMC20070918meeting--59 57,MR. PLOSSER.," Thank you, Mr. Chairman. My first question was very much related to what Charlie just asked. First let me say that I appreciate the tour of the sausage factory. It was a little bloody, but I want to commend you in that I think it was a fairly balanced way of looking at what the risks are in various places. But I want to come back to my interpretation of what you just said. Your answer to President Evans sounded to me as though a significant part of your downward revision, particularly to consumption, was the factor of consumer sentiment, which is looming rather large in this forecast. While you’ve revised down some other things, it sounded as though you were saying that consumer sentiment is a particularly sensitive and difficult thing to forecast. We know it is very volatile; it can change rapidly. But I heard you say that in the forecast you have implicitly reduced consumer spending and held it low for a period of time into the forecast. Am I misinterpreting your answer there?" FOMC20060920meeting--101 99,MR. STOCKTON.," The answer to that is “yes,” and I think there is some risk. One feature of our forecast is the fact that we are not projecting large declines nationwide in house prices. We are expecting a deceleration but not any outright declines. One could imagine that more of the adjustment could take place more quickly by a big drop in house prices that in some sense clears out that inventory through higher sales and maybe less production adjustment. On that side, you would probably get a quicker housing cycle than the one that we are projecting. However, it also brings with it some downside risk in that households would realize how much their net worth had fallen, which could have consequences for consumption both directly through the wealth effect and perhaps through sentiment. That correction could be quicker and maybe deeper, but then the rebound could be faster. That is a risk we have certainly contemplated. We were a little nervous about being too adventuresome on the house-price forecasting. We are not very good at forecasting asset values, we never understood how prices got as far out of alignment as we think they are, and we are not sure exactly what the process of correction is going to look like. So we have taken a middle stance between two models: one model that basically forecasts house prices off pure momentum and another one that takes seriously the analytical apparatus, which we showed you a year and a half ago at our special briefing on housing, that looks at the error-correction process of house prices to rents. The latter model actually does forecast outright declines nationwide in house prices by 2008. We are between a momentum model, which expects house prices to slow less than we are forecasting, and this error-correction model, which shows bigger declines." FOMC20071211meeting--61 59,MR. PLOSSER.," Thank you, Mr. Chairman. I have sort of a longer-run question that I’d like to pose. I was looking at the alternative scenarios in the Greenbook, and one of the things that I was looking at was the funds rate path that was described as the market-based forecast for the funds rate. It drops almost 150 basis points, or 100-plus basis points, between now and the middle or end of next year. One consequence of that, though, seems pretty benign—that there’s not much change in the inflation forecast at least through 2009; it changes only about 0.1 percentage point—and there are some positive effects on output, particularly in ’09. It appears, at least within this period, that 100 basis point rate cuts seemed to be pretty much free. So I guess my question to the staff is, Is there a price to be paid for that, and if I run the forecast out beyond 2009, will any of those prices or those consequences appear in the forecast for inflation? If so, how long would I have to look before I saw them in the model?" FOMC20070321meeting--56 54,MS. JOHNSON.," Constructing our outlook for the rest of the global economy this time entailed assessing the information in and implications of varying indicators of activity from different regions, the somewhat weaker prospects for U.S. output growth, and the backup in global oil prices. In addition, we struggled to understand the likely consequences of the episode of financial market volatility that emerged in global equity and credit markets at the end of February as well as the risks to our forecast that this episode might foreshadow. In the end, our baseline forecast for real GDP growth abroad is just slightly stronger over this year and about the same next year as in the January Greenbook. Our projection for foreign inflation has been revised up just a little in response to the higher level of our path for oil prices. The resulting contribution for U.S. real GDP growth this year from the external sector is about neutral and that for next year is a small negative; we now see exports, relative to the January forecast, as contributing slightly more positively to U.S. GDP growth over the forecast period and are projecting an arithmetic negative contribution from imports that is a bit smaller in magnitude, especially this year. The favorable news for activity abroad was mostly from the major foreign industrial countries. We were particularly surprised by Japanese real GDP growth in the fourth quarter, which in the latest data was an annual rate of 5.5 percent, 2 percentage points above our expectation in January. Household consumption showed some signs of strength—a development that has been lacking in Japanese economic activity for a long time. In addition, private investment spending increased at a double-digit rate. Available indicators for activity in January, such as machinery orders and household expenditures, support the view that solid expansion is continuing, and we have revised up our near-term forecast such that our projected growth rate for 2007 is ½ percentage point stronger. The economic expansion in the euro area continues to firm, and we were surprised by the fourth-quarter growth rate there, as well. The 3.6 percent annual rate of growth recorded for last quarter was 1 percentage point higher than we had expected in January. That strength was due particularly to investment and to export demand. We have revised up our outlook for growth over the forecast period about ¼ percentage point as a result. Within emerging Asia, real GDP continues to expand vigorously in China and in India, sustaining expansion in the region at an average annual rate of about 6 percent. We see average growth in Latin America this quarter as having been slowed by weakness in Mexico that is related to softness in U.S. manufacturing production. Mexican growth should rebound in line with the projected improvement in U.S. industrial production, resulting in average growth in the region of about 3½ percent over the forecast period. We have revised down slightly our forecasts for growth in Mexico and emerging Asia relative to the January outlook. On balance, we do not see the negative implications of the slightly weaker U.S. projection this time as outweighing the indications of robust domestic demand in Europe and Asia. Accordingly, our baseline forecast continues to be for vigorous growth on average abroad. A weaker U.S. outcome than projected is clearly a downside risk for the global economy, however. The rise in oil prices over the intermeeting period erased some of the inflation restraint that the low January level of global crude prices provided. We have added a couple of tenths to our inflation projection as a result, with most of the upward revision projected for the Asian emerging-market economies that are very dependent on imported crude oil. The heightened financial market volatility that appeared in late February was a global event, with stock prices in several major foreign countries declining 2 to 6 percent through the date of the Greenbook and then retracing somewhat over the past week. Credit spreads widened for risky credit abroad, including emerging- market sovereign risk spreads, and yields on long-term governments bonds moved down in the euro area, the United Kingdom, and Canada as investors shifted to higher quality securities. But in many instances, these moves just brought the particular price or yield back to its level toward the end of last year. Although the drop in Chinese stock prices on February 27 was seen on that day as a contributing factor, market developments on subsequent days support the view that much of the concern of global investors is directed toward the U.S. expansion and, in particular, the U.S. subprime mortgage market. We do not see the market correction to date as a source of significant restraint on spending abroad. In addition, the evident weakness in the U.S. housing sector has limited potential for spillover to economic activity abroad. Accordingly, we have strengthened a little our forecast for foreign real output growth and reduced the magnitude of the net subtraction from U.S. GDP growth implied by the projections for exports and imports. Clearly, global financial market participants are ready to react strongly to any news suggesting less-favorable outcomes on investments. This poses a negative risk to the global outlook as the financial market response to a negative shock may intensify the consequences of that shock for credit extension, spending, and ultimately global growth. On the upside, we have been surprised by the strength of domestic demand in some foreign industrial countries, and we could be underestimating its momentum. In addition, a more buoyant outcome for China is always a possibility. Last week we received data on the U.S. balance of payments for the fourth quarter, completing our picture for the year as whole. Although the annual total for the current account deficit rose in 2006, the balance for the fourth quarter narrowed quite a bit. That narrowing is due to a reduced trade deficit and a swing to positive in the figure for net investment income. A decrease in our nominal oil bill largely accounts for the improvement in the trade deficit, but the non-oil trade balance also narrowed somewhat. The smaller bill for imported oil in the fourth quarter resulted mainly from lower prices, although the quantity imported declined as well. The balance on the portfolio portion of U.S. net investment income was a sizable deficit that widened about $4 billion at an annual rate from the previous quarter. However, the positive balance on direct investment income jumped nearly $40 billion at an annual rate as receipts continued to be robust and payments fell sharply. The decline in payments was widespread across sectors and countries. The net result was a positive figure for total investment income of nearly $19 billion. Going forward, we expect that the current account deficit will resume widening from its reduced, fourth-quarter level and will reach about $950 billion, or 6½ percent of GDP, by the end of 2008. We project that a widening of the trade deficit will continue, with the oil and the non-oil components of the merchandise balance both becoming larger deficits. However, a positive change in the balance on services will partially offset the deterioration in the deficit on traded goods. The net investment income balance should account for a larger portion of the current account widening. The positive balance of direct investment income should drop back in the near term but then rise slowly to record a small, positive net change over the forecast period. However, the negative balance for portfolio income is expected to increase in magnitude significantly, as our net international investment position records yet greater net indebtedness. This increasing net indebtedness and wider current account deficit will continue as long as the trade deficit remains sizable. David and I will be happy to answer any questions." FOMC20050630meeting--289 287,VICE CHAIRMAN GEITHNER.," Let me just follow this conversation a little further. If I get this right, what is new in the forecast, based on this conversation today, is that you’re anticipating a little more persistence in what we view as the underlying rate of the core PCE deflator. And it ends the forecast period higher than we previously expected. Again, that is in the context of a forecast where you’re expecting both oil and commodity prices—and import prices, too, I think—not to be a source of negative pressure. They constitute a sort of positive factor on the inflation dynamic. And you’re expecting structural productivity growth to stay fairly high. What is interesting, I think, is that you haven’t changed your implied path for the fed funds rate significantly. I guess my question is: Why is that? It’s not that your growth forecast has come down and is significantly softer. It’s not as if you’re substantially more pessimistic on the outlook for growth relative to potential. So why wouldn’t that view on inflation, if it’s right, have induced June 29-30, 2005 97 of 234" FOMC20080805meeting--50 48,MR. PLOSSER.," So in the way you've modeled this in your forecast, are you thinking of yourselves as modeling that net effect, or do you think of yourselves as modeling and forecasting just one side? Have you made any effort to incorporate both sides of this potential effect? Even though it may be small, the question is how small it is. " FOMC20070131meeting--132 130,MS. MINEHAN.," In the forecast, yes." FOMC20061212meeting--34 32,MR. MOSKOW.," Otherwise, you change the forecast." FOMC20070918meeting--62 60,MR. STOCKTON.," That would raise the forecast, as I said." FOMC20081029meeting--264 262,MR. MADIGAN.," 7 Thank you, Mr. Chairman. I will be referring to the version of table 1 that was distributed to you on Monday. It is reproduced in the package before you labeled ""Material for Briefing on Monetary Policy Alternatives."" Changes in the language relative to the Bluebook version are shown in blue. Starting on the right-hand side of the table, even though members saw the economic and financial information that became available over the intermeeting period as worse than expected, they might be inclined to leave the stance of policy unchanged at today's meeting, as in alternative C. As noted yesterday, your 7 The materials used by Mr. Madigan are appended to this transcript (appendix 7). economic projections reveal that many of you anticipate that inflation pressures will diminish less quickly than the staff anticipates, and several of you noted explicitly that you thought less easing would be appropriate than was assumed in the Greenbook forecast. Also, the Committee already reduced rates in early October, responding to at least some of the adverse economic news. Moreover, the Federal Reserve has put in place additional facilities to support credit intermediation, and the Treasury and the FDIC are moving quickly with the implementation of other programs that should, with time, help stabilize financial institutions and markets and enhance the flow of credit to households and businesses. Finally, you might believe that the Congress is likely to enact a second fiscal stimulus package, possibly reducing the need for additional monetary policy accommodation. The rationale section of the statement suggested for alternative C would acknowledge the intensification of financial turmoil and the weakening of the economic outlook. However, it would also cite the range of policy actions taken in recent weeks as factors that should help over time to improve credit conditions and promote a return to moderate economic growth. The language on inflation would be essentially identical to that used in the Committee's statement earlier this month, noting that the upside risks to inflation have been reduced. The risk assessment would state explicitly that the Committee's primary concern is the downside risks to growth, suggesting a predilection for lowering rates. Nonetheless, with market participants anticipating an easing today--a 50 basis point move is seen as most likely--an announcement along the lines of alternative C would point to a much higher trajectory for the federal funds rate over the next few months than investors had expected. Short- and intermediate-term Treasury yields would likely jump, credit spreads probably would increase further, and equity prices might decline sharply. If the Committee is of the view that further policy accommodation is appropriate at this time but is also quite uncertain about the extent of rate reductions that will ultimately be required, it might be attracted to the 25 basis point easing of alternative B at this meeting. Members might have a less pessimistic outlook for the economy than that presented as the baseline in the Greenbook or might at least be quite uncertain as to the extent of the negative forces at work in the economy. At the same time, you may view the incoming information as suggesting that the 50 basis point easing earlier this month is unlikely to be sufficient to adequately balance the risks to economic activity and inflation. Given these considerations, you might see modest further easing today as appropriate and be prepared to cut rates again in coming months should developments warrant. The statement proposed for alternative B would note that the pace of economic activity appears to have slowed markedly, and it would repeat language from your early October statement indicating that the financial market turmoil is likely to exert additional restraint on spending. The announcement would also indicate that, in light of the decline in the prices of energy and other commodities, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability. As noted in a box in the Bluebook, we think that, in view of your previous policy communications, outside analysts would interpret such a statement on the inflation outlook as indicating that the Committee anticipates that overall inflation will drop to around 1� percent to 1� percent before long, a indication that would be consistent with the central tendency of your inflation projections for 2009. The risk assessment in alternative B, paragraph 4, would cite the same broad range of policy actions that was proposed in alternative C, paragraph 2. It would indicate that the predominant concern of the Committee is the downside risks to economic growth. Market participants see a 25 basis point easing at this meeting as possible, but at this point they seem to place significantly higher odds on a 50 basis point reduction. The explicit citation of downside risks to growth would suggest that further easing could be forthcoming after this meeting, but this announcement still would suggest a higher path for the federal funds rate than they anticipate. Consequently, short- and intermediate-term rates might tend to edge up after such an announcement, credit spreads might widen somewhat further, and equity prices might decline. Under alternative A, the Committee would ease policy 50 basis points at this meeting. An economic outlook along the lines of the Greenbook forecast would provide one rationale for choosing this alternative. The Greenbook forecast for aggregate demand has been slashed dramatically, importantly reflecting a sharp decline in equity prices, a steep rise in credit risk premiums, and a considerable climb in the foreign exchange value of the dollar. One metric for this revision is the Greenbook-consistent measure of the short-run equilibrium real interest rate, r*, which has been cut nearly 3 percentage points since the September meeting to a level of about minus 3 percent. That level is about 2 percentage points below the actual real funds rate defined on a consistent basis. The staff outlook for a protracted period of substantial economic slack, together with the recent plunge in energy prices, points to a considerable diminution of inflation pressures, with overall inflation falling to 1� percent next year in the Greenbook forecast--even with the Greenbook's assumption of 100 basis points of further easing by early next year. But even those who are somewhat less pessimistic about the outlook than the Board staff might view the modal outlook as having deteriorated enough, or the downside risks as having increased enough, to warrant a 50 basis point rate cut today. The rationale language for alternative A in the revised version of table 1 is similar to that for alternative B, but alternative A, paragraph 2, notes additional factors that are restraining growth. The risk assessment, too, is similar to that for alternative B, but it references the rate reduction that would be implemented today under this alternative and notes that downside risks to growth remain, without saying that the downside risks are the Committee's predominant concern. An announcement along these lines seems largely consistent with market participants' expectations, and the market reaction would likely be relatively small. Thank you, Mr. Chairman. " FOMC20080430meeting--66 64,MR. STERN.," Well, sorry. The more fundamental question is that I have been trying to get comfortable with an outlook that would have core inflation leveling off and maybe declining a bit, and that's the forecast I have. But I took your presentation, which I think was certainly on the right topic, to say that the risks around the core inflation forecast seem to be symmetric at this point. Is that a fair characterization? " CHRG-110hhrg44901--110 Mr. Bernanke," Forecasting is always very difficult, and it is extremely difficult when you have the kind of financial issues that we have had recently because it is just hard to know which way that is going to go. Unfortunately, for monetary policy purposes, because monetary policy works with a lag, even if our forecasts aren't very good, we have to take our best stab because we have to have a sense of where the economy will be when the monetary policy actions begin to take effect. So we have at the Federal Reserve just about the best team of forecasters anywhere, and they have done a very good job over the years. But they are facing a very, very tough environment both because of the global issues that you mentioned and because of the changes in financial situation. " FOMC20051213meeting--61 59,MR. LACKER.," Okay. If I could just follow up for a second: In the late ’90s, your forecast of productivity growth seemed to display a cyclicality—almost a responsiveness to recent productivity growth—that in hindsight took it up above where productivity growth came in and then down below it. Are you worried about the sensitivity of your forecast to recent data?" FOMC20060328meeting--247 245,MS. YELLEN.," Thank you, Mr. Chairman. I think overall we are in a good position at this point with the economy essentially at full employment and growth homing in on potential, which will, I hope, hold unemployment roughly steady. Core inflation is pretty steady although, at least by several measures and particularly the core PCE, it is in the top half of the range that I would like to see. But I agree with Governor Kohn that this is a matter that we should consider. What index, and where it is relative to what we would like, bears further thinking about. If you take inflation to be in the top half of a comfort range as opposed to the middle, an optimal policy setting would place the funds rate toward the upper end of a neutral range or would be minimally restrictive. I say “minimally” because we are at most a little above the middle of the so-called comfort range and also because the various rules presented in chart 7 of the Bluebook suggest that the appropriate response of policy to a deviation of inflation from the middle of the range is actually quite small. If inflation were to decline, say, 50 basis points, from 2 percent to 1½ percent, the response, according to most of the rules in the table, of the fed funds rate to that deviation is on the order of 25 or 30 basis points. So it is sort of a one-policy-move difference. At this point, it seems to me, policy is pretty close to appropriately positioned. In terms of risk assessments, I share Governor Kohn’s concern about the possibility that growth won’t actually slow to a sustainable pace and so the economy may overheat. But I am also concerned about overshooting, in part because the delayed effect of our policy actions may show up especially in the housing sector with greater force than we expect and we are a little uncertain— David mentioned this yesterday—about just what the spillovers might be to consumer spending via balance sheet effects or wealth effects. I think we do need to be sensitive to the possibility of overshooting, and here I would endorse President Hoenig’s comments on that. So I can certainly support a 25 basis point tightening today coupled with some slight policy inclination for further firming. But I would not like to do anything to boost the market’s perceptions of the likely ending point of the cycle. I’m not sure what the best way is to accomplish that. I had first found myself having some preference for using the alternative language suggested for B that would say that some modest additional policy firming may be needed. But I am not sure that is the right way to go. As I look forward, I share the concern that a number of you have expressed—that as we get to the May meeting we are going to find not only that markets expect us to go another 25 but also that an additional 25 will be priced into the market. And it seems to me that the construction of our statement raises the likelihood that markets are going to continue to build in expectations for moves beyond 5 percent. Let me explain in part what I’m worried about. I am worried about the way in which line 3 of alternative B characterizes our concerns about energy and commodity prices. As I looked at the new Bluebook handout that Vince just gave us, I liked the change that has been made in line 2 where it says that the economic growth has rebounded but in effect then adds, “But look, in our Committee forecast, we wanted to let you know we’re expecting really strong numbers for Q1, but we think it is then going to moderate to a more-sustainable pace.” Now, we might have tried to do the same thing in line 3, but unfortunately we didn’t. We don’t state what our forecast is to give markets a reasonable way to judge incoming data. Let me get a bit more specific about what I mean. Consider the Greenbook forecast for core PCE inflation for the remainder of this year. I’m more optimistic than the Greenbook is, but the Greenbook forecast is that, for the remainder of this year, core PCE inflation is going to come in at 2.2 percent, which is certainly above the top end of the comfort range that I or anyone else who has opined on this has suggested. So what will the market response be if the Greenbook forecast actually materializes? It seems to me that the Greenbook projects that the uptick would be temporary, so we needn’t respond. But the statement in B essentially says, “Look. The run-up in energy prices has had only a modest effect on core inflation.” In effect, it says we continue to think that that will be the way the world transpires, and in the end I think it says that we regard it as an upside risk to our forecast that elevated prices of energy and other commodities have the potential to add to inflation pressure. So if, in point of fact, the Greenbook is right and we start seeing 2.2 for core PCE, what will markets conclude? “Yes, this is what they’re worried about. They’re really worried that an upside risk to their inflation forecast is that inflation is going to come in this high. What are we to conclude other than that this is a negative surprise to the Committee, and therefore they are going to go above 5 percent?” So we have told market participants in line 2, “Don’t be surprised if you see a very strong growth number in Q1. We think that’s temporary. It’s going to abate.” What we haven’t told markets is the comparable thing, namely, that we may well see a boost in core PCE inflation for the next couple of quarters, but we think it is temporary. One thing that we could do would be to change the phrasing and say in line 3 that the elevated prices of energy and other commodities may boost core inflation modestly for a time. That would distinguish this from the case of rising inflation due to resource utilization, which we do see as an upside risk to our forecast. But generally whether or not we make this change, I am concerned that we are going to see more increases priced into fed funds futures, and I would cheerfully endorse the kind of move that has been made in this draft of alternative B, in which the Committee’s forecast for growth has been clearly enunciated. And moving in that direction for our baseline forecast for inflation would be a useful way to go as well. If I could just spend one more second, I would like to propose a bit more wordsmithing in alternative B. A principle, or a practice, that I learned at the Council of Economic Advisers that I think would be a good one for us is that you never make a statement that purports to be a statement of fact unless it can be fact-checked. [Laughter] This process is rigorous there. I would say the first statement in line 3—“as yet the run-up in the prices of energy and other commodities has had only a modest effect on core inflation”—is not fact-checkable. I believe that’s the case. I think most of you believe that’s the case. I wouldn’t want to have to fact-check it. I don’t know how you would do it. I would add something like “has apparently had only a modest effect on core inflation.” The point about the fact that productivity gains have held the growth of unit labor costs in check, I don’t personally mind that at all. I agree with that. I simply think that it is not the only thing—arithmetically modest compensation gains have done the same thing. So I do not mind listing it, but I would say “have helped.”" CHRG-110hhrg44901--67 Mr. Bernanke," Again, I think I would not put much weight on this technical terminology. I mean, I think it is clear that growth has been slow, and that the labor market is weak. And so conditions are tough on families. I have no doubt whether it is technically a recession or not, and I don't see how that makes a great deal of difference. As far as the projection is concerned, we see continued growth, positive growth but weak for the rest of the year. Looking at the housing market, it is beginning to stabilize, at some point around the end of the year, early next year. And with the hope that we can continue to strengthen the financial system, we would hope to see recovery back to more normal levels of growth in 2009. But like all economic forecasting, there are uncertainties in both directions. But with respect to the current situation, again, whether it is a recession or not doesn't really play in our policy decisions. " FOMC20070131meeting--349 347,MR. LACKER.," I’m not suggesting that we reduce the public’s uncertainty to less than our uncertainty about future outcomes. But the econometric evidence is that Greenbook forecasts are superior to the private sector’s forecasts. So if the public knew them, their uncertainty would be lower. I think there’s reason to suspect that more information, more communication, from us about our outlook is likely to reduce the public’s uncertainty." FOMC20051101meeting--104 102,MR. KOHN.," Thank you, Mr. Chairman. I’d like to talk a little bit to the point Bill made, especially if we’re going to do a survey of Committee members. I like the way we’re getting the forecast now. The staff has a view of forces of aggregate demand, potential supply, and inflation pressures, and they take that view and fold in some course of Federal Reserve policy that will produce an outcome that we see in the Greenbook. And in some cases, for some types of prices, they think they can’t do any better than the market so they just put in the market forecast. Other prices, like bond yields, etc., are endogenous; stock prices are endogenous to the process. If we ask the staff to put together a forecast that had their view of demand and supply and November 1, 2005 27 of 114 and demand and market prices—I’m not sure what we’d get in the end. We’d get an outcome that could look very strange from time to time when their view and the market’s view differ. And then we would want to know what we would have to do in order to produce something that looked more sensible. Right now, we have your fed funds forecast in there. If we went the other way, I would ask for another forecast that incorporated how the staff thought market prices would evolve. There’s no perfect way of doing this. But I’m a little more comfortable with the way it is done now than I would be in the other case." FOMC20070131meeting--328 326,MR. FISHER.," Brian, on your exhibit 4, you point out that there’s no econometric evidence that publishing forecasts—these improved methodologies—has actually had an effect from an econometric standpoint. But you make the statement that observers agree that forecasts have improved communications and accountability, which is a more subjective statement. Who are the observers?" FOMC20071031meeting--163 161,MR. PLOSSER.," Thank you, Mr. Chairman. The last time we sat around this table, I and many of you argued for what the markets described as a surprisingly aggressive 50 basis point rate cut. At that time, the baseline Greenbook forecast was for 25 basis points, 25 in subsequent meetings, and then flat thereafter. Our rationale was that we were trying to act preemptively, trying to get ahead of the curve, to limit some of the potential spillover effects from what we then believed to be a weakening housing market, perhaps a somewhat softer labor market, and the financial turmoil. We also argued that higher-than-normal tail risk loomed out there, that it was associated with the financial market meltdown, and that it warranted aggressive action to help forestall the possibility of that. In the forecast that we submitted in September, and we all submitted a forecast, the appropriate policy varied. Nine of us submitted appropriate policy as being consistent with the Greenbook, which was 25, 25, and then constant. Of the remaining eight, seven of us had a 50 basis point cut in September, which we did. Many of those, including myself, had some further cuts to the funds rate but further out in the economy, more like in ’08, later in ’08, and ’09, as we move toward more-stable inflation, expectations coming down, a recovered economy, and so forth. I was certainly in that camp as well, and in fact, most people ended up with a funds rate forecasted at either 4¼ or 4½ percent—little differences but not much. In September, only two of us anticipated appropriate policy as dropping 75 basis points before the end of ’07. Of course, we all have the luxury, fortunately, of changing our minds in response to data and other things, and certainly all of us are doing our best to read the tea leaves of the economy, both aggregate and within our regions, and that influences the color and texture that we put around our forecast. We all work very hard at that, and I respect those efforts. But I think it is important that, as a Committee, we enforce discipline and systematic behavior on ourselves as our views evolve, particularly as those views influence policy choices. Without that discipline, without that systematic behavior, I find it very difficult to figure out how I am going to communicate to the public about what monetary policy is doing and why. It makes both our commitment and our credibility, either to inflation or to employment growth, more difficult to substantiate. It makes transparency in general more difficult. All of those things—commitment, credibility, and transparency—are important elements of what contributes to a stable economic environment. Now I have tried to impose that discipline about policy on myself by focusing on the incoming data, trying to focus on how those data cause me to revise my outlook for the real economy, not for tomorrow or next month particularly but for the coming quarters. After all, the monetary policies we have just been talking about operate with somewhat of a lag. In that sense, I think there has been a lot of discussion by myself and others around the table that we are data- driven, that we are forecast-based in how we think about our policy choices, and that we try to take a somewhat longer run view. I think that view is important to communicate to the public. I suspect that at the end of our last meeting—certainly I can speak for myself—many, if not most, of us probably would not have anticipated that we would cut again at this meeting. Perhaps some of you did. Certainly, your appropriate policy paths in our forecast at the last meeting didn’t suggest that. But we wouldn’t have anticipated cutting unless we thought that the outlook for the economy had noticeably deteriorated. So what has really happened since the last meeting? Well, the collective forecasts that we submitted—in terms of risk assessments, ranges, medians, and however you want to look at them—hardly budged. The Greenbook forecast didn’t change very much. The economy generally had better-than-expected news on many fronts—not hugely better but certainly the surprises were on average to the upside for most of us given our forecast from last time. I thought we generally agreed that the risk of serious financial meltdown, while perhaps it hadn’t vanished, had mitigated at least somewhat. As a consequence, neither the Greenbook nor our collective FOMC forecasts moved very much. To the extent that they did, they actually moved up a little. Based on that forecast and on the data that came in, I’m in a very troubled position in figuring out how to justify in my mind additional rate cuts at this meeting. Had this meeting been held two weeks ago, as President Poole suggested, before the market’s reaction to the write- downs in some of the financial institutions, before the fairly dramatic flip-flop in the fed funds rate futures market about the assessment of a future rate cut, I certainly would not have been in favor of a rate cut at that time, and I suggest that each of you should ask yourself the question that Bill did: Would I have chosen to cut rates at that time? I certainly would have also resisted the temptation, arising from those data and what has happened over the past two weeks, to be in any great rush to think we needed to call a special meeting of the FOMC to consider additional rate cuts. My attitude would have been that these financial markets are volatile and they are bouncing around an awful lot, we understand that there are risks, but let’s wait and get the data on the real economy and see how it is evolving and make appropriate decisions at the time. What worries me is that we run the risk of being whipsawed here by market expectations or by the financial markets that are moving around in a very volatile way. That leaves me with some concern that we may be putting ourselves in a position of either responding too much to these volatile markets or being accused by markets of being bullied by the financial markets. So at this point, my take is to say that we are going to get a lot of data between now and December. We are going to get two more employment reports, as we have discussed. We are going to get some more information about retail sales and consumption. I would prefer to keep my own approach to discipline-based policymaking by looking at the forecast and waiting for the data to tell me whether my forecast deteriorated significantly. If it has, I will be the first to argue for an additional rate cut in December if I think it is called for. Right now we have a difficult time justifying a decision. On what grounds are we going to justify it, particularly in a more systematic fashion? I think that creates problems for us. As we have already been discussing, it is creating somewhat of a problem in the language of the statement, and I will come back to that in a minute. But I also think that, without a very articulate rationale in the data and in reasoning that supports a systematic approach to policy, we run the risk of being capricious or arbitrary. I think we are in a situation, as Kevin Warsh said yesterday and Tom Hoenig spoke about, when many of us view inflation risks as more fragile perhaps than they have been recently, particularly more fragile in an environment in which we are cutting rates. I think that we run the risk, more so now perhaps than in other times, that inflation expectations might be at risk. I don’t want to raise those inflation expectations. They are much harder to get down. You can’t act nimbly to deal with movements in expected inflation. I also think we have to ask ourselves the question—and this ties into the balance of risks issue—if we choose to cut today when our forecast hasn’t declined and suppose the data between now and December look as they have for the past six weeks—kind of in line with what we expected, not much different one way or another with nothing really falling out of bed or booming—on what basis in that meeting would we choose or not choose to cut again? At this meeting we have had a hard time grappling with the criteria that we are using. If we are not very explicit about those criteria, we could find ourselves in the same boat next time. I think this is related to Tom’s point that, once we start on the path of making explicit what our expectations are or what the market is going to be expecting us to do without having a firm basis for saying we are doing this because of X or Y, we are going to find ourselves in an awkward position in December. So I share Brian’s concern about the assessment of risk language in alternative A being balanced when it seems to be out of touch with the way the Committee has described things. Again, I think that puts us in an awkward position of trying to balance those two things. So with that, I appreciate the time, Mr. Chairman. On net, I am troubled by a cut today. I would much prefer to wait until December and to assess the data that come in. If a 50 basis point cut in December is required, so be it; but I feel as though we would have a firmer basis then for making that decision. Thank you." FOMC20070131meeting--197 195,MR. REINHART., You probably won’t have that trouble in public because among the things that will be released is your central tendency forecast and it does have a steeper decline in core PCE inflation than the staff’s forecast does. So keeping policy unchanged at this meeting does not validate a 2 percent inflation goal; it just means you might have a different view. CHRG-109shrg30354--88 Chairman Bernanke," It is mostly anecdotal, a little statistical. The fact is that as our society relies more and more on productivity gains as a source of growth, the forecasting is going to get tougher because it is more difficult to forecast in say the size of the workforce. Senator Sununu. Which are you more worried about with regard to the medium term prospects for inflation: Inflationary expectations or the absolute level of inflation based on changes in energy prices or labor prices? " FOMC20061212meeting--65 63,MR. MOSKOW.," Thank you, Mr. Chairman. Business activity in the Seventh District appears to be expanding at a slightly slower pace than the last time we met. But most of my contacts were still positive about the outlook, and when we put together our forecast for the national economy, we did not make any large changes to the projections of either growth or inflation. We see output recovering as we move into ’07 and core PCE staying near its current rate through the forecast period. As Janet discussed, we’ve talked about the bimodal nature of the national economy. Housing is weak, and the auto sector is struggling, but the rest of the economy is performing well. We see these sectoral differences, particularly with regard to autos, in our District economy. Michigan’s unemployment rate is about 7 percent, and it was the only state to show a year-over- year decline in the OFHEO house price measure. In contrast, Illinois and Wisconsin have a more diversified manufacturing base, and they’re doing well. Furthermore, we continue to hear reports of growth in demand for manufactured goods outside of autos and residential construction. One example of this is Caterpillar. They expect revenues from highway construction and mining equipment to remain strong with some easing in the U.S. market being offset by increased demand from abroad. Manufacturers of machine tools continue to report solid orders. Of course, such reports contrast sharply with our conversations with the Big Three automobile makers. General Motors indicates that they expect ’07 to be another challenging year. Incentives are one issue. GM thinks that their own incentives are now about the right level, including the Classic, [laughter] whereas others are still high. Another issue is that the UAW contract will be coming up for renewal next year in September, and the negotiations are expected to be difficult. Turning to labor markets more generally, Kelly and Manpower said that the overall nationwide placements of temporary workers were unchanged year over year, but placements of light industrial production workers continue to increase, and conversions from temporary to permanent remain strong. Moreover, their clients, while cautious, generally do not expect any prolonged period of weakness. These temp firms said that wage pressures were steady to down a bit, but a major national specialty retailer indicated that he was having difficulty hiring holiday workers and permanent workers and that he was planning for an increase of 10 to 12 percent in wages for entry-level full-time hires. Retailers also told us that they believed strong labor markets were supporting spending, and they were looking forward to good results for the holiday season. With regard to inflation, even though energy prices have moved off their peaks, there were few signs of rollbacks in fuel surcharges. Indeed, we even heard of further cost pass-throughs from petroleum-based inputs. However, we did not get the sense that general cost pressures were intensifying. Finally, we held our annual economic outlook symposium ten days ago in the midst of the first major snowstorm of the year. The three dozen hardy forecasters predicted real GDP growth of 2.8 percent in ’07 and the employment rate to drift up to 4.9 percent by the second half of the year. They also forecast that total CPI would increase 2½ percent and that sales of light vehicles would be 16.4 million units. Turning to the national outlook, the data have come in somewhat softer than I expected at our last meeting. Our uncertainty about the outlook has increased somewhat, but I still think that there are significant forces supporting activity and that the economy will return to a better growth path as we move into next year. To be sure, residential construction is quite weak, auto sales are softer, and the businesses supplying these industries are experiencing some sizable reductions in demand. However, I do not get the sense of a secondary spillover to other sectors of the economy. Importantly, the labor market has remained robust, supporting household spending—as we’ve talked about. Business confidence appears to be holding up fairly well. Indeed, I’m impressed by the lack of pessimism among my contacts, even those who are experiencing flattening sales or sluggish sales. Finally, real interest rates are low across the maturity spectrum, and risk spreads remain narrow. Given the liquidity in the system, it’s still hard to see current financial conditions as being that restrictive. In the end, we did not make any large changes to the overall contours of our GDP forecast. We still see the economy growing moderately below potential in ’07 and increasing at a pace moderately above potential in 2008. Now, we condition our baseline forecast on market expectations for interest rates. Accordingly, this outlook is boosted by the expected decline in the funds rate that’s in the market. If, like the Greenbook, we had assumed a flat federal funds rate path, we would project a recovery only to potential in ’08. Turning to inflation, the recent data have not clarified the trends. The six-month change in the core PCE price index is down, but the three-month numbers have moved up. In Chicago, we like to use indicator models, like the ones that Stock and Watson developed, as a way to assess the implications of incoming data for future inflation. These are time series models, and they forecast inflation based on more than 80 economic indicators linked to inflationary pressures. The projections of these models have changed little since our last meeting. Our forecasts continue to show inflation running too high for my taste. Even our most optimistic models, which are estimated using data only since 1984, have core PCE inflation flat at 2.4 percent through 2008. In sum, I am still concerned that inflation will be too high for too long; and even though the downside risks to growth have increased, I continue to see inflation as the predominant risk." FOMC20070628meeting--47 45,MR. LACKER.," I am wholly on board with you there. What I was most curious about was what you took away from this for your core inflation outlook, which you have going to 2.0 real soon and staying there, and whether you view current expectations as broadly similar to this period and your forecast as consistent with that period? Or do you view expectations and your forecast as potentially at variance with that period, or some combination of the two?" FOMC20080625meeting--84 82,MS. PIANALTO.," Thank you, Mr. Chairman. The last two months have brought an interesting shift in my conversations with my business contacts. Their concerns have shifted from problems in financial markets to the rapid increase in input prices. Energy prices are the focus nationwide, but steel prices are also capturing the attention of the business people in my District. Several manufacturers and builders noted that the price they pay for steel has almost doubled since the beginning of this year. Clearly, businesses are worried about signs of growing price pressures, but their reactions to these price shocks tell a more complicated story. Many manufacturers have not been able to pass on price increases, resulting in a clear loss to profit margins. These businesses often report cost-containment or efficiency programs that will affect their hiring and capital decisions for months to come. Interestingly, the consumer price data show a similar dichotomy. My staff noted that our primary measures of core inflation are not providing a consistent story about the path of underlying inflation. In the May CPI report, roughly one-third of the weighted price changes increased at rates above 5 percent, and roughly one-third of prices changed by rates less than 1 percent. For example, while energy costs were up strongly and prices for a number of general service components have been drifting higher, large declines in apparel and vehicle expenses are imparting significant offsets. The 16 percent trimmed mean indicator showed an alarming 4 percent rise in prices, while the median rose just at 2.2 percent. The weight of price changes in the 1 percent to 5 percent range was unusually small, making it difficult to estimate the central tendency of the price change distribution with much confidence. So this makes it difficult to get a good read on where future prices are headed. My District business contacts remain pessimistic about growth prospects. District retail reports focused extensively on the likely effects of gasoline and food prices on the purchasing decisions of consumers. Many manufacturers, builders, and distributors are facing complicated output and investment decisions in the context of input price growth and weaker markets. Overall, most of the business people that I talk with are still quite cautious about their business plans, despite the fact that most of them have found sources of credit and terms that are not too elevated from what they have seen in previous years. In the economic projections that I submitted for this meeting, I raised my near-term forecast for output growth slightly and for headline inflation slightly more. Over the medium term, my outlook continues to be for modest growth because the housing market, in my forecast, recovers slowly, actually more slowly than in the Greenbook. My staff estimated a model for national housing starts that takes into account what has happened in the past in states that have seen major increases in foreclosures. The real estate difficulties that these states faced were much more persistent than anything that we have yet seen in the national data. The bottom line of this analysis is that, if the patterns of past housing cycles from the states that experienced the boom�bust cycles are repeated at the national level, then housing starts should remain relatively weak over the next couple of years. Supporting this analysis, three of the large regional banking organizations in my District are increasing their loan-loss provisions significantly in the second quarter based on the continued deterioration in the housing sector. Based on current projections, these institutions are projecting housing sector credit losses to accelerate in the second half of 2008 and to continue into 2009. Currently, the weak output growth contributes to my forecast of declining inflation rates, especially the core rate, but I also see evidence supporting that view in the ""less worker bargaining power"" scenario that is in the Greenbook. My contacts see very little price pressures coming from labor costs now or in the near future. Finally, implicit in my forecast for output growth and inflation is a fed funds rate path that includes increases later this year and into next year. Although additional risks to growth remain, the primary risk to my forecast concerns input prices and inflation expectations. If commodity prices continue to accelerate, they are going to put upward pressure on both headline and core inflation and downward pressure on output. That environment could lead to a highly undesirable increase in inflation expectations. On the positive side of risk to the outlook, I think that the fed funds rate actions that we have taken, in conjunction with the actions that we took in August to bolster market liquidity, have improved confidence, and I have substantially lowered the odds I had placed on financial market meltdown and on a severe recession. In that sense, since our meeting in April the downside risks to my outlook for economic growth have lessened somewhat, and the risks to my inflation outlook have moved up somewhat. Regarding the issue of providing longer-term forecasts, I have long supported efforts to clarify the underlying objectives of FOMC participants by providing our longer-term economic projections. Of the proposals that were offered by the Subcommittee on Communications, I favor reporting the average values for output growth, unemployment, and total inflation expected over a five-to-ten-year period--option 3. The features of these five-to-ten-year projections that I find attractive are that they indicate where the economy might converge and don't imply too much knowledge of the path to the long run. Thank you, Mr. Chairman. " FOMC20081216meeting--177 175,MR. STOCKTON.," My guess is that, if our baseline forecast evolves in the way we are expecting here, you are still going to be worried about the downside risk to inflation even if, in fact, we were in the process of bottoming out because there will still be a very substantial output gap. On the commodity price side, things are fairly stable, and at least in our forecast, inflation expectations are probably drifting down some. On the other hand, there are upside risks to that inflation forecast as well. I do actually think that our baseline forecast, on the assumptions that we have had to make in constructing it, is reasonably well balanced because another possibility is, in contrast to the gradual downtrend that we're expecting in inflation expectations, that inflation expectations will be stickier, you will be able to convey a greater sense that you wouldn't want inflation over the longer haul moving down below 1 percent, we won't get as much disinflation into inflation expectations or into labor costs, and you'll get greater stability there than we're expecting. So to my mind, looking ahead, monitoring how those inflation expectations evolve in the context of an economy where things are weakening will be very important. " CHRG-109shrg21981--203 PREPARED STATEMENT OF SENATOR WAYNE ALLARD Thank you, Chairman Greenspan for coming to the Senate today to share the Federal Reserve's Semi-Annual Monetary Policy Report to the Congress. This Committee and the Congress greatly benefit from your reports and visits, and the expertise that you offer to us and the Country. The economy is healthy and expanding, with GDP having increased in both the third and fourth quarters of 2004. Productivity and output both increased as well during the last months of 2004. We have even seen recent increases in exports and a decrease in the U.S. current account deficit. The Federal Reserve Board has done a good job at monitoring monetary policy and economic indicators in order to see that policy remains accommodative to the ebbs and flows of the U.S. economy. Their steadfastness in recognizing the immediate monetary needs and adjusting policy accordingly is to be commended. Dr. Greenspan, I appreciate your commitment to this Committee, the Congress, and this country. I look forward to hearing your evaluation and insights on monetary policy, the condition of the economy, and your forecast for the next several months. Thank you, Chairman Greenspan for coming to the Senate today to share the Federal Reserve's Semi-Annual Monetary Policy Report to the Congress. This Committee and the Congress greatly benefit from your reports and visits, and the expertise that you offer to us and the Country. The economy is healthy and expanding, with GDP having increased in both the third and fourth quarters of 2004. Productivity and output both increased! as well during the last months of 2004. We have even seen recent increases in exports and a decrease in the U.S. current account deficit. The Federal Reserve Board has done a good job at monitoring monetary policy and economic indicators in order to see that policy remains accommodative to the ebbs and flows of the U.S. economy. Their steadfastness in recognizing the immediate monetary needs and adjusting policy accordingly is to be commended. Dr. Greenspan, I appreciate your commitment to this Committee, the Congress, and this country. I look forward to hearing your evaluation and insights on monetary policy, the condition of the economy, and your forecast for the next several months. ---------- FOMC20070509meeting--37 35,MR. STOCKTON.," It came principally from the fact that we have been gauging our construction forecast from an expectation that builders would try to adjust production to reduce the months’ supply of unsold homes down toward a more normal level over the next couple of years. Between the March forecast and this forecast we were surprised (1) by the weakness in the level of home sales and (2) by the very substantial further increase in the months’ supply of unsold homes. So to get the inventory of unsold homes back into a more normal relationship—and even then we are not getting back to where we were in the March forecast in terms of months’ supply of unsold homes—we saw a bigger production adjustment as being necessary. Now, the awkwardness in relation to your question about the fundamentals is that we actually think that the overhang of unsold homes is a fundamental, even though it is not really in our models of residential construction. Those models do not have a special component for the inventory of unsold homes, in part because that factor is much more episodic than it is a normal sort of right-hand-side variable. So we do view it as fundamental. We think that what we learned was that a bigger problem is out there, a bigger overhang, and we are having it work off. Therefore, it takes longer to work that off with deeper production cuts." FOMC20050322meeting--86 84,MS. MINEHAN.," So, do you think these other forecasts are not incorporating that?" FOMC20061212meeting--48 46,MR. PLOSSER., That doesn’t show up in your forecast. FOMC20070131meeting--429 427,VICE CHAIRMAN GEITHNER., Good. And about forecast error? FOMC20071211meeting--49 47,MR. STOCKTON.," In response to your first question about whether there is independent information in that estimate of the equilibrium funds rate for the Greenbook-consistent measure, the answer is that there is no independent information. It’s just a transformation of the revision in the GDP outlook into interest rate space. Now, obviously, we provide a few other measures in that table, some based on a large-scale econometric model and some on smaller-scale models. Those have come down, too. So I don’t think our forecast is doing something different from, well, what those other models suggest. In response to your second question, our forecast of housing activity going forward is not driven by the foreclosures. The foreclosure forecast that we have is driven importantly by the house-price developments, and there we have marked down our house-price forecast. We would expect some increase in foreclosures, and obviously that would have some feedback on overall lending and conditions of bank balance sheets. In general, since the October forecast, we have built in more broadly about ¼ percentage point to the level of GDP in additional restraint on spending coming from the increased overall financial turmoil—not just in the housing markets, but we’ve taken down a little our forecast of consumption and our forecast of business fixed investment too. Basically, looking at the past correlation between measures of overall financial stress and the residuals of our spending equations, there’s considerable correlation there. That is, our standard models, as I noted in the past, have very rudimentary financial transmission mechanisms in them—mostly a few interest rates, a few asset prices, housing, equity, and the exchange rate. In the past, periods when we’ve seen significant increase in financial stress have also been associated with significant shortfalls in spending, and we’ve tried as best we can to build that in. Most of that effect overall is in housing—over half of it—but some of it we think will spill over elsewhere. Those bank balance sheets are going to be impaired. We think there will be some restraint on lending going forward. But, boy, it’s a lot of guess work! On the housing side, I do think we can go through more-careful calculations of the implications of the shutdown of the nonprime market and the current impairment in the jumbo markets, but beyond that, I’d say we’re very loosely calibrating it." FOMC20071211meeting--55 53,MR. STOCKTON.," This is obviously a situation in which, in some sense, the financial stress is the shock to the system rather than the endogenous response to some other shock, either an aggressive tightening of policy or some other type of aggregate demand shock. So in that sense this particular configuration, I think, sort of fits with the situation we’re currently facing. Obviously we’re not forecasting a business cycle peak. So in our forecast, we’re not yet saying that we’re on the downside of a business cycle. We have a growth recession in this forecast and nothing more than that. If we were to get a true cyclical downturn, I think you could obviously expect that to have some very considerable effects on foreclosures, business failures, and so forth; that channel or mechanism would amplify the downturn in this particular episode." FOMC20070816confcall--96 94,MR. DUDLEY.," Well, the reality is that we don’t know with any certainty. All we can say is that, as the discount rate gets closer to the funds rate, there will presumably be more use and more variability in the use of the discount window. The use of the discount window is not really the problem. The problem is the variability in the use and the difficulty of forecasting that use. If we could forecast exactly what the discount window borrowings were going to be every day, then we could offset that by our open market operations. Forecasting what the discount window borrowings will be in a day is a very difficult thing to do. Of course, when the use occurs at the end of the day, it’s too late for us to offset it. So I think we could say that the risk goes up as you narrow that margin. But Governor Mishkin’s point is a fair one: At the same time, there is a tradeoff; and if you go further, you’re going to have a more powerful effect, and you have to make a value judgment about where the tradeoff is. It’s a difficult judgment to make because we haven’t done this before." FOMC20080318meeting--42 40,MR. STOCKTON.," President Fisher, I will just basically reiterate what I said earlier and amplify many of the same things that Nathan just said in terms of the influences on our headline forecast. We revised up � percentage point as well, and that really is coming from higher energy prices, higher food prices, and higher commodity prices, all of which we think are already showing through to some extent and we expect to continue to show through to headline inflation. Despite the fact that we run with a much larger output gap in this forecast, we haven't revised down our forecast for 2009 because of the lingering effects of the run-up in commodity prices that we are expecting. As I indicated, we think there has probably been some small deterioration in inflation expectations as well. " FOMC20061025meeting--142 140,VICE CHAIRMAN GEITHNER.," This is really just a question about the framework the policy rules give us for this choice. The way I understood this is that, if you alter the weights and you’re asymmetric in your weights, in your policy rules, but you’re talking about a forecast that’s sort of the basic central forecast underpinning your rules, don’t you get a higher path?" FOMC20071031meeting--159 157,MR. LOCKHART.," Well, I’m gaining ground this morning. [Laughter] Having said that, I prefer that we reduce the federal funds rate target 25 basis points. My thought process is that the softening of economic activity, at least in some sectors, and the lower estimates suggest that the neutral rate of interest may be falling. The downside risks to economic growth and the evidence of lingering liquidity issues are to me good arguments for taking steps that insure against an inadvertently restrictive policy stance. With regard to the policy statement, I am going to continue to use the inexperience excuse as long as I can, even though we have some newer members. But just a few remarks. The language in the rationale section of alternative A most closely reflects my assessment of the situation, but I am not entirely comfortable with any of the options for the assessment of risk. The real economic outlook faces uncertainties on the downside that are difficult to characterize. Because of that, I am skeptical that we can credibly claim near-term downside growth risks to be roughly in balance with upside inflation risks, as is done in alternatives A and C. That said, I worry that the wording in alternative B would be interpreted as a rather significant loss of confidence in the economy and a signal that another rate reduction is probable in the near term. At this point, I’d prefer not to send a signal that another rate cut is most likely in December. Since our last meeting, expectations were centered on no change in the fed funds target today until a string of weak housing and earnings reports moved the probabilities strongly in the direction of a rate reduction. Thus, judging from the evolution of market expectations since our September meeting, the assessment of risk language in our last statement was sufficient to convince financial market participants that our decision on the funds rate is being driven by incoming data. As I said, I think the assessment of risk statement should try to recognize the uncertainties inherent in our growth forecasts—and those uncertainties are greater than those associated with our inflation forecast—but without tilting expectations in favor of a future rate cut. As I said in my remarks yesterday, it is quite possible that we will enter another period in which headline inflation numbers exceed the trend suggested by core measures. If that is even a short-lived problem, my opinion is that—and this is based on the Bluebook version—we would be well served to note that fact by adopting the language in alternative C, section 3. However, I do note that the new language, as presented this morning, in alternative A, section 3, is quite helpful because it largely incorporates the language in alternative C. Thank you, Mr. Chairman." FOMC20060328meeting--50 48,MS. YELLEN.," I have two brief questions, one for David and one for Karen. To David, my question is whether or not you have changed your assessment of the normal gap that we should expect between the core CPI and the core PCE, since those two measures seem to give rather different readings about the strength of inflation pressures. I have long thought that 0.4 or 0.5 was the natural differential to expect between those two measures. But it looks as though, at the moment and perhaps going back several years, the average differential between the two measures may have narrowed to something closer to a quarter of a point. We have talked about this as a mystery, but I wonder whether, because it is persistent, we should not be benchmarking our view of the core CPI at a slightly different place than, say, 2 being the equivalent to 1½ on the PCE. And for Karen, my question has to do with the evolution of net exports and the difference between your persistent forecast of worsening net exports and the forecast of Macroeconomic Advisers, which you have probably looked at, which projects a turnaround. David mentioned that we only need to see a modest slowing or a downturn in the housing sector to realize sustainable growth going forward. But that assessment is contingent on what’s forecast for every other component of aggregate demand. As I compare the Greenbook forecast to Macroeconomic Advisers’ forecast, the thing that really stands out, and has stood out for quite a long time, as a consistent, strong difference is the Greenbook’s forecast that net exports will be a growing drag on the economy and Macroeconomic Advisers’ view that net exports are just poised to turn up. I assume that the difference comes down to differences in your assessments of the effects of past depreciation of the dollar on net exports. My question is, Is that right? I am assuming that you are well aware of this difference, and I am just curious to know what your perspective is on that." FOMC20070321meeting--66 64,MR. STOCKTON.," Those are two elements of the forecast that we’re struggling with. Over the past few months there has been a little evidence perhaps that the participation rate has been a bit higher than our model was forecasting. That might suggest some upside risk on the labor force growth. On the other hand, the productivity figures have probably been running below what our model would have expected, given our estimate of structural productivity." FOMC20070131meeting--425 423,MR. KROSZNER.," Thank you very much. The question that Presidents Poole, Minehan, Fisher, and others asked—Why are we doing this?—is always the important one. You always have to think about the objective and what you’re trying to achieve, so that question has to be taken very seriously. As part of our general obligation to improve the monetary policy making process, we are doing this as part of the broader evolution in improving transparency. We need to be proactive. We don’t have to wait for someone to ask us to give them this or that. We should be controlling that process, and we should always be thinking about ways to improve, and this discussion is very, very useful in thinking about how to move forward. I want to repeat the kudos to the staff for the excellent memos that they put forward, giving us both substantive information about what others do and ways to think about any sorts of changes. I’ll go quickly through the questions. I think it’s very valuable to have different points of view that are reflected in the forecast. Part of the value is that it is in the spirit of the Federal Reserve Act. A forecast that is seen as purely centralized would to some extent be contrary to the act and could raise some hackles. It is valuable to get those differences of views out there. Whether there should be common assumptions, I guess I differ a bit from where everybody else is. I think it would be worthwhile to make some effort when we’re going through the dry runs to see if there are areas of commonality because it would provide more information. As President Lacker said, the clearer, more centralized, and more consistent the forecast, the more potentially informative it is and the more accountable we can be. So it might be worthwhile at least to explore whether there are some aspects of commonality that wouldn’t cause inconsistencies of models or other problems. I’m not sure that we could get there, but I think it is worthwhile to spend some time on that. Part of the motivation for doing so is that we already put out a central tendency forecast a couple of times a year. Although the market respondents to that survey had said they want more of this, when I talk to reporters or to market participants, they don’t really seem to pay much attention to it, or it seems to decay very, very quickly. They may pay attention for a very short time, and that’s why it might be worthwhile to see whether something a bit more consistent could be given out about it. Right now, except for a very small window around the two times a year that we put it out, I don’t see much emphasis on it. It’s valuable to have a more-rapid release of information. However, the last thing I would want is to feel that we have to get it out faster and to have that feeling impeding our decisionmaking process—either needing to put out the Greenbook earlier or constraining our discussions because we had already put a line in the sand. I think it’s 4.2, and you think it’s 3.2; my memo is out there, and my memo is better than your memo [laughter]—I think that would be a mistake. Also, particularly since we are thinking of frequency, if we release information three to four times a year, it is going to get stale. But trying to get it out a week sooner so that it’s out there for three months and a week or four months and a week, rather than four months and two weeks or three months and two weeks, isn’t that helpful. I don’t want to undermine the excellent decisionmaking process that we have. So speed is valuable, but there is a cost to it, and I don’t see the enormous benefit of getting it out a week or two sooner. As I said, three to four times a year seems reasonable. I like the evolutionary approach of providing some narrative, because I think that’s one of the key things in providing more transparency—it gives us greater ability to convey to the world how we’re thinking about things. It also helps us because we would not be as constrained with the very few words that we put out as a Committee. It would be nice, in principle, to be able to use more words to convey our ideas rather than be so constrained. If we do put the information out as a separate document, I think that it will get much more attention. That may be valuable, but it also will get different reactions. Right now, it goes out as part of testimony that the Chairman gives. I could certainly see requests for more-frequent testimony if we start putting the information out more frequently. We have to think about that kind of feedback dynamic. When we report more information, what other demands might come? I’m not sure that would be the case, but I think the form and frequency with which we put it out may induce that kind of response. With respect to the forecast horizon, I think the key will be whether we are more explicit on some sort of target or goal, and then horizon should be related to that. I don’t want it to go too far out. At the Council of Economic Advisers, I chaired the so-called troika process, in which we would do the Administration forecast. Initially we had to do ten-year forecasts. What information do we have today that will tell us anything about ten years down the line? We would always revert to the mean, and we would do that over a five-year period. Basically, we didn’t feel that we really had any more information after two to three years. So I would be reluctant to push the horizon beyond two to three years unless we wanted to tell people about what we sort of thought trend rate was. That could be valuable but only to tell people about trend, not to say that we really have any insight into what’s going to happen four to five years from now. Generally our tendency will be to bring things back to trend. In terms of what to talk about, real GDP, unemployment, and some measure of core inflation make a lot of sense. I’d be very reluctant, certainly early on, to talk about interest rates or interest rate assumptions. Uncertainty is another thing. When we were working on the forecasts at the CEA, one of the things that I and others had pushed for was trying to give some sense of the uncertainty when we were making these forecasts. We actually got far enough to have some of our people talk with people on Capitol Hill, and we had very strong negative pushback. They were saying, “Well, if you’re not willing to stand by your number—we have asked you to make a forecast, and you’re not standing by it if you’re giving us this range.” Also, people will pick out the high end or the low end of the range for their particular purposes, and so you have to be very careful about how you put that out. In principle, I really want to provide the uncertainty; I agree completely with Governor Mishkin on that. But the form in which you provide it is very important because we may think of it as uncertainty but others may think of it as either dodging an obligation or making a particular commitment on the high side or the low side—this is as high as you can go and this is as low as you can go—and see it as a bargaining type of thing. Being an academic, I had never thought about it that way. But it is something that we should consider in making sure that providing it is improving transparency and the effectiveness of monetary policy. We don’t want to get into side debates about exact numbers—that would be exactly the opposite of what we want to convey about uncertainty. Thank you." FOMC20071031meeting--49 47,VICE CHAIRMAN GEITHNER.," Richard, you described vividly the bunch of forces working on headline inflation. But since you identified yourself as a negative outlier on the inflation forecast, it seems to me your headline forecast is still for significant moderation in headline inflation in ’08. Am I wrong in that? At least I infer from this that you’re not showing an acceleration in core PCE inflation." FOMC20080430meeting--91 89,MS. YELLEN.," Thank you, Mr. Chairman. In looking at the latest Blue Chip forecasts for GDP growth, I noted that the range between the highest and lowest is among the largest on record. The 10 most optimistic forecasters are predicting over 2� percentage points faster Q4-over-Q4 growth than the 10 most pessimistic ones. Such forecast dispersion is indicative of the unusually high degree of uncertainty that we are facing. The Greenbook presents one of the most pessimistic economic forecasts; yet I find its recessionary projection quite plausible and see downside risks that could take the economy well below that forecast. Although I found it especially difficult this time to decide on the most likely outcome for the economy, I ended up submitting a forecast that shows somewhat more growth in 2008 than the Greenbook, even though we shared the same assumption concerning monetary policy this year. My forecast projects 2008 growth of � percent. This averages no growth in the first half and 1� percent growth in the second. The unemployment rate increases to just over 5� percent by the end of this year, a bit lower than the Greenbook. In one critical area--namely, the adverse effects of financial sector developments on the real economy--I remain just as pessimistic as the Greenbook. Although the likelihood of a severe financial panic has diminished, the risks are by no means behind us. Moreover, credit conditions have turned quite restrictive. This credit crunch reflects the drying up of financing both for markets that were important sources of business and consumer credit and from banks that are contending with capital-depleting losses and illiquid assets. Among banks, the latest Senior Loan Officer Opinion Survey noted a clear tightening of lending standards, and my own discussions with bankers confirmed this point. They say they are carefully reassessing and significantly curtailing existing home equity lines of credit as well as unsecured consumer loans of all sorts. Banks are also clamping down on the provision of revolving business credit, even to very creditworthy customers. For example, the treasurer of Chevron, a highly rated oil company that, as you can guess given energy prices, has a very strong profit outlook, recently complained to me that banks were reluctant to extend even its credit line. Such reluctance is also evident for lending to students, consumers, and other businesses. The risk of a deepening credit crunch remains as a weak economy--especially with further sharp declines in housing prices--escalates credit losses, harms financial institution balance sheets, and causes them to scale back lending even further. My sense from our business contacts is that their perception of reduced access to credit is causing them to manage their firm's liquidity more carefully and is leading to some deferrals in capital spending projects as a precautionary measure. Certainly the mood is decidedly more pessimistic and cautious. Amid the gloom of the credit crunch, I do see a possible silver lining in that it may amplify the effects of the fiscal stimulus package, and this is part of the reason that my forecasted downturn is a little milder than the Greenbook's. In particular, because of the credit and liquidity considerations, the latest fiscal package could well provide a bigger bang for the buck than the tax rebates in 2001. First, the current tax rebates are more directly targeted at lower-income households, which are more likely to be credit constrained and to spend the cash once it's in hand. Second, given the current tightening of credit availability, households will likely spend an even greater fraction of the tax rebates than they did in 2001. Of course, there is considerable uncertainty about assessing the potential size of these effects. But over the next few months as the checks go out and the retail sales reports come in, we should get a pretty quick preliminary read on how things are shaping up. Regarding inflation, the most worrying developments since we met in March have been the price surges for a wide variety of raw materials and commodities, especially the jump in the price of crude oil. From the U.S. perspective, this run-up in prices represents mainly a classic supply shock, which could threaten both parts of our dual mandate, although the decline in the dollar has slightly exacerbated the severity of the impact. Like the Greenbook, my forecast for inflation does take commodity price futures at face value and foresees a leveling-out of prices going forward. Although I must say, after four years of being wrong, I am beginning to feel like Charlie Brown trying to kick that football. The most recent core consumer price data have shown some improvement, and like the Greenbook, I'm optimistic that core inflation will subside to around 1� percent over the forecast period, assuming that the commodity prices do finally level off and compensation remains well behaved. An interesting analysis by Bart Hobijn of the New York Fed as well as my own staff implies that, in an accounting sense, pass-through from the run-up in oil and crop prices may have boosted core inflation as much as 0.3 percentage point over the past two years. So a leveling-off of these prices could lower not only headline but also core inflation. My core PCE inflation forecast is a tenth or two lower than the Greenbook this year and next also because we assume lower passthrough of the dollar depreciation to non-oil import prices. We have been reexamining the data on this issue and find the evidence quite convincing that pass-through has been quite low recently-- lower, for example, than embodied in the FRB/US model. With respect to inflation expectations, market-based measures have now edged down. We took little comfort from this fact, however, because we had viewed the uptick in inflation compensation in recent months mainly as a reflection of a higher inflation risk premium and not a reflection of higher inflation expectations. I am also somewhat concerned that the median expectation for inflation over the next five to ten years in the Michigan survey has ticked up. " FOMC20060328meeting--115 113,MR. STERN.," Thank you, Mr. Chairman. I see little in the latest information on the District economy or data on the national economy that gives me undue concern about prospects for sustained economic growth. Turning first to the District—as is frequently the case, overall it is performing much like the national economy. The expansion is broadly based, employment is growing, while the usual labor market churning continues. Sectors such as manufacturing, mining, and energy are particularly strong at this point. Some job skills, particularly in health care, accounting and auditing, technology, and the energy sector, are in short supply. Consumer spending overall is well maintained, and nonresidential construction activity appears to be improving. Housing activity is a little more difficult to summarize. Construction remains strong; sales are still relatively substantial, as best I can determine; and inventories of unsold properties are rising as well. Turning to the national economy, I said earlier I wasn’t particularly concerned about the outlook, but I really should put it more positively. It seems to me that the current state of the national economy and its prospects are both quite good at this point, consistent with growth this year of 3½ percent or perhaps even more. I’m impressed by the employment gains that we’ve seen, sustained income gains, and so on, and remind myself and others that, as the 1980s and 1990s demonstrated, the economy is certainly capable of long periods of uninterrupted expansion. I thought I would comment a bit more on two issues in particular—one is housing—where I wonder if the significance of potential developments might not be being exaggerated a bit. I certainly agree that changes in housing prices, up or down, feed into household wealth and through that into consumer spending. I think that’s a perfectly acceptable story. So if housing prices go down or level off, they will have that effect on wealth and potentially on spending. But there seems to be a view that, in some sense, an exogenous pronounced decline in housing prices is possible, maybe even likely, and that this could be more devastating for the economy. It’s not that I would quibble with that story, but I would wonder about its likelihood because it seems to me more likely that housing is the tail rather than the dog in this. That is, as long as employment continues to go up, incomes continue to go up, and mortgage rates remain relatively moderate, then I would expect that we would avoid severe difficulties in housing except for a few markets that are particularly inflated at this point. Putting it the other way around, only if overall economic conditions deteriorate, with employment declining and income growth slowing or declining and so forth, would I expect there to be more broadly based and more-severe problems in housing. The second issue I’d like to spend a little time on is the inflation outlook. The question I asked myself is, How likely is an appreciable acceleration of inflation at this point, particularly in light of the steps we have taken to get the federal funds rate back to a reasonable range? First, I would argue that inflation expectations remain very well anchored at this point. I don’t hear, as I go around and talk to various groups and meet with various business people, any doubt among the participants about the Fed’s ongoing commitment to low inflation. And I think most of the available data support that. One of the things I was looking at was a chart of one-, five-, and ten- year rates of core PCE inflation. And when you look at that, you see that the ten-year rate of inflation has been declining steadily and now is a little below 2 percent. The five-year rate has basically the same pattern. It leveled off in about 2000, but it, too, is a little below 2 percent. And, of course, the one-year rate of inflation, although it bounces around a lot more, ends up at about the same place, also a little below 2 percent. And I just don’t have a sense that there has been any unhinging of inflationary expectations at this point. Another topic that I would comment on only briefly is the issue of lags in policy. That is, presumably the full effects of the actions we’ve already taken have not yet been felt. Finally, we have looked at some forecasting equations that try to incorporate the growth in the money supply in particular and to forecast core PCE inflation. I wouldn’t claim a lot for the quality of these equations. I wish I could, but I can’t. But for the most part, these various equations provide forecasts that are very close to the Greenbook forecast. Inflation might be a little lower this year or might be a little higher this year, but they show very small changes for the most part. My view is that the Greenbook inflation forecast is a pretty good one. Like President Yellen, I originally submitted a number of 1.8 percent for inflation this year, and I don’t see any reason to change it at this point. Thank you." FOMC20080130meeting--134 132,MR. PLOSSER.," Thank you, Mr. Chairman. I have three questions. Let me go to Brian first. This is more of a comment. In your description of the forecast, you referred several times to the notion that there might be slack in the economy in 2010 based on these numbers. I guess my reaction to that, while I was kind of skeptical, I am not sure exactly how you infer that from what was reported. Certainly, that seems to be true in the Greenbook forecast, but trend growth seems to be as good as or better than it was in the last projection. In 2010, inflation--true--is a little higher. The unemployment rate may be a 0.1 or 0.2 percentage point higher. But unless you infer something about what people thought the NAIRU might be, I don't know how you would necessarily infer that the reason inflation went up in these forecasts was that there was slack in the economy in these projections. So I just wanted to caution about the language we use in how we describe what we see here without necessarily inferring something about whether, in any individual person's forecast, there may or may not have been slack. In mine, there wasn't in 2010, but I don't see that necessarily follows from what these numbers look like. That was my only observation here. " CHRG-110hhrg44903--62 Mr. Cox," I think economists will have to tell us what are the actual effects based on empirical data that even now they are collecting of the stimulus package that has already been put into effect. Complementary to the SEC's role in instilling and maintaining market confidence is the policy that the Federal Government and that the Congress enacts, including fiscal policy, that stimulates economic activity and that promotes economic growth. I would say, as the investors advocate, that investors rather obviously look for after-tax rates of return. And that when they are facing, as they are now, scheduled increases in taxes on dividends, capital gains, ordinary income, that there is probably a lot of room there to create positive incentives for people to put their money in the market that will also be consistent with promoting growth in the economy, and that for Congress to be examining those things. " FOMC20060920meeting--96 94,MS. MINEHAN.," It is interesting that, when you plot out all the other major forecasts and you look at the underlying elements of them and you look at GDP, inflation, and so forth, the Greenbook is really an outlier on the low side in terms of growth and the fed funds rate. Maybe you are right. You have been here before as an outlier from the rest of the mainstream forecasts. I wish I had a good sense of how all of that worked out." FOMC20080430meeting--95 93,MR. ROSENGREN.," Thank you, Mr. Chairman. Without judgmental adjustments, the Boston Fed forecast is somewhat more optimistic than the Greenbook. As in the Greenbook, our GDP is weak in the first half of this year, though neither of the first two quarters actually turns negative. Our slightly more optimistic forecast assumes that consumption and business fixed investment are weak, but not as weak as in the Greenbook, and then the fiscal and monetary stimuli are sufficient for the economy to pick up in the second half of this year. In a sense, the Greenbook represents another mode in the forecast distribution with probability roughly equal to our forecast. The big risk to our forecast is that the financial turmoil and housing price declines, which are not fully reflected in the Boston model, result in a greater drag on the economy. Such an outcome would largely close the gap between the Greenbook and our forecast. In short, the downside risks to our forecast are appreciable. With a monetary policy assumption similar to the Greenbook's, we have core PCE below 2 percent in 2009, but the unemployment rate remains well above the NAIRU even at the end of 2010. If we sought to keep inflation below 2 percent but did not want an extended period in which the unemployment rate was above the NAIRU, our model would require more easing than currently assumed in the Greenbook. Since the last meeting, the economic data have remained weak. Private payroll employment declined by approximately 100,000 jobs on average over the past three months, and the unemployment rate increased 0.3 percentage point. In addition, the labor market weakness was widespread across industries. Such labor market weakness is likely to aggravate an already troubling housing story. To date, falling housing prices have disproportionately affected subprime borrowers and those who purchased securitized products. However, if housing prices continue to decline rapidly, that will begin to affect more prime borrowers and a wide array of financial institutions. Smaller financial institutions that were largely unaffected by the financial turmoil last August are beginning to see increases in delinquencies, and those with outsized exposures in construction loans are now experiencing significant duress. Commercial real estate loans are also now experiencing increased delinquencies. Like the Greenbook, I am concerned that commercial real estate may be the next sector to experience problems. However, the biggest concern remains that rising delinquencies and falling housing prices cause a much higher rate of mortgage defaults than we have experienced historically. Should these mounting problems become more pronounced, we are likely to see credit availability for small- and medium-sized businesses affected. That sector has not to date been significantly affected by the financial turmoil. Many financial indicators have improved since the last meeting, as was highlighted in Bill's report. The stock market has moved up. Many credit spreads have narrowed. Treasury securities and repurchase agreements are trading in more-normal ranges, and credit default swaps for many financial firms have improved. Nonetheless, several ominous trends remain in financial markets. The LIBOR�OIS spread has widened, so borrowers tied to LIBOR rates have seen those rates rise more than 25 basis points since the last meeting. Similarly, the TAF stop-out rate in the last three auctions was higher than the primary credit rate, providing another indicator that banks remain in need of dollar term funds. Finally, the asset-backed commercial paper market is once again experiencing difficulties. Rates on asset-backed commercial paper have been rising, and there is a risk that more of the paper will end up on bank balance sheets. Higher food and energy prices are both a drag on the economy and a cause for concern with inflation. But despite the extended sequence of supply shocks, I do not see evidence that inflation expectations are no longer anchored. Labor markets do not indicate that the commodity price increases are causing wage pressures, and such pressures are even less likely if the unemployment rate continues to increase. Many of the financial indicators of inflation, such as the five-year-forward rate, have fallen significantly from their peaks earlier this year. Finally, core PCE over the past year has been 2 percent, and most econometric-based forecasts expect that the weakness we are experiencing should result in core and total PCE inflation at or below 2 percent next year. Overall, the downside risks to demand that I listed in the outset seem the more compelling cause for concern. Thank you. " FOMC20060629meeting--50 48,MR. STOCKTON.," It’s a big revision, and as you can imagine, we agonized a lot about “isn’t this is a big revision for just six weeks of information.” The problem we confronted was that, if just the incoming data had been worse than we thought, we would not have made a revision as large as this. But in each case, the weakness in the data was being reinforced by weaker readings in the underlying fundamentals for those sectors. In consumption, for example, we have had a string of weak numbers. We lost $60 billion worth of income in downward revisions in the fourth quarter and the first quarter, and we’re starting out with a much lower saving rate than we thought. The stock market when we closed the Greenbook was off 7 percent. Those were big fundamentals. And housing, for the most part, continued to come in worse than we thought: Although new home sales came in a bit above our expectations, starts were below what we had in May, and the permits were continuing to come down. Even in this forecast, we basically have housing activity not declining a whole lot further in terms of housing starts going forward from where they are today. So we could see some downside risks still to that. If you ask where I think some of the vulnerabilities might be and how we could get to August and not be looking at a forecast as weak as this, I can imagine that by the end of the next week we could get 200,000 on payroll employment with some upward revisions. We could get a strong retail sales report for June with a little upward revision. This is all going to look a bit as though we overreacted. Things weren’t so strong. But in each case it was not as though we had actual data or fundamentals that we could hold onto to tell us not to revise as much as we did. So we thought we had things reasonably well balanced in this case. I could see more downside risks than upside risks to our housing forecast. The risks around our consumption forecast look pretty balanced to me. On the one hand, given how low the saving rate is and some recent weakening in employment growth, I could see how things could come in lower. On the other hand, it is easy to see that the consumer has been more resilient in recent years and could continue to be so. So I see the risks there as more balanced. On the business-sector side, however, I probably see a little more upside risk than downside risk to the forecast. In the end, we felt as though we were compelled by our normal analytical apparatus to produce a forecast that was noticeably weaker than the last time, even though the revision looks big and showing a forecast that changed as much in such a short time certainly made us very nervous. So I think you are right to be a bit taken aback by how much we revised in a short period; however, I still think the forecast probably has both upside and downside risks to it." FOMC20060328meeting--76 74,MR. STOCKTON.," For my part, the most salient risk that I would note is housing, for a few reasons. One, it’s an asset market as well as a natural investment, and I just don’t know how to forecast those prices. I think that, in our presentation last June, we made pretty clear just what the uncertainties are there. Beyond that, I’m not sure what the effects will be if, in fact, there is a correction either on the construction side or on the price side. There are just so many uncertainties. As we’ve noted in the past, we use a standard wealth effect to calculate the consequences of that. But there could be bigger effects associated with equity extraction. There also could be confidence effects that are difficult to gauge. And so I see big risks on both sides. Obviously, I’d be more worried about the downside risk than the upside risk if we get another couple of years of things going on as they have been going. It means that for a while you’ll have to lean a little harder against the strength in housing, but it also means you’ll be dealing with potentially bigger consequences when the correction in housing markets occurs. So looking at the data, I’m feeling comfortable with our basic forecast—that things are tipping down. But as I indicated, we’re just really not sure what it’s unwinding to—whether it’s unwinding to the sort of benign soft landing that we’re forecasting. We think that forecast is reasonable. There’s nothing in the rate environment or in other factors that makes the forecast look far-fetched to us. On the other hand, one could certainly envision a more painful and bumpier adjustment that will cause bigger problems for the Committee." FOMC20080625meeting--54 52,MR. BULLARD.," I want to ask a question about exhibit 7, which talks about factors affecting the GDP forecast. The second bullet point mentions judgmental adjustments, which were tempered this time relative to last time. Last time I described this as a regime-switching model, and you said that was perhaps too much. The economy sort of switches into this recession-like behavior, and we know that the economy might behave differently in that environment. But do we now think the probability of switching into that behavior is smaller? What is the forecast? Is the forecast some kind of average between this high state and this low state? That's what you said here--it has tempered our judgmental adjustments. It sounds as though there is less probability of switching into that state. " FOMC20071031meeting--28 26,MR. STOCKTON.," It looks to me as though some of the investment piece has to do with the idiosyncrasies of our forecast of the high-tech area. The underlying core piece of E&S spending follows pretty much a standard accelerator path, where things slow down more evenly through next year and then begin to pick up with the overall pickup in activity toward the end of next year as we move into 2009. So I think your basic intuition about what you should have seen is there. We have some slowdown in high-tech spending that sort of progresses. In transportation, in particular, things are especially weak in the first half of this year. They pick up a little in the beginning of next year and then slow down again, and that really is more based upon our forecast of motor vehicles and our forecast for aircraft production." FOMC20070131meeting--427 425,VICE CHAIRMAN GEITHNER.," Thank you, Mr. Chairman. I want to say just a few things quickly about internal transparency, about the analytical framework that we use to make decisions about monetary policy, and then about the external dimension of the forecast process. First, on internal transparency, I think that it makes sense for us to be a little more explicit with each other about assumptions underpinning the forecast that we bring to the table. That’s why I circulated the note—just to lay it out there in a clear way. Without that information, it is very hard for us to know, when we are debating what to do, what we are really debating. Generally, being more explicit with each other in private—discreetly—about the conditioning assumptions that are important to our forecasts, about what we mean by “appropriate policy,” about why and where we differ from the Greenbook, how we see the balance of risks, and maybe, if we can, at least a qualitative sense of uncertainty would be useful and would enrich the conversation. On the analytical framework for monetary policy, I just have two suggestions, one I’m going to repeat from our last conversation. The first is that I think we need to broaden the set of analytical tools the staff gives us now at each meeting to think about the consequences of alternative views in the forecast of different monetary policy choices and so forth. You give us a range of things now that are very helpful. The two things we don’t get now fall in the following categories. One is that you don’t give us a simple way to look at what it might mean for an inflation forecast and an optimal policy exercise if you have a very different view about structural inertia in inflation—not that there’s any great way to do that now, given the state of the art—but it would be nice to have a way we could distinguish a little more clearly what a backward-looking, highly inertial view about inflation fundamentals means for the way we think about the forecast and monetary policy and what a more forward-looking view of inflation determination means. That’s one area in which having something broader would be helpful, even if it’s a set of highly simplified, highly imperfect analytical prisms, reference frameworks, or reference models. The other thing that we don’t get now is a way to think through how we make more explicit choices about the appropriate period, for example, for bringing inflation down to a more comfortable level. That’s, of course, an important way to tease out what people’s different loss functions or reaction functions are. Right now we aren’t really presented with, for example, a set of alternative horizons for bringing inflation back down to target and what that would mean for the rest of the things that are important to us. Those are two areas in which it would be helpful to have a broader set of reference frameworks to underpin our conversation of monetary policy. That’s an important investment to make if we’re going to do anything to change our current regime—whether in the direction of an explicit quantitative objective for the definition of price stability over the long run, even with no horizon, and certainly if we’re going to evolve in how we publicly describe our forecast. My second suggestion echoes a suggestion that Randy Kroszner made before. I think that we would benefit from spending a bit more time as a Committee on thinking through what we understand about inflation, both how it is captured in the model the staff uses and what are the important distinctions between our views on these questions. We don’t go very deeply into those distinctions—just a little. You can see this in both President Plosser’s and President Lacker’s descriptions of their views of the forecast because they have a lower inflation forecast than the staff has without a very different view about unemployment and with a modestly tighter monetary policy. The case for that view deserves some reflection, and we don’t spend a lot of time talking through that. That’s an important investment to make if we’re going to be more explicit in public about choices concerning, for example, how fast we want to bring inflation down to our objective. Two small things on that ground would be helpful when the staff comes back to prepare for the discussion in March about inflation objectives. First, a short treatment about the issue of what makes the United States different would be interesting. We have a lot of international experience to look at, but we’re not Norway, and we’re not New Zealand. I don’t know how to think through that interesting issue. I’m not sure it’s right, but I don’t think we can dismiss it out of hand, and I’d like some help thinking it through. Another small thing, to elaborate on a discussion that Janet, Don, and I had on the margins: If you could tell us a bit about what the past forecast error is of the mean FOMC forecast and how that compares to the Greenbook forecast error, that information would be interesting to have. It’s a small thing." FOMC20070131meeting--95 93,MR. SLIFMAN.," Let me first comment specifically on our consumption forecast and the larger question that we raised. Dave may want to add some comments. With regard to our consumption forecast, as I had mentioned and as we suggested by the alternative simulation that we showed in Part 1 of the Greenbook, clearly the unexplained strength that we’ve been seeing in consumption spending in the second, third, and fourth quarters is an upside risk to the forecast. We’ve carried some of that through into 2007, as we noted in the Greenbook and I noted in my briefing, and we think that it will eventually correct. We base that forecast just on the historical patterns in the data. In the past when spending had gotten out of line with what we think of as being the fundamentals for consumption, it eventually corrected over time. There are a couple of possibilities. One is that we’ve got the timing wrong and that the correction is going to take longer, in which case there would be more consumption. Another possibility—and this goes back to the point Bill made—is that we could be wrong with regard to income growth. That might be revised up, and we will find that a lot more income growth is out there. Now, taking our forecast rather than the alternative simulations at face value—yes, we are slower than the FOMC. I suspect that part of the reason may be that the staff has a lower estimate of potential output growth than most members of the Committee probably have in their minds; we can’t know for sure, but I suspect that it probably goes a good way toward explaining the difference." FOMC20060808meeting--72 70,MR. KOHN.," Thank you, Mr. Chairman. As many of you have remarked, the inflation news over the intermeeting period was not favorable. Core consumer prices continued to run at an elevated level, and the CPI actually came in on the high side of expectations. The shortfall in the PCE that President Yellen referenced was, I think, more of those mysterious nonmarket components. Petroleum prices rose further, implying additional feed-through going forward. Prices of other commodities, as Karen remarked, were on average unchanged to somewhat higher, suggesting not only continuing cost pressures on producers but sustained strength in global demand. Early estimates of unit labor costs for the second half of last year and the first half of this year show a faster increase than had been estimated and anticipated. The compensation data for the early part of this year, in particular, are subject to very large revisions. Even the now-faster growth doesn’t necessarily indicate that the economy has been operating beyond its sustainable potential, given the likelihood of some catch-up with past productivity gains, the still quite elevated profit margins, and the moderate increase in the ECI. But at the very least, the unit labor cost story doesn’t provide as much comfort about future inflation as it did previously. Largely as a consequence, the staff revised up its inflation forecast for 2006 and 2007, and that response seems reasonable to me. At the same time, some developments over the intermeeting period help me feel a touch more comfortable, or perhaps a touch less uncomfortable, with the downward trajectory for inflation after the bulge. One of them that a number of you have mentioned from surveys is that the long-term inflation expectations in the market remained stable or even edged down a little despite higher energy prices and, importantly, despite downward revisions to the expected path of monetary policy. If I were forecasting today, I would forecast a slightly higher inflation rate, but I would also forecast a slightly higher unemployment rate than I did before. To be sure, output gaps, as you’ve mentioned, don’t play a large role in determining inflation, but certainly the growth of demand relative to potential has some effect on the competitive conditions that businesses are facing and on their ability to pass through costs. From the information that we received over the intermeeting period, growth slightly below the growth rate of the economy’s potential seems more likely than it seemed a month or so ago, and this would inhibit the pass-through of higher energy and labor costs. Weakness in the housing sector has deepened, and we have not yet seen the full implications of the rise in long-term and short-term interest rates over the first half of the year. This weakness seems to be having an effect on housing prices as well as on activity. The effects of a lower expected trajectory for housing wealth and the increase in interest rates this year haven’t begun to show through to consumption, judging from the minus 1½ percent saving rate. The energy-price increases of recent weeks will take something more out of consumption. Recent data are consistent with a below-trend track for the growth of economic activity: Private domestic final purchases increased at a rate of only 2 percent in the second quarter. The consumption and investment data for late months in the quarter don’t suggest an acceleration going into the third quarter. The growth of employment has been running slightly below what would be a steady-state pace if participation were to remain stable, and participation has edged higher. The greater increase than had been anticipated in inventories in the second quarter suggests little impetus or even a small drag from inventory accumulation in the third and fourth quarters. The growth of federal government spending seems to be dropping back a bit as Katrina-related expenditures top out. Moreover, the recent higher rates of core inflation, though they are puzzling to a considerable extent, must reflect some influences that are unlikely to be repeated indefinitely into the future. One of those is the rise in oil and energy prices. The recent rise clearly has been associated with escalating tension in the Mideast and other producing areas, as well as the recent cutback in supply from Alaska. At some point, the risks of supply disruptions, while remaining very high, should level out. As a consequence, so, too, should energy prices, which will reduce core inflation as the feed-through fades. Another factor boosting inflation in recent months was related to rising rents and, in particular, to an even greater increase in owners’ equivalent rent. The staff has assumed that owners’ equivalent rent will rise in line with other rents and that both will continue to increase fairly rapidly but less rapidly than they did. That seems reasonable to me, given the increased availability of houses and apartments on the market that would, at some point, seem to limit the rise in rents as well as house prices. So my conclusion is that the staff forecast of a gradual moderation of core inflation after the second quarter is a reasonable expectation, although I am very worried about upside risks to inflation. The inflation rate looks as though it will end up a tad higher than either the staff or I thought likely at the time of our June meeting. Thank you, Mr. Chairman." FOMC20070131meeting--445 443,MR. STOCKTON., We’d like to get updates to forecasts by Friday. FOMC20081007confcall--25 23,MR. KOHN.," Larry, what were the policy assumptions under your forecast? " FOMC20071031meeting--52 50,MS. YELLEN.," Thank you, Mr. Chairman. Over the past week or so, we have been following the devastating fires in Southern California. They have burned over 500,000 acres, destroyed nearly 2,000 homes, and inflicted seven deaths and sixty injuries. These were large fires, even by California standards, but they were by no means the largest in recent memory; and, of course, the loss of life and economic costs pale compared with Katrina. While the fires have seriously affected the lives of many individuals, they do not seem likely to show up in the macroeconomic data. Turning to the national economy, developments since we met six years—six weeks ago—actually, it seems like just two weeks ago—[laughter] generally have been favorable and the risks to the outlook for growth have eased somewhat. But I think it is too early to say that we are out of the woods. The inflation news has continued to be favorable, but some upside risks have become more prominent. With respect to economic activity, we have raised our forecast for growth in both the third and the fourth quarters in response to incoming data, even though the pace of deterioration in the housing sector has been more severe than we expected and the problems associated with housing finance seem far from resolution. We agree with Greenbook that residential investment is likely to continue its severe contraction for at least a few more quarters. We also agree with Greenbook that the rest of the economy has held up reasonably well, at least so far. Exports have been strong, and while business fixed investment seems to be slowing, it should still make a robust contribution to growth in the second half of this year. With respect to consumer spending, most aggregate data suggest only a modest deceleration so far. Such readings help to allay our concerns about potential spillovers from housing to consumption, but they don’t completely assuage them. Survey measures of consumer confidence are down sharply since the financial turmoil began, and most indexes of house prices show outright declines. Given the current state of the housing and mortgage markets, bigger declines going forward are a distinct possibility. Indeed, the Case-Shiller futures data for house prices point to larger declines in the months ahead. A sharp drop in house prices would likely crimp consumer spending over time through wealth and collateral effects. Some of my directors and other contacts are also raising warning flags about consumer demand. For example, the CEO of a large well-known high-end retailer said that the company’s sales are softening and that the company is having to work diligently to control inventories. In his view, the consumer has pulled back. The CEO of a Southern California bank observed a number of his clients talking about a drop in discretionary consumer purchases. The bottom line is that consumption spending seems to be all right for the time being, but there is a real risk that households may cut back on spending more than expected in response to higher oil prices, a slower economy, and economic uncertainty. I agree with President Rosengren’s assessment of financial markets. Strains appear to have eased a bit on balance since our September meeting, with interbank lending markets showing some improvement and spreads on asset-backed commercial paper declining. But structured credits related to mortgages remain quite troublesome, and liquidity conditions and Treasury bill markets are still at times strained. My impression is that, despite having moved in a positive direction over the past six weeks, these markets remain vulnerable to shocks, and so the economy remains at risk from further financial disruptions. Both survey evidence and anecdotal evidence have confirmed that banks are tightening lending standards across the board. Tighter terms and conditions are being applied to a range of business lending, including commercial real estate, and on most household lending from prime and nonprime mortgages to auto and home equity loans. The main financial variables that are commonly included in formal macroeconometric models appear to have changed since the onset of the financial shock—say, in late June—in ways that should have roughly offsetting effects. Oil prices are markedly higher, which should restrain consumer spending, and the stock market is roughly unchanged since June in spite of the financial turmoil. A weaker dollar should have a positive influence on growth. Mortgages rates on jumbo loans and the rates facing the riskiest corporate borrowers are higher, but many private borrowing rates are down because of the decline in Treasury yields. Of course, the current levels of Treasury yields, as well as the stock market and dollar, reflect at least in part the market’s expectation that the Committee will ease the stance of monetary policy at this meeting. Underlying our forecast is the policy assumption that the Committee will cut the funds rate another 25 basis points at this meeting. In assessing the appropriate path of the stance of policy, I took a number of considerations into account. First, core consumer inflation currently is at a level that I consider consistent with price stability. Second, unemployment is very near my best estimate of the full employment rate. In the context of a Taylor-type rule, these considerations imply that the real funds rate should be near its neutral level. In fact, any version of the Taylor rule you prefer, with whatever rates you want to put on inflation versus the gap, will give you the same recommendation because all the terms are zero and drop out, except for one—the equilibrium real rate. Of course, we cannot know the level of the real equilibrium rate with certainty. Defined in terms of the PCE price index, our best estimate is in the range of 2 to 2½ percent, which is well below the current real rate of about 3 percent. I would like to highlight two additional points here. First, the actual real rate has been boosted over the past six months or so by declines in short-term inflation expectations, whether one measures them by lagged inflation, by surveys of expected inflation over the next year or so, or by forecasts of inflation including the Greenbook forecast. Second, one important aspect of the financial turmoil is that it probably represents in part a movement toward a more reasonable pricing of risk, as seen in the rise in risk spreads. This development tends to push the equilibrium real funds rate down toward the lower portion of the range I just cited. The bottom line is that in my view, even without the contractionary effects of recent financial developments, an appropriate stance of monetary policy would involve further declines in the fed funds rate. I have assumed that the funds rate drops to 4½ percent by the end of this year and to 4¼ by the end of next year. My assumed path ends in the same place and embodies the same medium-term assumption concerning neutral as FRB/US, on which the extended Greenbook forecast relies. The only difference concerns timing. We assume a more rapid path to the long run than the Greenbook does. Our forecast shows real GDP growth gradually picking up to around 2½ percent, our estimate of potential, by the end of next year. However, given that the financial shock is not yet resolved, I think the downside risks to this forecast predominate. With regard to inflation, I expect core PCE inflation to remain around 1¾ percent over the next several years. The probable appearance of a small amount of labor market slack is likely to help hold down inflation. In addition, I expect that, with inflation remaining below 2 percent, inflation expectations will edge down as well, reinforcing our success. I hope that this result will be aided by the release of our extended forecasts and the greater awareness of where we would like to see inflation settle down. I see the risk to my inflation forecast as moderate and mainly to the upside in view of recent increases in oil and food prices, declines in the dollar, and a slower rate of structural productivity growth. So, in summary, I think the most likely outcome is that the economy will move forward toward a soft landing. I see downside risks to economic activity and some upside risks to inflation. But in view of continuing questions about the effects of the financial market shock, I am more concerned about the activity side of things right now." FOMC20070131meeting--417 415,MS. BIES.," Thank you, Mr. Chairman. Let me just make an introductory remark, and then I’m going to go through these questions fairly quickly. First, I’ve heard different reasons here for our looking at change. One issue is to improve the credibility of the Fed. The point about credibility that I’d like to make is that it is a trust issue. You earn trust by demonstrating that you can achieve the objectives of your organization. I think we have credibility. Whether or not we put out a forecast, our credibility is precious. If we don’t demonstrate our ability to control the inflationary pace, we’re going to lose that credibility whether or not we have a forecast. Accountability, too, is important. We are a central bank in a democracy, and whatever we can do to enhance transparency—to let folks understand how we come about our policy choices—is important. I use the word “enhance”—President Lacker or someone else used it earlier, but I like the word—because it says that things are going well. We always have ways in which we can improve, and we should be looking at change on the margin, not major changes. I also agree with Government Mishkin and a few others that the strength of the way the central bank is set up in this country is the diversity of viewpoints. We not only get different regional inputs, we also have people from different backgrounds sitting around this table, whether they are Ph.D. economists and experts in monetary policy, experts in Reserve Bank operations, or folks from the private sector. We all come at monetary policy from a different perspective. For that reason, if we go forward in this vein, I support individual forecasts and retaining that diversity of viewpoints. Therefore, I don’t support any common assumptions. Each of us should be free to choose the framework in which we produce our forecasts. I worry that forcing common assumptions sort of forces convergence, and I would not be likely to support that. I feel strongly that the most important part of issuing a forecast is the narrative. If we just put numbers out, I don’t know what value added we have. The numbers in the Greenbook don’t vary a whole lot in most of the scenarios, but the narratives give a different flavor. As you read through the scenarios, you can say, “Well, I feel strongly this way,” but the model doesn’t produce a whole lot of difference. So I think it’s essential that we talk more about it in a narrative form. That qualitative aspect really adds value to a forecast, particularly with the diversity of views that may occur from time to time. In terms of how we do the narrative, the proposal that Vice Chairman Geithner circulated is a good framework that we could use to start. Again, if we do that before the meeting, it may help the timeliness of the communication. It should come out at the same time as the numbers, whether it’s tied to the minutes or tied to the Monetary Policy Report. It is part of the overall process. As for technical aspects of the forecast—again, based on the comments about staff work, I agree that we need to keep things simple. Twice a year is sufficient, at least initially, partly because we shouldn’t overcommunicate the ability of monetary policy to fine-tune short-term variations in inflation and monetary policy. I think about my life as a corporate CFO and the frustration of being held quarter to quarter to the results of a company when so much is going on and you are managing the long term successfully. For that reason, and because the lags in monetary policy are so long, I think we’re overcommitting—whether to the Congress, the general public, or the markets—about our ability to implement and affect markets by doing too short a forecast period or too frequent a forecast. However, going forward I would lean toward what we have now in the forecast and not go out longer. I understand that people want to go out further because they think that doing so signals what our long-run real objectives are. But if we want to set an objective, let’s just set the objective rather than having a longer-term forecast because out in the long run we’re more prone to volatility and because timing, too, will be more of an issue. I also would favor just the three variables that are related to our mandate from the Congress—inflation, real GDP, and the unemployment rate—varieties of which are to be determined, but they should be tied to the mandate. Down the road we could add more, but for now let’s keep it to those three. I think it’s important to communicate uncertainty surrounding the forecast, and I would do that with regard to two dimensions. First, whatever the consensus, in the five years that I’ve been here, there have been periods when we did not know how far policy was going to have to go. One instance was when we started down the path of raising interest rates, we knew we were going to go at a measured pace and we clearly signaled for a long period that this was where we were going and that we felt confident that a 1 percent funds rate was too low. We were not sure of the stopping point, but we knew we had a long way to go. Second, regarding the central tendency, it is important to signal a rise in uncertainty around turning points—that our forecasts about them depend a lot on incoming data. If in the Committee we have an outlier or really different viewpoints, we need to spend a bit more time in a narrative explaining why we have a difference of views. The only other comment I would make is that, in thinking about the alternatives and the variability around them, it will be a challenge to communicate that effectively. So we should, as some suggested, do a few dry runs. I’ve been spending a lot of time recently on Basel II, Pillar III, disclosures regarding uncertainty and risk. Looking at what we really can control through monetary policy and differentiating that from other things going on, the style that we choose in talking about uncertainty and risk regarding the forecast will be very important. So I think it would be good if we practice that communication a little first. Thank you, Mr. Chairman." FOMC20050503meeting--81 79,MR. STERN.," Thank you. Well, two issues have been weighing on my mind. They’re really the two issues that Dave Stockton addressed. First, is the recent reduction in the Greenbook forecast roughly appropriate, or will the economy do appreciably worse or possibly significantly better than that? Second, is the forecast of modest inflation still tenable in the face of the increase in most core measures that we have seen? I must say that I think there is a danger of over-interpreting and overemphasizing a batch of statistics, all of which became available within several weeks in April, given their reliability or unreliability and given that not all of them seemed to me to be a particular surprise. Still, I wouldn’t totally dismiss them, so I am inclined to reduce my forecast of growth, although it’s perhaps still a bit above the Greenbook projection of 3½ percent. Plus, for what it’s worth, our internal forecasting May 3, 2005 37 of 116 maybe a touch more optimistic than the Greenbook for three sets of reasons: one, the fundamentals; two, the nature of the anecdotes I’ve been getting; and three—and perhaps most importantly— history. As far as the fundamentals are concerned, we have the usual suspects that we’ve been talking about at this table for several years now: continuing comfortable financial market conditions, underlying expansion in productivity, a general lack of supply-side constraints, and still healthy consumer and corporate balance sheets on average. As for the anecdotes, discussions with business leaders in our District and an examination of District economic data for the most part yield positive conclusions. Manufacturing is clearly continuing to advance, employment is increasing, and labor markets appear to be gradually tightening, especially in areas where mining and energy activity are strong. Consumer spending activity is continuing to expand, and reports on capital spending and commentary associated with capital spending from directors are really quite strong overall. All of this is balanced a bit by a note of caution, which has crept in among firms with large exposures in the transportation sector, but I would have to say that the anecdotes preponderantly have really been quite positive. As far as history is concerned, I consider particularly relevant the long expansions of the 1980s and the 1990s. In my view, those expansions were not particularly dependent on good luck nor on astute policies conducted with exquisite precision, although I do believe that policy made a positive contribution. But I think the real lesson of those expansions was that the economy is fundamentally sound, flexible, and resilient. And I don’t think those traits have been altered or have diminished just because we’re in a new decade. So that gives me a fair amount of confidence that May 3, 2005 38 of 116 As to inflation, I continue to think that moderate inflation will prevail, with the performance of core prices probably at a pace comparable to that over the last five or six years on average. Still, there is no denying that core measures of inflation have been increasing persistently since late ’03, and this does give me a bit more concern. And it makes me a little more cautious than I was formerly about the inflation situation currently and about the outlook for inflation. Thank you." FOMC20080318meeting--124 122,MR. STOCKTON.," I can't really answer that question. Over this intermeeting period, we were coping with two important developments. One was that we saw some increase in overall measures of financial stress. As you know, we went to a forecast back in September when they first emerged and started marking down the level of GDP to account for that. We did a little more in this forecast to account for what we perceived to be an increase in financial stress. But the bigger factor in marking down our forecasts significantly this year was a reading that we were switching from a sense of a slow-growth scenario and moving into something like a more nonlinear downturn of the economy. That motivated the more significant portion of the downward movement that we had in the equilibrium real interest rate here. " CHRG-109hhrg31539--72 Mr. Bernanke," Congressman, let me just note that when these forecasts were made at the last FOMC meeting, I believe the unemployment rate was 4.7 percent at that point. We are not that precise in our forecasting. I think the thrust of our forecast is that the unemployment should stay at about the same region as it is today. The unemployment rate is calculated from the Current Population Survey, which is a survey of 60,000 households; that is the one that we are referring to. The discrepancies that have arisen in the past are between the job creation numbers from that survey and the job creation numbers from the payroll survey, which we are perhaps more familiar with. Those two surveys have come closer together in recent years, and in the last few months we have seen some divergence again, but they have been somewhat more aligned than they were a few years ago. " FOMC20060808meeting--181 179,MR. PLOSSER.," Thank you, Mr. Chairman. The goals are pretty clearly stated, and I have no real problems with them. I agree that communication and transparency are really a key part of maintaining and enhancing our own credibility. I also understand, as I listen to people around the table and other conversations, that some of these issues have no easy or clear answers to them, and I should note in advance that my own views are evolving as I think about and understand the nuances of the issues. I agree with President Yellen. I’d like to applaud the Committee because in the past ten years there have really been great strides in both transparency and communication. Part of the challenge, it seems to me, is how we meet these goals. I think it’s true that putting some limits on what information is released is probably necessary over certain periods of time. For example, I wouldn’t advocate opening the FOMC meetings to the public; I think that would not be terribly useful. On the other hand, Governor Warsh was just talking about perhaps releasing minutes earlier or faster or some version of them, maybe with incomplete detail, but including the tone and nature of the discussion. I think it could be fairly useful and informative, particularly if it noted disagreements or discussions in terms of where the tension happened to be within the meeting. I spent several months at the Bank of England a couple of years ago and watched the give and take among committee members at the MPC and also watched them go out in public and discuss their different views and why they disagreed with each other. That was very instructive to me because they did it without apparently adding to volatility in the marketplace. The market had come to accept the notion that these people disagreed on some things. The information released might differ depending on the type of monetary regime we think we’re in—whether in a regime of inflation targeting or one of full discretion. However, regardless of the regime, the need for policymakers to clearly communicate what their goals are, their understanding of the economy’s current economic conditions and expected future conditions, and then the reasons for their decisions is an important part of communication. As to the quantity of information, quantity and quality to me are intertwined, so I’m going to talk about both of them together. Again, I applaud the expedited release of the minutes. Instituting that was a tremendous step forward, and I think it’s a very good idea. However, I would favor the Committee’s releasing some additional pieces of information. I obviously favor stating an explicit definition of price stability because doing so would help clarify our goals. The current practice of citing the range and central tendency of members’ forecasts is fine, but I would favor our releasing more information, perhaps in a quarterly forecast or in something like an inflation report, to help convey to the marketplace and the public what our range of views is and where the Committee stands on the state of the economy. It might help the public’s assessment of our views if we based our forecasts on some underlying policy assumptions rather than on what one might call appropriate policy, which might differ from member to member obviously and would likely not be well understood by the public anyway. One suggestion that has already been mentioned is conditioning the forecasts on the market’s expected funds rate path, for example. But in some way stating our assumptions or projections about potential GDP would be important as well because that information, again, will help the markets and market participants understand where the Committee is coming from. In regard to forward-looking information, I think there are a number of things that the FOMC could and should communicate, but its current expectation about the future path of the fed funds rate is not one of them. I don’t think that’s a very good practice in general. However, I do think that what we need to do is talk more about what our goals are, what our forecasts of those goals are, and even more in a qualitative sense the process by which we think we’re going to get there. That is to say, talking about how monetary policy will respond to various events—I hesitate to use the phrase “decision rule”—wouldn’t necessarily say anything about the future path of the fed funds rate, but it would be very informative. It’s critical, as has already been mentioned, that the FOMC members agree on what the goals are. The members don’t need to agree on the model of the economy or the channel by which they think monetary policy actually operates. Indeed, given the state of economic science, the differences in models and channels can aid in policy formation. Similarly, since dissents at this meeting are public, dissenters should feel free to explain the reasons for their dissent. We shouldn’t discourage presidents and other members from expressing their views about the state of the economy and the process. Committee members should be free to indicate how their views on the economy are evolving. In fact, I think that doing so supports our goal of helping the public form sound expectations of what policy is actually going to be." CHRG-109hhrg28024--194 Mr. Bernanke," At the Federal Reserve, when we make forecasts of budgets, we try to make the most realistic forecasts we can, and we try to take into account all features of what Congress is likely to do, both on the tax side, say AMT, and on the spending side. So yes, clearly, good planning requires you to think hard about what you believe actual spending needs are going to be. " FOMC20050920meeting--36 34,MR. STOCKTON.," Well, on the year-ahead inflation forecast. The longer-term forecast actually has not been around long enough to develop a lot of observations on that. The evidence is mixed when you more or less throw all of the determinants of inflation into an equation. In fact, it’s a matter of some controversy among the researchers on the staff as to whether or not the Michigan survey has any additional explanatory value. But I recognize that you were just referring to the straightforward inflation—" FOMC20070918meeting--111 109,MR. EVANS.," Thank you, Mr. Chairman. To date, economic conditions in the Seventh District have changed little since our last meeting. We continue to expand at a modest rate, as reported in the Beige Book two weeks ago. Even after accounting for continuing declines in the housing sector, most of my contacts thought the national economy had softened. Outside of housing, they generally reported a modest deceleration rather than an abrupt change in conditions. Retailers thought that continued high energy prices were holding back consumers, but demand was not seen as deteriorating sharply. A similar slowing was reported on the hiring front. For instance, Kelly and Manpower experienced softer demand for temporary workers, but again this was not characterized as a general pullback in hiring. Many contacts added that finding skilled workers remained difficult, as President Fisher mentioned. In terms of the business outlook going forward, several directors and other contacts noted that many in the business community were apprehensive about the prospects for growth. They were concerned that these worries might soon begin to weigh more heavily on actual spending. For example, in the motor vehicle sector, both Ford and General Motors cautioned that the August sales numbers overstated the underlying strength in demand for vehicles. They thought some selective incentive programs had boosted the sales figures. I asked all my contacts about the effects of the turmoil in credit markets. Though it is still early, none of them thought that the recent financial turbulence was causing creditworthy nonfinancial firms to have unusual difficulty in finding adequate financing. As several people have said, many business people suggested that the situation is much better than what they hear from financial commentators on Wall Street. Of course, we heard many examples of difficulties from financial market contacts, and several have spoken about that already. Turning to the national outlook, three broad developments since our August meeting have influenced my views on the economic situation. First, financial conditions have become more restrictive. Second, the incoming data suggest a greater decline in housing and a somewhat weaker labor market. Third, inflation prospects have improved to the point where my outyear projections are within a range that many participants would view as consistent with price stability. These projections embed a path for the federal funds rate that is similar to the Greenbook assumption. With regard to financial conditions, I think it is useful to consider the situation relative to an assessment of a neutral or an equilibrium federal funds rate. Taking into account the slower growth of structural productivity, a neutral rate is likely between 4½ and 4¾ percent. The Greenbook-consistent rate is in this range. Until recently, one argument for keeping the target funds rate at 5¼ percent had been to offset otherwise accommodative conditions. As recently as June, we had very low risk premiums and ample liquidity for all types of private borrowing, including large commitments for private equity deals. Now, of course, overall financial conditions have tightened and in some markets have turned very restrictive. Clearly, this restrictiveness is a downside for growth. Whether it is as large as ½ percentage point, as the Greenbook assumes, is uncertain. In any event, the ongoing repricing of risk also adds a good deal of uncertainty to the forecast. You all know it is very difficult to forecast the impact of such financial turbulence. Recent history and Dave Stockton remind us of this. In the early 1990s, restrictive credit due to depositories’ capital adequacy problems had a significant impact on real economic activity. In contrast, in the fall of 1998, we thought financial conditions would impinge a good deal on the real economy, but 1999 turned out to be a very strong year for growth. Bottom line—and we all recognize this—we need to be careful how we react to the current financial situation. Turning more specifically to the outlook for growth, our Chicago forecasts have tended to be somewhat more optimistic than the Board staff forecast, and we remain so. That said, the incoming data have been softer than we expected. So we marked down our assessment of residential investment again, but not as much as the Board staff did—again, and the decline in payroll employment caused us to lower our near-term outlook somewhat. As long as the financial difficulties are contained, and that is our working assumption, we expect growth to return to potential by the second half of 2008, and we have a higher potential output growth rate than the Board staff. However, I admit that the risks seem weighted to the downside of this projection. With regard to inflation, the improvement in core PCE inflation earlier this year appears to have a bit more staying power than we thought it might. If aggregate demand does weaken, as expected, then there is less risk of inflationary pressures arising from constraints on resource utilization. Energy prices, though, are a concern. My contacts do not seem to have much difficulty passing cost increases through to their customers. Overall, however, we have core PCE inflation edging down to 1.8 percent next year and remaining near that rate in 2009. I see the risk to this inflation forecast, conditioned on the outlook for growth, as being fairly well balanced. Thank you, Mr. Chairman." FOMC20070918meeting--57 55,MR. STOCKTON.," In this particular forecast, the housing revision is basically all driven off our assumptions about the difficulties in financial markets. There are no additional sentiment-type effects there. On commercial real estate, I’d say pretty much the same thing. As I noted in my briefing, the area where we have ventured into a looser sort of approach would be on the consumer spending side, where we are not really expecting a significant amount. We would expect some restraint on consumer lending and consumer borrowing associated with tighter underwriting, so there will be some increase in cost. But I don’t think those effects are likely to be large. Here we are relying more on an assumption that some disturbance to consumer sentiment will persist into next year. One thing that I would be looking for—for that piece of the forecast to be wrong and, therefore, for there to be more underlying strength in the economy—would be a quicker rebound in consumer sentiment and a moving up to the low 90s in relatively short order. That piece of what we built into the forecast would look to be questionable and might be worth a couple of tenths on the level of GDP next year. The other area where I would be looking if I were in your shoes and auditing our forecast is that we are expecting the labor market to be quite weak moving into the fourth quarter and, by the end of the fourth quarter, no employment growth, basically flat employment. Thus far, we have seen some uptick in initial claims for unemployment insurance. That seems consistent with some of the slowing that we have already seen. But I think we would have to see a further rise there to be consistent with the weakness that we are expecting in the labor markets. If that were not to occur, it would suggest, again, that we are likely to be off the mark on the weakness in activity that we are projecting. So I would say that those two areas would be at the top of my list for monitoring the weakness of the forecast. The factory sector would be the final area where I think, again, we get relatively timely information—some of it physical product data, not just data based on the labor market. We are expecting things to be a little weaker than they were in the middle of the summer but not so weak as they were in August. However, if we saw continued strength there, I think that would suggest some inconsistency with the weakness of our forecast." FOMC20080130meeting--212 210,MR. STOCKTON.," 4 Thank you, Mr. Chairman. My dictionary defines a miracle as an event so improbable that it appears to defy the laws of nature. Along those lines, we distributed a GDP report that compares our forecast with the actual number that was published this morning, and they are exceedingly close. [Laughter] As you can see comparing the Greenbook and advance estimate columns, in fact, it wasn't just close on the top line, but it was really quite close in terms of the various components. Personal consumption and business fixed investment were very close to our estimate. Residential investment was not quite so weak in the advance release as it was in our forecast; that might reflect either a different estimate by the BEA about cost per start or something they know about additions and alterations that we don't. In the opposite direction, federal spending--in particular, defense spending--was weaker in the advance estimate than we have incorporated in the Greenbook estimate. At the bottom of the table are the price indexes. Both total PCE and core PCE were spot-on with the forecast. Really, I didn't see anything in this report that would alter our outlook at all going forward. I would just note, obviously, that both the advance estimate and our Greenbook estimate are based on partial data. There is still a lot left to be learned about the fourth quarter, and even more about the first quarter going forward. One other piece of information that became available this morning was the ADP report for private nonfarm payroll employment. That report showed an increase of 130,000. Looking at that report and thinking about our forecast of 20,000, we'd probably up our forecast to about 50,000 for the month, following our normal rules of thumb in responding to that. Quite frankly, I don't think that particular piece of information would alter my view about the state of the labor market going forward. As we noted yesterday, we have seen a fair number of other indicators suggesting that there has been some softening in the labor markets. I think that is probably still the best bet going forward, so I don't think at this point we would change too much our employment forecast. " FOMC20050920meeting--35 33,CHAIRMAN GREENSPAN., Do you mean on their long-term inflation forecast? FOMC20061025meeting--138 136,VICE CHAIRMAN GEITHNER., So that would leave you with a forecast for inflation that you’d be comfortable with? FOMC20060920meeting--70 68,MR. STOCKTON.," Viewed from the appropriate perspective, 25,000 per month is not too bad—viewed perhaps from the perspective of the Administration of Millard Fillmore. [Laughter] So I will readily acknowledge that, if we’re right about our labor input forecast, there will be some communication difficulties, and there will be maybe even more political consequences in some sense than underlying economic consequences. A number of you noted, and I think the Chairman noted in the testimony or a speech, that marking down of our expectations for what would be good underlying employment growth. I’ve also been surprised in the past few months. If you had told most economists or market commentators earlier this year that 100,000 a month was going to be a good employment figure, it would have come as a real shock. Yet there has been, I think, a marking down of expectations for employment growth in that the recent figures, when they come out at 111,000 aren’t viewed as devastating." FOMC20050630meeting--251 249,MR. OLINER.," The final chart displays your economic projections for 2005 and 2006. As shown in the top panel, the central tendency of your projections for the growth of real GDP this year came down slightly from the projections in February, while the central tendency of the projected rise in core PCE prices was revised up a bit. The central tendency for the projected unemployment rate in the fourth quarter of this year is now a shade below that in February. For 2006, your central tendencies indicate essentially no change in real GDP growth from this year’s anticipated pace, no change in the core PCE inflation rate, and no change in the unemployment rate. If you should decide to update your projections, we request that you submit your revised forecast to Dave Stockton by the close of business tomorrow. We would now be pleased to take any questions you may have." FOMC20080130meeting--141 139,MR. REIFSCHNEIDER.," If you think about the forecast as resource utilization and inflation, then it has an effect on resource utilization that is bigger now going forward in the product market. We also see a bigger effect in the labor market, and if that were the only thing, it would have put more downward pressure--but not a lot--on inflation. But as I mentioned, we are coming into this forecast with somewhat worse inflation performance lately, and we think that has some persistence. So that is helping balance it out. " FOMC20080130meeting--176 174,MR. PLOSSER.," Thank you, Mr. Chairman. You know, listening to the staff discussion I have certainly come to understand why everyone continues to believe that economics is a dismal science. [Laughter] It is quite a dismal picture. But more seriously, recent economic data have certainly helped feed that view, and the Third District is no exception. Economic activity has weakened in our District since December, and to double the fun, firms continue to face increasing price pressures--not a very comfortable position for monetary policymakers. The Philadelphia staff's state coincident indicators indicate that overall economic activity has been moderate in New Jersey, flat in Pennsylvania, and declining in Delaware over the past three months. Our Business Outlook Survey of manufacturers fell sharply in January. The index fell to minus 20.9 from minus 1.6 in December. Now, some of that we have to remember is sentiment, in the sense that the question has to do with general activity and doesn't necessarily reflect just their firm. But it is a sentiment of pessimism that certainly is more prevalent than it once was. A reading that low, of minus 20, indicates declining manufacturing activity in the region and is usually associated with very low GDP growth or perhaps even negative GDP growth at the national level. More related to the firms' own performance, though, the survey's indexes of new orders and shipments also declined in January, and both are now in negative territory, although much less so than the general activity index. On the other hand, while expectations of activity six months from now have moved down somewhat this month, they remain firmly in positive territory, and firms' capital spending plans over the next six months remain relatively strong. District bankers are reporting weaker consumer loan demand, but business lending continues to advance at a moderate pace from their perspective. Loan quality has shown slight deterioration, mainly in residential real estate and auto loans, to a lesser extent in credit cards, and to an even lesser extent on the business loan side. This downtick in quality follows a period of extraordinarily low delinquencies and default rates and thus is well within historical norms, so it has not greatly alarmed our banking community. Thus far, our District banks apparently have largely escaped the credit problems plaguing the larger money center banks and investment banks. While there has been some tightening in credit conditions and standards around the District, most non-real-estate-related firms I spoke with are not finding it difficult to obtain credit for any reasonable project they want to do, and so they have not identified largely with the credit crunch scenario. Despite the softness in the activity, firms in our District report higher prices in their inputs and outputs. As President Lacker said, inflation seems to be alive and well. The current prices-paid and prices-received indexes in our Business Outlook Survey accelerated sharply in January and are at very high levels, almost record levels, of the past twenty years. Firms also expect prices to rise over the next six months. These forward-looking price indexes, too, are at very elevated levels relative to their twenty-year history. I am hearing from business contacts and from one of my directors, for example, that they are planning to implement price increases to pass along costs they are experiencing. Thus, even though they are pessimistic about growth in the future, they are not pessimistic about price increases. This adds to my skepticism about arguments that link inflation too closely with resource utilization. The national near-term economic outlook is also deteriorating, as we have been hearing, and I have revised down my growth forecast for 2008 compared with my October submission. It is hard to find much positive news in the data released since our last meeting, and the Board staff has summarized that quite eloquently, and so I won't repeat them. Nevertheless, in general, my forecast is probably slightly less pessimistic than the Board's forecast. However, I must add that, at the same time that growth has slowed, inflation has trended up. Both the core CPI and the core PCE accelerated in the second half of '07, compared with the first half. The core CPI advanced at a 2.6 percent rate in the second half of '07, compared with a 2.3 percent rate in the first half, and the core PCE was up at a 2.4 percent rate in the second half compared with 1.9 in the first half. As we know, the PCE price index gets revised. Recent research by Dean Croushore, one of our visiting scholars, has shown that between 1995 and 2005 the average revision from initial release until the August release the following year was positive on average for both the core PCE and the total PCE. This suggests that inflation is likely to be even higher in the second half of '07 than the current estimates indicate. I am also concerned that, over the past 10 year period, core and headline inflation for both the PCE and the CPI have diverged on average about 50 basis points. Headline rates have exceeded core rates in 8 of the last 10 years for the CPI and 9 out of the last 10 years for the PCE. While I would like to believe that these two rates should be converging on average, I am concerned that core rates may not be as indicative of underlying trend inflation as we might have thought. This line of thinking also leads me to question estimates of ex post real funds rates calculated by the staff and presented in the Bluebook, which are based on subtracting core PCE from the nominal funds rate. I am not convinced that the core PCE is the right measure of inflation in this context. Even if you thought it was, then the reported real rates are likely to be overstated for recent quarters given the apparent systematic bias in the preliminary estimates of the PCE that I have noted before. Moreover, some measures of inflation expectations are not encouraging: In particular, the Michigan survey one-year-ahead measures and five-year-ahead measures are up. We have already discussed a bit the acceleration in some of the TIPS measures. I will return to that in a minute. The Livingston survey participants have also raised their forecast for CPI inflation in 2008 from 2.3 percent to 3 percent. My forecast overall is similar to the Greenbook's, and I expect a weak first half and a return toward trend growth later this year and into '09 and inflation at the 1.7 to 2 percent range. But the policy assumptions that I make to achieve the forecasted outcomes for the intermediate term are different from the Greenbook's. The ongoing housing correction and poor credit market conditions are a significant drag in the near term on the economy, and I expect growth in the first half of the year to be quite weak, probably around 1 percent. As conditions in the housing and financial markets begin to stabilize, I expect economic growth to improve in the second half of the year and move back toward trend, which I estimate to be about 2� percent, about 50 basis points higher than the Greenbook, I think, in 2009. The slowdown in real activity suggests a lower equilibrium real rate. How much lower is difficult to measure with any precision. Ten-year TIPS have fallen about 100 basis points since the beginning of September. In such an environment, optimal policy calls for the FOMC to allow the funds rate to fall as well. And we have; the funds rate is down 175 basis points since September--or more if we cut today. But we also must remain committed to delivering on our goal of price stability in this environment of rising prices. To my mind, that means we must continue to communicate that commitment to the markets and to act in a manner that is consistent with that commitment. I want to stress that while many of us, myself included, have argued that inflation expectations remain well anchored, we cannot wait to act until we see contrary evidence to such a claim because by then it will be too late and we will have already lost some credibility. I also might add that the staff memo on inflation compensation, which I thought was very good, suggests that one reason for the increase in forward inflation compensation might be a greater inflation risk premium rather than a rise in expected inflation. That may, in fact, be true, and I think the memo was very well done. But if that is the case, if the rise is in the inflation risk premium, then I think it might be worth asking ourselves if the increase in inflation uncertainty might be an early warning sign of our waning credibility. This perspective leads me to a different policy assumption from the Greenbook's. In particular, once the real economy is stabilized, the FOMC must act aggressively to take back the significant easing it has put in place in order to ensure that inflation is stabilized in 2010. Employment is a lagging indicator, so we will likely have to act before employment growth returns to trend, should output growth pick up in the second half of the year as forecasted. Thus, I expect we will need to begin raising rates by the fourth quarter of this year and perhaps aggressively so. In contrast, the Greenbook assumes a flat funds rate at 3 percent throughout the forecast period. Despite the real funds rate remaining below 1 percent--and well after the economy has returned to trend growth--inflation expectations remain anchored in the Greenbook. In my view, this seems somewhat implausible or, at best, a very risky bet. It appears that the Greenbook achieves this result through an output gap--related to the question I was asking earlier this afternoon. I think all of us understand the very real concerns that many researchers have with our ability to accurately estimate the level of potential GDP. Furthermore, in the recent research on inflation dynamics that we have discussed--and President Yellen was referring to this--inflation becomes less persistent and appears to be less related to other macroeconomic variables as well. We do not know whether these changes are an outcome of a more aggressive and credible stance of monetary policy against inflation or are due to some fundamental changes in the world economy. If the lower persistence is due to enhanced policy credibility, then it is incumbent upon this Committee to maintain that credibility. Otherwise, we cannot expect inflation persistence to remain low. Thus, if the economy performs as forecasted on the growth side, with a return toward trend growth in the second half, I would be very uncomfortable leaving a real funds rate below 1 percent. The Bluebook scenarios involving risk management indicate that the inflation outcome is poor when there is a gradual reversal of policy. Better outcomes are achieved under a prompt reversal strategy. Given that forecast, I believe we must begin thinking now about what our exit strategy from this insurance we have put in place is going to be. How we communicate our monetary policy strategy will also be crucially important because of the effects such communications will have on expectations. We need to better understand in our own minds, I think, what our reaction function looks like so that we can be more systematic and articulate in our implementation of policy. Thank you. " FOMC20061212meeting--77 75,MR. POOLE.," I think I may be able to clarify the Wal-Mart outlook a bit. There’s been a lot of publicity that Wal-Mart reported November year-over-year same store sales to be, I think, 0.1 percentage point down. The Wal-Mart take on the situation is that the problem is about 75 percent in the forecast that they had and about 25 percent that sales are actually coming in a little weaker than forecast. The big miss is that, in the year-over-year comparisons, there’s an enduring effect that was larger than they had earlier realized of the sales in the hurricane-affected regions. People whose homes were destroyed went out and bought toasters, apparel, and all sorts of other things to replace the stuff that they lost, and that pumped up year-ago sales. They’re expecting that effect to continue to affect year-over-year comparisons through March, obviously tapering off. The other thing that they note—and this I think is perhaps a little more problematic—is that they continue to open lots of stores. They know that the store locations in some cases cannibalize sales from existing stores. So when they try to make allowance for those things, they say that October and probably also in November, although they haven’t completed that analysis, would have been about 3.8 percent above, year over year. They would have expected on this basis 4.5 percent to 5 percent. So they are running below the expectation. The overall impression of the holiday season is that it’s going to be good but not great. On the average shopping basket, the prices for goods sold are up about 1.1 percent year over year. Wal-Mart does not see much inflation pressure. They expect to be seeking price cuts from suppliers. Apparently consumer product companies generally adjust prices in the first quarter of the year, and they end up negotiating with Wal-Mart, and Wal-Mart is expecting to ask for some price reductions. A contact with a major money center bank indicates that their analysis of their credit card activity suggests that year-over-year retail sales have decelerated a little. They expect the holiday retail season to be okay but not great. My contact at UPS said in a conversation last week that the Christmas season has been somewhat slow to materialize in terms of volume since Thanksgiving. When I talked with him yesterday afternoon, he said that probably most of that was a consequence of weather, which delayed their volume. Perhaps more interesting, UPS is expecting international volume to be up 11 percent in 2007 compared with 2006. Their ’06 over ’05 output was 19.4 percent; 19 to 11 is a significant decline in growth. For domestic express, they’re expecting ’07—I guess the annual average—to be up 1.2 percent over ’06; the ’06 over ’05 comparison was 4.8 percent. So the deceleration in ’07 is significant. On the labor front, they don’t have any particular issue, and they’re not having labor availability issues. My FedEx contact had a similar outlook. FedEx has somewhat downgraded its expectation for next year. Again, he said that the company is starting to see momentum softening “as many others are.” The most downbeat contact was a large trucking firm. He started off by saying that “things are pretty slow.” He said that the trucking business never had a third-quarter or fourth-quarter peak. They just didn’t have a shipping peak. He said their customers are not too concerned. Shipping rates are down 4 to 5 percent year over year, and they’ve actually cut pay for new drivers. They had increased it back in July. They put the new driver pay back where it had been before, and they have also been laying off some drivers. I guess that’s the main thing. The company is not buying any new trucks next year. I have a couple of comments on the outlook. To me the only way to reconcile what we see going on in the equity and the bond markets is that the markets together are anticipating declining inflation pressure and continued good economic growth. One market or the other may be making a mistake, but if you want to assume that they’re well-informed people making good estimates, then it seems to me that’s the way to reconcile those observations. My view of the Greenbook forecast is that it’s very sensible. My own assessment is that outcomes above or below the forecast on both output and inflation have roughly equal probabilities; they’ve cut it right down the middle. It makes good sense. Both the Greenbook and the Blue Chip and other forecasters have been reducing their forecasts for ’07. If you look at the Greenbook, Part 1, page 23, there’s a nice chart of how the forecast has come down over this year. That’s all for me right now. Thank you." FOMC20080318meeting--57 55,MR. LOCKHART.," Thank you, Mr. Chairman. Reports from my directors and business contacts are consistent with what others have said this morning--that overall economic growth has slowed appreciably since the beginning of the year. Pessimism about the near-term outlook has increased. At the same time, many are troubled by the continued elevation of prices and price level increases and are apparently becoming less convinced that inflation will moderate any time soon. In my view, the deliberations this morning and the decision we make must be about, first, financial system stability--the threat to the broad economy of severe financial instability-- and, second, inflation risk and the role of rate policy in response to immediate problems. One addition to the list of concerns is the continuing dollar depreciation since we met last and its role in price pressures and overall uncertainty. In the run-up to this meeting, I heard little that casts doubt on where the economy is trending. My assessment is that we have entered recession territory. Previous forecasts premised improvement in the second half on the stabilization of house prices and financial markets. Neither has materialized, nor are there early encouraging signs. In the current circumstances, financial stability must be priority one. That said, the inflation picture has become quite troubling. Headline inflation, perhaps excluding last month, has been elevated since late summer, as have measures of core inflation, though less so. The expected easing of pressures hasn't yet convincingly set in. A longer view leads to the conclusion that inflation has been relatively high, on average, since 2005. We must be mindful of this as we address financial stability concerns. I mentioned the dollar's trajectory when I listed what in my view are the relevant considerations today. I am concerned about what I perceive as growing mention of the possibility of a dollar currency crisis. Although only one conversation, I also heard mention of a developing dollar carry trade fueled by interest differentials, expected rate cuts, and possibly the view that recessionary conditions will persist for some time. Policy is often a balancing act, but I see our current constraints as tightening. The real side has entered recession in all probability. There is increasing risk to the inflation objective. Financial stability is profoundly in play, exacerbated by the trajectory of the dollar, although to be measured about this, I think the current round of financial market problems has not yet thrown the economy irreparably off balance. I intend to support a downward rate move today, but with reservations about the utility of continuing cuts in addressing financial stability problems. Discussion in the policy round may address this, but I will comment now that balancing our policy objectives in such a risk-laden environment may require decoupling rate policy from liquidity measures. Thank you, Mr. Chairman. " FOMC20050630meeting--376 374,MR. FERGUSON.," Thank you, Mr. Chairman. The issues before us at this meeting are two. The first is: Are we going to be dissuaded from the announced strategy of another modest tightening in monetary policy? And second: Is there palpable need to adjust market expectations of policy going forward? We might be dissuaded, or feel obliged to change market expectations under one of four circumstances; and I will go through each of them in order. The first is if we thought the baseline forecast itself, which I think is built basically around the announced strategy, was unacceptable. I find the baseline forecast basically acceptable, although I am somewhat concerned, as are President Lacker and a few others who have already spoken, that the inflation drift seems to be upward. So I think there is some risk there, but by and large it’s basically an acceptable forecast. The second reason I think we would change strategy or change policy in terms of our announcements is if the incoming data made a basically acceptable forecast seem highly unlikely. June 29-30, 2005 141 of 234 consistent with the baseline forecast. Consumption is likely to hold up well, as outlined in the baseline, because labor markets do appear to be gradually improving. As David Wilcox indicated, not only has the unemployment rate edged down a little but, more importantly from my standpoint, the broader indicators of labor market conditions seem to be consistent with improvement. Economic conditions have strengthened enough to bring some individuals back into the labor market, as evidenced by a gradual rise in the labor force participation rate. There is also a decline in the share of individuals working part-time, for economic reasons, as shown on exhibit 4 in the chart show as well. And I think the tone in the survey data from both businesses and households has been relatively positive. Moreover, I continue to believe that low interest rates are likely to support wealth creation in the housing market, as we discussed extensively yesterday, and I have very little concern about a sudden fall-off in that regard. And, finally, with respect to business fixed investment, I would say though the investment-to-GDP ratio has been relatively low—a point I will return to later—I agree with the assessment in the Greenbook that the fundamentals are at least consistent with ongoing business fixed investment. On the inflation side, I would say that David handled the incoming data well in terms of why one should not put too much weight on some of the data. The one point that he didn’t touch on was unit labor costs. They rose quite dramatically in the fourth quarter of last year, but I think the good news is that in the first quarter of this year the increase in unit labor costs on an annual basis, quarter over quarter, seems to have subsided somewhat. So there may be less inflation pressures in that regard. So by and large, in terms of the second reason, I’d say the incoming data are consistent with a pretty good outlook. The third reason that might force us to change our views is if the market signals indicate that June 29-30, 2005 142 of 234 Vincent and the staff have done I think firmly outlines at least some of the issues. The fixed-income conundrum has been much recognized. Additionally, risk premia in the fixed-income universe are also quite low. In the equity markets, I think the signals are somewhat contradictory. And here I pick up a little from exhibit 8. One thing that’s not shown there is that the implied share price volatilities of both Nasdaq and the S&P 500 are really quite low, and yet the risk equity premium is relatively wide—toward the wide end of the norm that we’ve seen over the last decade. So in lieu of decrying these conundra with which we are confronted, let me at least do what Michael wouldn’t do, which is venture a hypothesis on why some of these things are true. With respect to the fixed-income markets, I have reached the conclusion—from these various observations of low rates and the flat yield curve—that the explanation probably relates to the fact that, at the global level, domestic absorption has fallen. I’m not trying to sort out investment versus consumption. Overall I think it has fallen below what it would have been otherwise. This suggests to me a fall in the neutral rate, not a global slowdown—to cite the two choices that were in Vincent’s model. I am heavily persuaded by the work that we saw on Monday, which Janet mentioned, about the number of real-side factors that may be holding back the economy and therefore reducing the neutral rate. I’d also say that the investment-GDP ratio, which has been quite low, has fed into fixed- income market performance because it has led to a change in the corporate financing gap. Between 1991 and 2000, the financing gap rose from less than $35 billion to a peak of more than $300 billion. That rise reflected the very sharp increase in capital expenditures that we saw and have talked a great deal about in the telecom, high-tech, and transportation sectors, etc. But the important thing is that the financing gap fell abruptly in 2001 and 2002, turned negative in 2003, and stayed June 29-30, 2005 143 of 234 accelerated tax depreciation, the financing gap returned to slightly positive territory in the first quarter. But overall the negative financing gap, which has been widespread across industries, indicates to me that the business sector as a whole is generating enough cash to purchase capital expenditures without borrowing. It is also true that the dividend payout ratio has been relatively low. The dividend payout ratio as a percentage of S&P operating earnings turns out to be, based on a report that I’ve just received, about 29 percent versus the 48 to 50 percent it has averaged over the last 40 years or so. So it’s clear that corporations are really sort of hoarding this cash. Since corporations do not tend to invest in equities, they do tend to invest in a number of fixed-income securities relatively short term. I think that’s one of the things that have been driving these relatively low interest rates. And just to put a final point on that, since the beginning of 2003, liquid assets in the nonfinancial corporate sector rose from about $310 billion, or more than 30 percent, to a total of $1.3 trillion. While the rate of accumulation of liquid assets has slowed, I think the ratio is still a factor that has been driving this relatively low interest rate. In equity markets, my read of the data is that the low volatility is telling us a better story than the rise in the equity risk premium we’ve seen. As Steve pointed out, or at least implied, the earnings-price ratio part of the equity risk premium really hasn’t changed very much over long periods of time. It is still in the 5½ to 6 percent range. So it really is the fixed-income side that has been driving the slight widening of the equity risk premium. The final market signal that I think would be important to us is the read on interest rates. Some people have already talked about the interest rate signals we’ve seen. I won’t belabor the issue. I will pick up a point that Janet made, which is that there are a number of different measures June 29-30, 2005 144 of 234 of the best forecasters of inflation. It’s not the only reasonably good one. From the Philadelphia Federal Reserve District, for example, the survey of professional economists also has a fairly good track record on forecasting inflation. And as Janet pointed out, a random walk—or at least looking back to recent inflation history—has been a good forecaster. The good news for us is that almost all of those forecasts fall in a range that’s very close to the Greenbook forecast, which gives us perhaps some comfort that the Greenbook has the forecast on inflation about right. The final point I’d make—if you remember, there were four reasons—is: Would we be dissuaded from raising rates or would we change the signal if we thought it would create some financial instability? In this regard, I asked the staff to do a very quick simulation of the effect of a rapid 1 percentage point rise in the fed funds rate over what is in the Greenbook forecast. It turns out that if we were to be so rash as to dramatically raise rates by 1 percentage point over the baseline forecast, that would create by the end of 2006 a rise in the financial obligation ratio of only about 6 basis points. I won’t go through all the math of it, but obviously it has a fair amount to do with the fact that a vast majority of the mortgages in this country are fixed-rate mortgages. And second, by definition, if we were to raise rates so dramatically that it would result in a slowing in the economy, we would see individuals take on less debt. But the bottom line is that I think the strategy we’ve outlined, if executed in a reasonable fashion, should not create financial instability. Let me conclude by saying that I think the strategy we have is about right. I don’t believe there’s a reason to change market expectations quite dramatically. I do think there’s some downward pressure on the neutral rate, and I think the Greenbook has picked that up. So, by and large, I think the appropriate course is full steam ahead. Thank you, Mr. Chairman. June 29-30, 2005 145 of 234" FOMC20051213meeting--28 26,MS. JOHNSON.," This is the time of year when folks young and old look forward to receiving a pleasant surprise or two—and not necessarily something that can fit inside a single stocking. We in the International Division have found ourselves pleasantly surprised by the strength of global economic activity during the third quarter, which is now evident in the data, and the indications that some of that strength is continuing. Accordingly, we have revised up our estimate of foreign real GDP growth for 2005 to near 3½ percent, about the pace we were projecting early last year. The baseline forecast this time calls for economic activity abroad to continue expanding at about that pace through the end of 2007. The greater-than-expected buoyancy of the global economy was widespread and does not appear to be explained by one or two special developments that have limited implications for future growth. Among the industrial countries, the strong performers such as Canada had another good quarter, with Canadian Q3 real GDP growth at 3.6 percent. But more sluggish regions, for example the euro area, also did moderately well, at 2.6 percent real growth. Labor markets have either continued to improve or remained solid. And German and Canadian orders data portend continued solid expansion. Among the Asian emerging-market economies, China, Taiwan, Hong Kong, Korea, the ASEAN countries, and India all performed well in the third quarter. In Latin America, a sharp rebound in Mexican GDP growth raised the average for the region despite a very weak quarter in Brazil. December 13, 2005 14 of 100 in the recent data. In contrast, in the major regions of the global economy, inventories do not appear excessive and in need of reduction. Private fixed investment has shown vitality in Japan, the euro area, the United Kingdom, Canada, China, and Mexico. These elements suggest the expansion will prove durable. In most foreign economies, financial conditions remain very favorable for growth. Equity prices, in particular, have risen substantially over the year, providing support for both private investment and consumption. Since the end of last year, equity prices have recorded double-digit increases in the foreign G-7 countries, with the more than 30 percent gain in Japan being particularly noteworthy. Among the emerging Asian countries, stock prices in Korea have surged over the year. In Latin America, Mexican and Brazilian stock prices have risen very sharply. Except for Canada, the major foreign industrial countries have all experienced expansionary depreciations of their currencies on balance over the year. For these countries, long-term interest rates remain low, ranging from about 1½ percent in Japan to 4¼ percent in the United Kingdom. We interpret the positive surprise in the pace of third-quarter activity as indicating somewhat greater fundamental economic momentum abroad than we recognized in the previous Greenbook. That momentum, in combination with the generally supportive foreign financial conditions, should sustain foreign real GDP growth, and we have accordingly raised our forecast for 2006 slightly. We expect that this continued moderate real output growth will be accompanied by little change, on average, in inflation abroad as the flat path projected for global crude oil prices over the forecast interval should result in some shifts down in headline inflation. Of course, risks of an acceleration in consumer prices abroad, owing to second-round effects from previous oil price rises, remain. Both the Bank of Canada and the ECB raised policy rates during the intermeeting period to counter any upward drift in inflation pressures or in inflation expectations. We expect further policy tightening in Canada in the next few quarters, more limited additional action by the ECB, and an end of the Bank of Japan=s policy of quantitative easing some time in 2006. December 13, 2005 15 of 100 deficits could increase. This feature of the December forecast is not such a pleasant surprise. Given today=s prices for energy, perhaps we would be better off with a lump of coal. David and I would be happy to answer any questions." FOMC20070918meeting--84 82,MR. STOCKTON.," The way I square the corners is that, even by our estimates, the labor market is still tight. The 4½ percent unemployment is still below the 4¾ that we are estimating the NAIRU to be. Even on our forecast of the labor market, the unemployment rate doesn’t get to the NAIRU until the middle of next year. So it wouldn’t surprise me if some complaints about availability of labor linger for a while here. The labor market, even with our weak employment forecast, only gradually begins to loosen up. Really not until next year would we have something approaching an equilibrium in the labor market and then beyond that before we got some slack. I think there is sort of a level versus a change issue here. The current state of the labor market is tight, even though we are forecasting it to deteriorate going forward." FOMC20070509meeting--65 63,MR. PLOSSER.," Thank you, Mr. Chairman. The near-term outlook for the Third District is moderate growth going forward. The major source of the strength in the District continues to be employment growth, and nonresidential construction is fairly stable and modestly healthy. However, manufacturing continues to be sluggish and residential construction weak. Job growth has picked up considerably in our District, having grown at 0.9 percent at an annual rate in the past few months. Unemployment rates have fallen in the region, and the labor market in Pennsylvania in particular has been especially strong. To get a better handle on labor market conditions, in our last business outlook survey we asked a panel of firms whether they had experienced problems filling jobs in the past three months because applicants didn’t have sufficient qualifications. Remarkably, more than two-thirds of our firms said that they had trouble with this and that the percentage has been growing since we first started asking the question three years ago. The strength in the regional labor markets is reflected in the rebound in our staff’s indexes of leading indicators of economic activity in the three states in our District, especially in Pennsylvania, where the index is predicting stronger growth over the remaining three quarters of the year. An area of stability in our region’s economy has been the ongoing modest strength in nonresidential construction. The growth in this sector has recently been largely in noncommercial construction—hospitals, education buildings, and so forth. However, general commercial vacancy rates in Philadelphia have been falling steadily, and the absorption rate in Center City is nearly at a record high. With regard to manufacturing, growth is stalled. According to our April manufacturing survey, our general activity index is close to zero, or just mildly positive, as it has been since late last year. Both new orders and shipments are close to zero, as they were. Further, in April the index of future capital expenditures was down somewhat and below the averages that we have been seeing in most expansions. The only bright spot was the significant bump-up in our future activity index, which signaled that more-robust activity is anticipated by our survey participants. It also comes as no surprise that residential construction remains weak in the District, and housing permits have continued to decline as the value of residential construction contracts has as well. Also, there seems to be little or no appreciation in house prices. On the inflation front in the District, prices paid and prices received by manufacturers have moderated a bit. Further, retailers are reporting very little change in prices over the past few months. In summary, the Third District is growing slowly, and our staff projection is for modest growth going forward. Labor market fundamentals appear strong, but we have yet to see any sign of the pickup in manufacturing that some of the national numbers indicate. On the national level, since the last meeting I have actually become a bit more comfortable with the economic situation. While I say that I am more comfortable, that’s a relative not an absolute statement. The most recent month’s readings on core inflation were welcome, but I think that caution and vigilance are still the order of the day. Indeed, the Greenbook authors, as we’ve noted, seem to have been revising their forecast of core inflation upward slightly over the past several months rather than downward, and that to me is a bit disturbing, even if the numbers don’t change a whole lot. News that has made me more comfortable with the projection of a somewhat quicker return to something closer to trend growth in the second half of the year is the recent strength in durable goods orders and the ISM numbers, which are indicating that manufacturing has picked up. Further, recent strength in manufacturing was broadly based, and the output of business equipment was strong. Along this dimension, I am in agreement with the latest forecast of the Board staff. However, these reports represent only one month of data, as people have said, and although they are consistent with a modest bounceback in the second quarter, there is still substantial uncertainty. I hope that, in the coming months, those data will be reinforced as new data come in; but, again, at this point that is only wishful thinking. I would add, though, that my business contacts, particularly in the financial sector, continue to report to me that business loans are strong, C&I loans are strong, demand is strong for loans, and balance sheets and firms still look good. So they see things as looking good from their perspective, but that positive news is not really showing up in some of these other numbers, at least as yet. So I’m a bit puzzled by that. Furthermore, job growth and personal income growth appear to be on solid footing, and I find myself increasingly puzzled by the weakness in the labor market as portrayed by the Greenbook forecast. The strength in personal income, along with a rebound in asset markets, leads me to view consumption as somewhat healthier going forward than the Greenbook sees it. Those circumstances, coupled with the more positive news on investment to which I just alluded, lead me to view closer-to-trend growth as the best forecast and, therefore, to have a little more optimism in my outlook for the second half of the year and into ’08. That is reflected in the forecast that I submitted. That said, I realize there are significant risks to this return to trend growth. The biggest risk remains housing. The extreme fluctuations in weather over the past four to five months have made discerning trends a lot more difficult, and I’m not sure exactly how much seasonal adjustment factors are bouncing the numbers around and making it harder to disentangle effects. Inventories of housing, as we have talked about, remain extremely high, and there is very little signal of a pickup in demand, at least as yet. However, I’m a little skeptical that this sector will continue to subtract a full percentage point of real growth from the forecast, as the Greenbook suggests. I’m a little more optimistic than that. I remain optimistic in part because I think real mortgage rates remain relatively low. I see strong income growth continuing, and I am increasingly less concerned, actually, about the spillover from subprime markets. So I can envision housing demand strengthening a bit more than is implied in the Greenbook, and that leads to less of a subtraction going forward. On the inflation front, I’m a bit less worried than last time but far from sanguine. The last core PCE inflation number was obviously very encouraging at something close to zero, but, again, we have to be very careful in extrapolating out one month’s data. As I said before, the Greenbook authors seem to be inching up their forecast of core inflation or at least pushing the decline out further into the future, and that concerns me a bit. I believe inflation is still too high. Inflation expectations are stable, but they are too high as well, and we need to bring that rate down. Thus, we need to be vigilant here and continue with a somewhat restrictive policy. In regard to my forecast, I’m not going to say much. I just assure you that, without collusion, President Lacker’s view of the forecast and how it evolves is very similar to mine. So rather than repeat what he said, I will just let his comments largely speak for mine. I have a slightly faster return to trend growth, partly because my productivity estimates are somewhat higher. I thought Janet Yellen’s comments about her productivity analysis were quite thoughtful, and I appreciate them. The optimal monetary policy, or at least my preferred path for monetary policy, might include some tightening if trend growth returns more quickly than we had indicated. But, indeed, my forecast for core PCE was actually down to 1.7 percent by 2009. I’ll stop there. Thank you." FOMC20070918meeting--197 195,VICE CHAIRMAN GEITHNER.," I didn’t mean to suggest not having anything that reflects the dispersion of views or the uncertainty around those views. But right now it’s so skeletal that it doesn’t add much value to the tables, and it gives in some ways less texture than what is in the minutes, frankly, about the outlook over time. If the central purpose of this is to animate the set of judgments about the evolution, we could do it a little better that way. This is complicated because we have all sorts of different conditioning assumptions that underpin our forecasts. When those conditioning assumptions vary, you can’t really tell much from what the variance in the forecast is. We don’t ask people to give a modal and an expected forecast and the difference between the two, even though we ask them about the balance of uncertainty in that sense. So it is hard in some sense, Mr. Chairman, but I didn’t mean to suggest you would want to do that because you want to try to force a consensus view." CHRG-111hhrg56766--138 Mr. Bernanke," Assuming that those numbers are appropriate, I mean the forecasts are very difficult to make, but assuming they're appropriate, no, it's not. " FOMC20070918meeting--61 59,MR. PLOSSER., That would be a significant change from the standpoint of how you are viewing the forecast. FOMC20050503meeting--90 88,MR. SANTOMERO.," Thank you, Mr. Chairman. Economic conditions in the Third District continued to improve in the first quarter, although at a slightly slower pace than in the previous quarter. Retail sales in the region were up slightly in March, with most merchants noting that unseasonably cold and rainy weather dampened sales of spring apparel and other seasonal merchandise. As in the nation, local auto dealers saw a healthy rebound in sales in March, helped by strong manufacturers’ incentives. Both retailers and auto dealers expect sales to improve this spring. Payroll employment continued to increase in the region in the first quarter, and the unemployment rate declined. A large national payroll and benefits administrator in our District reported that in the first-quarter employment growth was stronger at small firms with fewer than 1,000 employees than at large firms. But the positive growth rate at large firms was an improvement over the zero growth they saw last year. There has been little change in the overall picture in the construction sector. Nonresidential construction in our region remains soft. As in the nation, there has been a sharp drop in the value of nonresidential construction contracts in the first quarter compared to a year ago. The residential sector remains strong. The value of residential construction contracts declined in the first quarter in our three-state region, but remained at a high level. Home sales and the rate of house price appreciation remained robust. Our business outlook survey indicated that regional manufacturing activity is expanding. We saw a sizable rebound in the general activity index—from 11.4 in March to 25.3 in April— suggesting that the drop in March may have been a random volatility event rather than a signal of a more persistent slowing. About half of the firms reported that they plan to increase capacity in 2005, May 3, 2005 51 of 116 The most troubling regional economic news is the evidence of increasing price pressures in the District. Consumer prices in greater Philadelphia appear to be increasing at a faster pace than in the nation as a whole. After some moderation in February and March, industrial price pressures increased in April. The price indexes in our manufacturing survey rebounded this month across almost all of the industrial sectors represented and are at very high levels. However, while the indexes of future prices paid and received have risen sharply over the past two years, in recent months both indexes have stabilized, albeit at relatively high levels. Also, employment cost inflation in the Northeast region has not accelerated, running at a 3.5 percent annual rate in the year that just ended in March. In summary, the economic expansion appears to continue at a moderate pace in the Third District. This is what we gleaned from the data we have available and it’s consistent with the anecdotal information from our contacts. During April, I typically travel around the region, holding a series of meetings with our bankers and business leaders. They’re generally upbeat, with positive outlooks despite the recent negative national economic headlines. This gives me some confidence that the recent softness in the data will prove to be relatively temporary and is not signaling an economy that is taking on a new direction. My assessment of economic conditions in the nation is similar. Admittedly, higher oil prices likely are having some dampening effect on economic activity, and recent monthly data have come in softer than expected. However, this appears to be a temporary lull, as there is little to point to that suggests we are seeing a persistent deceleration in real economic activity. Last month was reminiscent of the soft patch we hit in June of last year, as President Yellen indicated, after oil prices May 3, 2005 52 of 116 As the expansion continues and the economy approaches a sustainable growth rate, it is to be expected that we will see growth in some quarters above and in some quarters below that sustainable pace. My reading of history suggests that a low quarter or two is fairly typical during the course of an expansion and that some of the concerns based on early measures of economic activity are assuaged by subsequent revisions in the data. The bottom line is that I agree with the Greenbook’s assessment that the economy continues to have positive momentum. This suggests that it is premature to be too concerned that the perceived slowdown will persist and clearly premature to alter our policy path based upon the available new data. Of course, there are downside risks for near-term growth, but there is nothing that monetary policy can do that will affect the real growth in the next quarter or so. Therefore, I think we should be focusing on a horizon over which monetary policy can have an effect. In that regard, the acceleration in inflation over the past year is a concern to me, and that sentiment has been echoed around this table. The first part of the increase in inflation was to get us away from the zero bound, but we are now well beyond that. In fact, over the last six months, the inflation rate has been moving up into the top half of my acceptable range. Of course, these are high-frequency data and the trend still might prove temporary, but it clearly deserves watching. The Board staff continues to forecast some tempering in core inflation over the forecast horizon, but the starting levels of their forecast have been moving up as new data have come in. The forecasted downward path seems dependent on a good deal of slack remaining in the economy. However, this increase in observed inflation may be evidence that there is less slack than we think. By ignoring the acceleration, we could end up in a situation of having to move rates up more rapidly than we now expect, which could have a negative effect on future growth. So this is certainly not May 3, 2005 53 of 116 That said, I’ve become less certain about the particular speed at which the removal of accommodation should proceed. If the inflation acceleration continues, a steeper path may be indicated. In the event that the softening of activity turns out to be persistent, a slower pace might be more appropriate. At the last meeting I indicated that I believed the dispersion of likely rate paths going forward was widening. I dare say there was some consensus on this point at the meeting. Given the recent data, I’d guess that not only is the dispersion around my own expected path wider still but that there is likely to be more divergence in the Committee’s view of it. Thus, I believe it’s important for us to craft our statement in a way that gives us considerable policy flexibility. It would also be useful if we could convey some sense that there is less certainty about policy actions going forward. I will not get into the specifics of how to do this until the second roundtable discussion. However, I want to point out that sometimes saying less offers more transparency about the Committee’s view than saying more. Thank you, Mr. Chairman." FOMC20071031meeting--39 37,MR. PLOSSER.," Thank you, Mr. Chairman. There has been little change in the District economic conditions since our September meeting. Except for housing, activity is expanding at a modest pace, somewhat below trend. Our business contacts are cautious, generally expecting slow growth to continue over the next quarter, but they remain fairly optimistic for business conditions six to twelve months out. Payroll employment continues to expand at a slow pace in our three states, which partially reflects slow population growth, and so the unemployment rate remains slightly below that of the nation. Retail sales have generally held up, but there are divergent views among retailers regarding holiday sales. High-end stores expect a very strong finish to the year; lower-end merchants are more cautious. Housing construction and sales continue to decline, but the pace of that decline is in line with the expectations at our last meeting. The value of nonresidential building contracts has declined more sharply in our region than in the nation as a whole. Nevertheless, I would characterize nonresidential real estate markets as firm. That office vacancy rates are declining and commercial rents are rising suggests a positive outlook for commercial construction going forward. According to our business outlook survey, manufacturing activity in the District has been increasing at a modest pace for the past several months. The general index of economic activity moved down slightly, from 10.9 in September to 6.9. Shipments and new orders also weakened slightly. Staff analysis suggests that our manufacturing index, which precedes the release of national industrial production numbers, provides useful information in forecasting monthly manufacturing IP and total IP. That forecasting model is predicting a rise in both manufacturing IP and total IP in October. About two-thirds of the District manufacturers and service-sector firms we have polled said that recent changes in financial conditions have not prompted any change in their capital spending plans, and the other firms are about evenly split as expecting a slight decrease or a slight increase over the next six to twelve months compared with the past six to twelve months. However, in speaking with my business contacts, I do hear a sense of continuing caution among businesses in their capital spending plans. The manufacturers seem to be a bit stronger than the service firms, perhaps reflecting a more robust export market, which many of them are participating in. District bankers, in general, continue to express concern over housing and mortgage lending but see commercial and industrial lending as fairly stable and proceeding about as they had expected. There has been little change in the District’s inflation picture since our last meeting. Firms continue to report higher benefit costs, but other wage pressures have moderated. Our manufacturers reported having to pay higher prices for many inputs, particularly energy-related inputs and petroleum-based products as well as agricultural commodities. They have passed on many of those increases in terms of higher prices to their consumers. While retailers report only modest price increases for many products, food prices are generally higher. In summary, since our last meeting, there has been little change in the economic conditions in the District or in the outlook for the region. Overall, business activity in the region is advancing at a fairly modest pace, and most of our contacts expect that pace to continue for the next quarter or so. But in general, firms in the District remain optimistic about business six to twelve months from now. Turning to the nation, the economy appears less vulnerable to me than it did at the time of our last meeting. Financial markets have improved somewhat, as Bill Dudley was telling us. Conditions are not back to normal yet in all segments of the market, but the markets that are still under stress are the same ones that were under stress last month. Subprime and jumbo mortgages and asset-backed commercial paper are the ones that still are struggling. Price discovery still plagues many of these markets, and I suspect it will take some time before the markets can sort things out and trading returns to normal. That does not mean that the ultimate agreed-upon market prices for some of these assets will bear any resemblance to what they looked like before August. Indeed, they probably won’t, but that’s not necessarily a bad sign or a cause for concern; it may even be a healthy development. We haven’t seen disruption spread to other asset classes for the most part, and the level of stress in financial markets seems to have fallen even as volatility remains high. The spread of jumbo over conventional mortgage rates remains elevated, reflecting some concern, I think, about the risk that expensive homes may face greater price declines than other homes, but the premium is less than it was in September. Both investment-grade and non-investment-grade corporate bond issues have increased. Financial institutions have begun to write off some of their investments and take the losses. This has weighed heavily on equity markets, but I view the write-downs as a necessary part of the process toward stabilization in the markets. Earnings reports from nonfinancial firms have actually been pretty favorable. I’m not saying that we are out of the woods yet, but in my view the risks for a serious meltdown in financial markets have lessened somewhat since our last meeting. The news on general economic activity has improved somewhat since our last meeting as well. Indeed, some of the data have come in better than expected. Employment was revised up, and retail sales data suggest that consumer spending remains resilient, despite the downturn in housing. Like the Greenbook, my outlook for the economy has changed little since our last meeting, when we acted preemptively and lowered rates to “forestall some of the potential adverse effects of financial market disruptions and the expected intensification of the housing correction on the broader economy.” Housing investment and sales continue to decline but about as expected in our forecast. After all, the rapid reduction in subprime lending is exacerbating the decline in housing demand and thus home sales, contributing to the slower recovery of that sector. Other sectors of the economy have performed about as I expected, with little evidence as yet of any major spillovers from housing. Oil prices have moved higher than expected since our last meeting, as has been discussed, but it is unclear to me yet how permanent that increase will be or how much of a drag it might be on activity. The oil price rise is likely to show through to headline inflation in the coming months. Although core inflation measures have improved since the beginning of the year, the rise in energy prices has the potential to put upward pressure on core inflation. Thus, while inflation and inflationary expectations have been stable to date, I suspect that inflation risks are now more to the upside than they were in September. The forecast is an important context for our policy, in my view. We have stressed in the past year that we are data driven and respond to the evolution of our forecast. In general, like the Greenbook, as I said, my forecast of the economy going forward is little changed from my September view. I see that growth returns to trend, which I estimate to be about 2.7—a little higher than the Greenbook—late in 2008 as the housing correction runs its course and the financial market turbulence unwinds. Core PCE inflation remains slightly below 2 percent next year and moderates toward my goal of 1½ percent by 2010. I built in a 25 basis point easing sometime in early 2008 to bring the funds rate back down to a more neutral level, and in my baseline forecast I assume a constant funds rate thereafter. That forecast, however, is contingent on inflation and inflationary expectations remaining well behaved. Having said that, I repeat my caution that inflationary pressures are somewhat elevated at this point, and we run the risk that inflationary expectations may become unhinged if the markets suspect that we have lessened our commitment to keep inflation contained. Thus, I don’t rule out the possibility that we may have to reverse course and tighten policy sometime in 2008 or 2009 in order to achieve consistency between my target rate of inflation of 1½ and inflationary expectations. Thank you, Mr. Chairman." FOMC20070131meeting--389 387,MS. YELLEN.," We don’t forecast the federal funds rate, but we do have data on our own errors with respect to the other variables." FOMC20080130meeting--282 280,MR. KOHN.," Thank you, Mr. Chairman. Like President Lockhart, I agree with the action and the language of alternative B. As I noted a few minutes ago, I don't think a real interest rate of around 1 percent, which is where we would be after this action, is really all that aggressively low, given what we're facing in financial markets and the uncertainty that's constraining business and household behavior in terms of spending. I guess I wouldn't obsess so much--a loaded word there--about where we are exactly relative to some estimate of the neutral federal funds rate. As President Plosser pointed out, our band of confidence around that is huge. It moves around a lot when it's defined in the short-term, three-year window that the staff has been using, but I think we just need to concentrate on the forecast, where we think this path of rates would have us go. The forecast central tendencies that we looked at yesterday look like a pretty good set of tradeoffs between getting back to full employment and damping inflation. I think one message from this longer-term forecast exercise is where the Committee thinks the Taylor curve is and where we would like to end up on it in terms of trading off inflation and output variability. If I heard Brian correctly, these results encompass not only a fairly universal assumption of 50 basis points at this meeting but at least ten of the cases see further rate cuts after that. In my case, I assumed further rate cuts but that they would start to be taken back in 2009. So it seems to me, heading where we're heading, and maybe even moving a little lower if circumstances permit over future meetings, is perfectly consistent and is consistent in the view of the majority of the Committee with some pretty reasonable outcomes for the economy given the shocks we're facing and the circumstances we're in, whatever it implies for where we are relative to some long-run neutral real rate that might pertain over ten or twenty years. Implied by that--and the Vice Chairman said this a few minutes ago--is that it's not clear that the 1 percent real rate has much, if any, insurance built into it relative to the kinds of headwinds we're facing. I agree that a 1 percent real rate is not sustainable indefinitely, but as I pointed out before, we ran with a zero real rate for two years in '92 and '93. I don't think that had any adverse effects on inflation expectations at the time. We explained why we were doing it. We explained the circumstances that were forcing us into that. We kept our eye on inflation expectations. You might remember that at the time there was a lot of political pressure that we should lower the rate even further, and we resisted that pressure in part by keeping our eye on inflation expectations and making sure they weren't moving higher. So if circumstances dictate, I think we could sustain, as the Greenbook has us doing, a 1 percent real federal funds rate for some time without any adverse effects on inflation expectations going forward. I don't think 50 implies an unacceptable inflation risk. I think it's consistent with the gradual reduction in inflation that we've outlined in our forecast. In these circumstances, we need to concentrate on addressing the economic and financial stability issues that we're facing. That's the bigger risk to economic welfare at this time than the risk that inflation might go higher, and the 50 basis points in my mind is just catching up with the deterioration in the economic outlook and the financial situation since the end of October. We are just getting to something that barely takes account of what has happened, with very little insurance. Now, I agree that if we got into a situation where we went lower, then these subtle tradeoffs between risk management and the inflation outlook would come into play, but I don't really see them in play at the level of interest rates that I'm suggesting we be at at the end of this meeting under the current circumstances. I do agree with President Plosser. We need to think about the circumstances under which we would begin to take back the easing. In the staff forecast we don't have to think about this for two years, if they're right. But they may not be right, and if we go further and have insurance, then I think that's a more important issue. One point that I took from President Evans's discussion was that there might be a risk in talking about taking it back right now because it would undermine the effects of the ease you put in place. So as a Committee we need to think about the circumstances. It's a very subtle and tricky issue. The Chairman can perhaps cover this in his testimony, and obviously we've talked about it. It must be reflected in the minutes. But going out front with hammering in public how we're going to take it back is going to undermine the effects of the ease itself. So we can talk about those circumstances, but I think we need to be careful about overemphasizing the ""taking it back"" idea, particularly from the current level. I'm comfortable with the language of alternative B. I think the first sentence of paragraph 4 does help to say that we think we've done something considerable that's going to be helpful. It is a change from the last thing we put out. Removing ""appreciable"" in terms of downside risk is also a change, and I agree with that. But I do think there are downside risks even after we move today, and it would be a mistake to avoid that topic. Those risks are still going to be there, even after the funds rate is 3 percent, until the financial markets begin to stabilize and for more than a few weeks. We had a bit of a head fake in October, right? They seemed to be stabilizing. We said the risks were roughly in balance, and then the financial markets collapsed. I think we need a period of stable financial developments so that we can gauge the effect on the economy before we go to a balanced risk statement. Right now the risks are still tilted toward the downside on real activity, and that should be our focus. Thank you, Mr. Chairman. " FOMC20070131meeting--149 147,MR. PLOSSER.," The path I was thinking about as I was doing the forecast and trying to determine the appropriate policy here—my desire is to get inflation down lower, and that’s reflected in my forecast—is one in which the fed funds rate goes up somewhat from where it is today, perhaps to 5½ or 5¾ percent. But then by the end of ’07 and into ’08, it’s coming back down again to more of a steady-state level, and then we can talk about what the real neutral rate is." FOMC20050920meeting--33 31,CHAIRMAN GREENSPAN.," I know we use the various measures of inflation expectations as a critical variable, which presupposes that the market has a superior capability of anticipating change than normal forecasting procedures. The mechanism, as you point out, through which we think inflation expectations largely reflect themselves in higher prices is the wage bargaining process. Have we done much work in the area of using various measures of inflation expectations directly as a forecast indicator of inflation by just creating a reduced form evaluation? What is the record on that, if we in fact have looked at that?" CHRG-109shrg21981--132 Chairman Greenspan," I have been traumatized by Senator Bennett saying forecasts do not work out for 6 months, so I am trying to avoid making a forecast out beyond 6 months. I think that, first of all, if the deficit as a percent of GDP does not go down, I think we are going into the 2008 are forward period poorly positioned. Senator Bayh. Do you have a figure in terms of percentage of GDP you would look at to---- " FOMC20050920meeting--28 26,MR. MOSKOW.," I wanted to ask you a question about inflation expectations, which is a key part of the forecast, as you described. In the Greenbook, you say that you assume “surging energy costs and other factors have caused inflation expectations to drift up since 2003.” And then you have the alternative scenario in which inflation expectations deteriorate more sharply than in the baseline forecast. Could you just elaborate on this a bit? What are the other factors? And what’s the time horizon you’re talking about for these expectations to play out? Also, how does this work its way into the wage and price dynamics in the economy?" FOMC20080916meeting--89 87,MR. STOCKTON.," Thank you, Mr. Chairman. In response to your request for some economy in our remarks this morning, I'm going to set aside my prepared remarks and just hit some of the highlights here. We did receive a great deal of macroeconomic data since we closed the Greenbook last Wednesday. We didn't seem to get any of it right, but it all netted out to just about nothing. [Laughter] Retail sales came in considerably weaker than we had anticipated, enough by themselves to have knocked about � percentage point off third-quarter GDP growth. But some of that was offset in higher retail inventories, and the rest was offset by a stronger-than-expected merchandise trade report for July. It all left us still feeling very comfortable with our forecast because it looks to us as though economic growth is going to drop below 1 percent on average in the second half of the year. In terms of the things that really have stood out over the intermeeting period, at least to my mind, one has been the weakness in consumption. As I indicated, the retail sales report was weak; and now with that report in hand, we'd probably mark down our current-quarter consumption forecast to a decline of 1� percent at an annual rate. What I think is really remarkable about that is that this weakness is occurring even though we still think spending is probably receiving some boost from the rebates. So excluding that effect, we'd be looking at something even weaker. Now, as you know, we've been head-faked a number of times by the retail sales data, which are subject to some pretty substantial revisions. So I wouldn't necessarily take that report at face value. But the drop we've seen in motor vehicle purchases pretty much mirrors in size and timing the kind of falloff that we've seen in overall consumption spending. So it looks like a very weak picture for consumption. The other notable development over the intermeeting period has been the weakness in the labor markets--now not principally in the payroll employment figures. Private payroll employment has been falling pretty sharply but not any faster than we would have thought. But the rise in the unemployment rate is remarkable. Now, some of the 0.4 percentage point increase in the unemployment rate last month could be statistical noise. It wouldn't be entirely surprising to see it fall back some. But the more than 1 percentage point rise that we've had since April is not going to be statistical noise. Some of that increase probably reflects a bigger response to the emergency unemployment compensation program than we previously thought, and we've upped our estimates for that to a little less than 0.3 percentage point on the level of the unemployment rate. But even putting that aside, we have experienced a more significant rise in the unemployment rate, and I think that's consistent with other things that we're seeing in terms of the labor market data. We've seen another appreciable jump in initial claims. Announced job cuts are up. Job openings are down. Survey hiring plans have softened. Now, this sharp rise in the unemployment rate is a bit difficult to square with a GDP figure that looks as though it was running above 3 percent in the second quarter and even 2 percent if you want to average the first and second quarters together. There are occasionally large errors in Okun's law, as I think I've noted in the past. It seems as though Okun's law gets obeyed about as frequently as the 55 mile an hour speed limit on I-95. [Laughter] But still, one of the things that we should probably be considering is that perhaps the economy has not been as strong as suggested by the real GDP figures. Real gross domestic income, which is output measured on the income side of the accounts, has risen about 2 percentage points less than GDP over the past year. And if we look at industrial production and compare that with the components of GDP that are, in essence, goods production, there's about a 1 percentage point discrepancy there, with industrial production suggesting weaker figures than GDP. We see no reason to discount the rise in the unemployment rate as suggesting that we're entering the second half with more labor market slack than we had previously thought. Furthermore, on net, we've revised down our projected growth in GDP over the next two years--admittedly just a bit--and that was in response to two pretty strong crosscurrents. One was the significantly lower oil prices that we have in this forecast. We do think they're going to provide some support to underlying disposable income and spending. But the positive effect of that on our forecast going forward was more than offset by a significant marking down in our forecast for net exports--which Nathan will be discussing--in response to an appreciation of the dollar and a further downward revision to our outlook for foreign activity. On net, that left us with a little lower growth rate and carrying forward a noticeably higher unemployment rate over the forecast period. Now, those were pretty small adjustments. I don't think we've seen a significant change in the basic outlook, and certainly the story behind our forecast is very similar to the one that we had last time, which is that we're still expecting a very gradual pickup in GDP growth over the next year and a little more rapid pickup in 2010. The three things that are absolutely central to producing that outcome are our projection that we're going to get a stabilization in housing in 2009--and early in 2009; that there will be some diminishment of the drag on growth from the financial turbulence; and that oil prices flatten out. Of those three, to my mind, the component that probably is most central and most important would be seeing some stabilization in the housing market, not only because this has been a big drag on growth and will also have consequences for household wealth but also because if there's going to be some clarity and reassurance to financial market participants, it seems as though some end to the housing debacle has to be in sight. We think we are seeing a few glimmers of hope there--however, we thought that on occasion in the past and have been proven wrong. But sales of existing homes have been flat since the turn of the year. Sales of new homes have been flat for several months now. We've had a drop in mortgage interest rates that followed the takeover of Fannie and Freddie. Starts have fallen so much now that, in fact, builders are making significant progress in working down the inventory of unsold new homes and even months' supply has tipped down of late. So we think that some things are looking a little better for us there. As a consequence, we're expecting to see some bottoming-out near the end of this year or the beginning of next year--but not a sharp recovery. Overall residential investment actually is still a negative for 2009 but less of a negative than it has been this year. As you know from the Greenbook, our estimates suggest that the financial restraints on overall activity--actually on the level of GDP--will increase between 2008 and 2009, but their effects on the growth rate of GDP are diminishing somewhat. Finally, with regard to oil prices, by our assessment the rise in crude oil prices since the beginning of 2006 is probably knocking about � percentage point off growth in 2008; and with a flattening out of oil prices, we expect that to be more of a neutral factor over the next two years. That's providing some impetus. A lot of what's going on in our forecast is bad things not worsening any more quickly next year than they did this year, rather than things actually getting better. I guess it's a sad comment that we're relying on second derivatives turning positive to be the main force generating some upward impetus to economic growth. But we are projecting a gradual pickup. Now, on the inflation side, this morning's CPI report for August actually came in a little better than we were expecting. The CPI in August fell 0.1 percent. We had been expecting an increase of 0.1 percent. That surprise was all in the energy component, but we at least did see some moderation in the retail food price side that we were looking for, and the change in core CPI fell back to 0.2 percent after a string of 0.3 percent increases. I don't think these data will do much to change our basic forecast, which is for total PCE prices to be up somewhere in the neighborhood of a 5 percent rate in the third quarter, and core prices up 3 percent. Still, if one looks back at the last few CPIs and PCEs, things have come in a little higher on the core side. The projected 3 percent increase is up about � percentage point from where we were in our August forecast, and our interpretation of this is that we're probably seeing more upward impetus and passthrough from the higher energy prices, other commodity prices, and imports than we had previously expected. That certainly squares with what we're hearing from our business contacts. It also squares with what we saw last week in the PPI, which was another very sharp increase in prices of intermediate materials. At least going forward, for the first time since this process got under way, we are seeing more than just a futures price forecast flattening out. Some easing in the prices of both oil and other commodities and the appreciation of the dollar are giving us at least a little more confidence that some of these cost pressures are going to abate going forward and that we will get the disinflation that we have been forecasting. We continue to see reasonably encouraging signs on inflation expectations. The medium-term and long-term inflation expectations in the preliminary Michigan report last week dropped 0.3 percentage point, to 2.9 percent. TIPS haven't really done very much, and hourly labor compensation continues to come in below our expectations. So based on our assessment, once these cost pressures work their way through the system--and we still think that the process will take place over the second half--we think that we'll get some receding of core inflation from the 2.4 percent that we're projecting for this year to 2.1 percent next year and 1.9 percent in 2010. Just a couple of final remarks on current events. Hurricanes Gustav and Ike obviously created an enormous amount of devastation for a whole lot of people, but they don't really appear to us to have significant macroeconomic consequences. There will be some temporary disruption to oil and gas extraction and refining, but it looks as though the basic infrastructure has largely been spared. I'll be interested to hear President Fisher's report. Retail gasoline prices have jumped in the last few days, but wholesale prices for delivery in October are actually lower than they were before the storms were on the horizon. I think that suggests that this is not going to be a major negative event. Undoubtedly, industrial production is going to fall like a stone in September, reflecting these two hurricanes as well as the Boeing strike, but we're expecting that to bounce right back again. I don't really have anything useful to say about the economic consequences of the financial developments of the past few days. I must say I'm not feeling very well about it at the present, but I'm not sure whether that reflects rational economic analysis or the fact that I've had too many meals out of the vending machines downstairs in the last few days. [Laughter] But in any event, we're obviously going to need to wait a bit to see how the dust settles here, but I think the sign would be obviously in a bad direction. I'll turn over the floor to Nathan. " CHRG-111shrg50814--203 PREPARED STATEMENT OF SENATOR TIM JOHNSON Thank you, Chairman Bernanke for being here today. It is no exaggeration to say that our economy is currently undergoing a period of extraordinary stress and volatility. Unfortunately, I suspect we are not yet at the end of the road in terms the financial difficulties plaguing Americans. I applaud the Federal Reserve for continuing to use its tools to lessen the impact of the recession, to decrease the volatility in the markets, and to unfreeze credit markets, but I have concerns that as the Federal Reserve expands its balance sheets and interest rates remain near zero, that the Fed will have fewer options and less flexibility than it has had over the past year. I am also concerned that some of these actions may perpetuate the idea that the government is in the business of propping up insolvent ventures when they go bad. I am deeply interested in the Fed's economic forecast for 2009, and I look forward to hearing how the Fed will continue to address the problems plaguing our economy. The crisis in our economy is real, and there is no question that more must be done to address the situation. I am committed to our Nation's economic recovery and to ensuring the safety and soundness of the financial sector without placing unnecessary burdens on the taxpayer. As this Committee works to address the crisis in our economy, we will continue to look to your expertise. ______ FOMC20081029meeting--232 230,MR. STERN.," Thank you, Mr. Chairman. I'll start with a few comments about the District economy, which will sound pretty familiar by now. The preponderance of the anecdotes from business contacts that I've talked with since our last meeting have been distinctly negative. It's not just a slowing of activity or some deterioration but a sharp contraction in activity, particularly with regard to discretionary spending or discretionary projects, beginning in the middle of September. The one exception to that is commercial construction, where there are enough things under way that business remains pretty good. But the backlogs are dropping, and so weakness certainly is anticipated next year. I thought another possible exception to the negative tone was the housing market in the Twin Cities--not that the housing market in the Twin Cities is in and of itself so important but that it might be representative of some middle-of-the-road markets across the country. Clearly, it's not indicative of what's going on in Florida, California, or places like those because sales volumes in the Twin Cities had been up distinctly. Some of that is no doubt due to short sales and foreclosures; nevertheless, there were some other signs that were favorable. The affordability index has really improved a lot. It is back to levels of 2002-03, which Realtors call very comfortable. The ratio of housing prices to rent has moved back to the levels of 2002-03, and that's also encouraging. I already mentioned the higher sales volumes. Unfortunately, when you get beyond those statistics and look at other things, it's too early to declare stability in the housing market or anything resembling underlying improvement. Part of the problem is something that we've talked about before. The inventory of unsold, unoccupied properties remains very substantial--by historical experience way above anything resembling normal. Second, even though the price-to-rent ratio has come down, it's still elevated relative to the longer-term historical experience. So it looks to me as though, even in that market, there are some further price declines to come and it's going to take some more time to get through all of this-- probably well into next year. As far as the national economy is concerned, I, too, have marked down my outlook for real growth for the balance of this year, for all of next year, and into early 2010 as well. This reflects to some extent the nature of the incoming data but also the intensification of the financial problems and associated headwinds, the impact of the negative wealth effect, and so on. When I looked at my June forecast, back then the forecast obviously looked better, although there were a number of what I called ""identifiable negatives."" They have proven, for worse rather than for better, to be relevant. I already talked about some of them. In addition, we still have the problem in housing with excess inventories. We have steady declines in employment, which obviously have negative implications for consumer spending, and the credit headwinds as well. So now I have the economy contracting through the middle of next year, modest growth resuming thereafter, and robust growth beginning with the second quarter of 2010--quite some distance off. On the inflation outlook, I have for some time been thinking that inflation would begin to slow this quarter. With the decline in commodity prices, the evolution of the economic outlook, and so forth, my confidence in that forecast has increased, and I do expect inflation to diminish over the forecast period. So I think I'll conclude with that. " FOMC20081029meeting--213 211,MR. ROSENGREN.," Thank you, Mr. Chairman. While the LIBOR�OIS spread has narrowed somewhat, the mutual fund industry is no longer experiencing waves of redemptions, and commercial paper market conditions have improved, we're still not back to the short-term credit conditions that prevailed before the failure of Lehman Brothers. This outcome is striking considering the historic interventions that have occurred in the past month. With all of the new government guarantees and equity infusions here and abroad, the limited improvement in short-term credit markets attests to the degree of concern and risk aversion prevailing in financial markets. These concerns are likely to become even more elevated if the economy slows to the degree expected in most forecasts. Like the Greenbook, our forecast anticipates a significant recession. The Boston forecast includes three consecutive quarters of negative GDP growth and results in an unemployment rate peaking above 7� percent. The weakening labor market and the large losses in housing and stock wealth make it quite likely that consumption will shrink in the second half of this year. While we need housing to reach bottom, mortgage rates relative to federal funds rates remain quite high, and further job losses are likely to aggravate the upward trend in foreclosures and add to the downward pressure on housing prices. With limited new home purchases and demand for vehicles weak, consumption of consumer durables is unlikely to recover until next year. Commercial real estate, which has held up reasonably well, all things considered, is likely to be much weaker next year as new and rollover financing is difficult to obtain and staff cuts and hiring freezes affect the space needed by businesses. More generally, firms are likely to have little incentive to make new investments until the severity of the downturn becomes much clearer. Unfortunately, many of our trading partners are likely to face an even more severe downturn, aggravated by their slow fiscal and monetary response to deteriorating economic and financial conditions. While the Greenbook assumes the stock market will rise by 8 percent for the remainder of this year--it looks as though that happened today-- " FOMC20060808meeting--33 31,MS. MINEHAN.," The way that changes is sort of speedy, too; but that was in your previous forecast." FOMC20060629meeting--41 39,MR. KAMIN., Do you mean would they slow down more than is embedded in our baseline forecast? CHRG-111shrg50814--74 Mr. Bernanke," Well, nobody's record in forecasting this thing has been particularly good, but I think that this---- Senator Menendez. We are agreed on that. " FOMC20080430meeting--146 144,MR. DUDLEY.," Yes, it's hard to know what to read into that. It could be that the forecasts have more inertia to them. " CHRG-109shrg24852--23 Chairman Greenspan," Yes, it is, and even though its forecasting or anticipatory capability is greatly diminished, it is not zero. " FOMC20080130meeting--140 138,MR. PLOSSER.," Well, it does really change the character of the forecast substantially, I think. " FOMC20070918meeting--52 50,MR. STOCKTON.," Thank you, Mr. Chairman. “This has been a far from placid time. Indeed, the intermeeting period has been marked by financial tumult of such a magnitude as to significantly alter the outlook for the economy. A deeper retrenchment in U.S. stock markets, more-cautious credit provision, and more-serious disruptions to economic growth abroad are now expected to combine to produce a sharper deceleration in output than we had projected in August.” These words were taken from the first page in the Greenbook of September 1998. [Laughter] While the particulars obviously differ in many important respects from that period, we once again face substantial financial turbulence; and once again, we have marked down our projection of real activity on the expectation that recent financial developments will impart considerable restraint on activity in the quarters ahead. Before explaining these changes, let me read to you from the first page of another Greenbook, and I quote: “[T]he economy has continued to exhibit remarkable dynamism, generating hefty gains in employment and income. We have tacked about ¾ percentage point onto our previous forecast of first-quarter real GDP growth, and the evident momentum of domestic demand has led us to elevate our projection for output growth over the near term a bit as well.” That passage was taken from the Greenbook of March 1999, just six months after the onset of that period of financial disturbance. Needless to say, the experience of that episode was not lost on us as we approached the construction of the current forecast. But neither were the episodes of the summer of 1990 and the fall of 2000, when we thought financial and other factors would result in a period of below-trend growth but that outright recession would be avoided. So the question is, Are we projecting too much or too little weakness in real activity over the next several quarters? Answering that question has two aspects. One is whether we have correctly gauged the magnitude of the potential restraint on real activity arising from the recent developments in mortgage and other credit markets. The other is whether we have appropriately assessed the underlying strength of the economy being subjected to those shocks. I think it’s fair to say that part of our mistake in 1998 was a failure to appreciate just how strong the U.S. economy was as we entered that period. Could we be making that mistake again? Possibly. The incoming data did lead us to revise up our estimates of the growth in real GDP in the second and third quarters by ¼ and ½ percentage point, respectively. Most notably, consumer spending has surprised us to the upside. Last Friday’s report on retail sales provided another positive innovation. Although the spending figures for August were right in line with our expectations, the upward revision to July suggests that the growth of real PCE in the third quarter will be about ¼ percentage point stronger than we projected in last week’s Greenbook. Elsewhere, the growth of exports has continued to outstrip our expectations, providing greater impetus to domestic production. That added impetus may help explain factory output, which has also been a bit stronger, on net, than anticipated in our August projection. Manufacturing IP excluding motor vehicles is estimated to have fallen 0.3 percent last month, but that decline came on the heels of upward-revised increases of 0.7 percent in June and July. We are now projecting manufacturing IP excluding motor vehicles to have increased 4¾ percent in the third quarter, a bit more than in our August forecast. Not all the news, however, has been favorable. Despite a rebound in motor vehicle sales in August, the automakers still found themselves with uncomfortably high inventories at the end of the summer and have announced substantial reductions in assembly schedules for the fourth quarter. In our projection, the cut in motor vehicle production lops ½ percentage point off the growth of real GDP in the fourth quarter, about ¼ percentage point more than we had earlier expected. The labor market report also was a bit weaker than we had penciled into our projection at the time of the August FOMC meeting. Private payrolls increased just 24,000 last month, which, combined with downward revisions in June and July, left the level of employment about 100,000 shy of our expectations. Nevertheless, we didn’t attach a great deal of signal to the employment report in terms of its implications for real activity. As you know, despite the fact that real GDP was coming in close to our expectations most of this year, we had been fairly consistently surprised to the upside by employment. For the most part, we had attributed that surprising strength to an unusual degree of labor hoarding that was resulting in a more-pronounced cyclical sag in productivity than is typical. Now that the employment figures have softened, we are inclined to let much of that softness show through in higher labor productivity rather than weaker output. Still, there is no denying that labor demand over the past three months now looks a bit weaker than we expected. We see the incoming data taken together as suggesting that there was a bit more strength to the expansion through the summer than we had earlier recognized. But we have seen little to suggest that the economy was either gathering any momentum or seriously faltering as we entered the period of increased financial turbulence. Obviously, getting the starting point right for the projection is important. But the main action in this forecast has been our reaction to developments in mortgage and other credit markets. I would love to dazzle you this morning with precise scientific estimates of the effects on spending and activity of difficulties involving subprime mortgages, structured-investment vehicles, leveraged loans, and the like. But, sadly, that will not be the case. Rather, because you seem to be on the brink of joining me in the humbling world of forecasting, I thought that I would invite you to don your hair nets and white butcher smocks and join me for a tour of the sausage factory. [Laughter] The difficulty we confronted in this forecast is that, even after decades worth of research on credit channels and financial accelerators—much of it done by economists at all levels in the Federal Reserve System—the financial transmission mechanisms in most of the workhorse macro models that we use for forecasting are still rudimentary. As a result, much of what has occurred doesn’t even directly feed into our models. But that doesn’t mean that it isn’t important. Indeed, the residuals in our main spending equations seem to be negatively correlated with measures of financial stress. In other words, our models tend to overpredict spending in periods of financial disturbance. To be sure, that general tendency is not evident in all episodes. Shortfalls in spending were sizable in the “headwinds” period of the early 1990s and in the aftermath of the stock market collapse in the early part of this decade. But we have found little evidence of any material effects on spending during the 1998-99 episode. In very broad terms, we were guided in our revisions to the forecast by the average historical tendency of these spending equations to overpredict in periods of financial stress. As for the specifics, we made adjustments in those areas that seem most likely to be affected in this particular episode. Housing, of course, is at the epicenter of the current financial shock. In response to the intensifying problems in mortgage markets and the increasingly bleak anecdotes, we slashed our housing forecast significantly further. We now expect new home sales to drop another 18 percent by the end of this year and single-family starts to drop another 25 percent by early next year. If this forecast comes to pass, this housing downturn will come close to matching in severity that of the late 1970s and early 1980s. Underlying this projection is an assumption that nonprime originations will remain virtually dead in coming months and stage only a modest and partial rebound over the next year and a half. We also expect some of the spillover that we have seen recently in prime jumbo mortgages to persist for a while, though the effects on housing demand from this part of the market are likely to be much smaller. Moreover, in contrast to the partial recovery in nonprime mortgage originations, we are expecting a full recovery in jumbo mortgages to occur by early 2009. Obviously, our estimates of the effects emanating from nonprime and jumbo markets are subject to considerable uncertainty—in terms of both depth and duration. As for the rest of the economy, we don’t think it will escape entirely unscathed by the recent turmoil in financial markets, and we have made some modest downward adjustments also to business investment and consumer spending. In particular, we have marked down a bit our forecast for nonresidential construction on the expectation that higher borrowing costs and tighter underwriting standards will hold down the volume of commercial real estate lending and construction activity in coming quarters. In that regard, we have already seen some increase in “busted contracts” for commercial property transactions. Like the effects in residential mortgage markets, the restraining influences on commercial construction are assumed to fade by the end of next year. We have also revised down our projection for equipment spending, but here the story is a bit different because we are not really anticipating a spillover that will result in significant funding problems for most nonfinancial firms. Rather, in previous forecasts, we had incorporated an extra dollop of spending growth to reflect the general strength of corporate balance sheets and the tendency of some of our models to underpredict equipment spending over the past few years. With heightened uncertainty and less favorable financial conditions, we have moved the E&S forecast down closer to the models in both our August and our September forecasts. Finally, we made a modest downward adjustment to our consumption forecast, in part to account for the likelihood of some tightening of terms and standards on consumer lending and for the possibility that weaker home prices may make it more difficult or expensive for households to finance consumption through the equity in their homes. We also assume that there will be some hit to consumer sentiment in an economy with a weakening labor market, ongoing strains in financial markets, and continuing downbeat news on house prices, home sales, and foreclosures. The restraint imposed by these factors is assumed to fade over the next year—again, on much the same schedule as we are expecting the financial restraints to lessen. I think we have the sign right here, but I must admit that this element of our forecast seems the most problematic to me. To be sure, we’ve already seen a fall in consumer sentiment that, if sustained, would imply a drag on spending going forward that is at least as large as is incorporated in our forecast. Still, the direct fallout of recent developments for the cost and availability of consumer credit could be quite limited, and consumer sentiment could recover more quickly than is assumed in the baseline. I would be more worried about the upside risks of this aspect of our projection if I didn’t also see some sizable downside risks to other elements of our baseline forecast. First, even with the 5 percent decline we have projected over the next two years, house prices will remain at historically high levels relative to rents. With foreclosures increasing, there is a clear risk that the drop in home prices could well be deeper and faster than we expect. Second, implicit in our forecast is the assumption that we are experiencing the worst of the financial turmoil now; there would seem to be more downside risk than upside risk to this assumption. Finally, we are still projecting what amounts to a very soft landing: The unemployment rate rises by a few tenths, growth converges to potential, and inflation levels out near current rates. Such an outcome would be nearly unprecedented. Turning to our inflation forecast, we did not receive any news that materially affected our outlook. Both headline and core PCE prices in July came in a bit lower than we had been forecasting. For the most part, the key conditioning factors governing our inflation projection changed little over the intermeeting period. Food and energy prices were nearly unrevised; nonoil import prices were a touch lower, reflecting lower commodity prices; and most measures of inflation expectations have been roughly unchanged. The only adjustment of note in our inflation forecast was the ¼ percentage point reduction that we made in our estimate of the NAIRU. We did so because of some tendency of our wage and price equations to overpredict inflation over the past few years and because we’ve seen a continuation of some of the structural forces in labor markets that we thought had lowered the NAIRU in earlier periods. The adjustment also better aligns our estimate of the NAIRU with other readings of labor market tightness. All told, some slack in resource utilization now emerges in this forecast. However, because the estimated slope of our aggregate supply function is quite flat and inflation expectations are expected to remain reasonably well anchored, this change is pretty small potatoes for our price forecast. Indeed, it trimmed only 0.1 percentage point from our forecast of overall and core PCE price inflation in both 2008 and 2009. That concludes my tour of the sausage factory. I hope it was somewhat revealing, though I recognize that sausage factories can test the convictions of even the most ardent proponents of full transparency. Karen will now continue our presentation." FOMC20060629meeting--71 69,MR. LACKER.," Thank you, Mr. Chairman. Economic growth in the Fifth District eased off the throttle a bit since our last meeting. Our June manufacturing survey released yesterday morning continued to show nearly flat activity. Indexes for shipments and new orders were barely positive, essentially unchanged from May, and down from strong readings for March and April. The service sector, on the other hand, continues to display solid growth, with overall services revenues right on their three-month average and retail sales rebounding after a dip in May. However, our big-ticket index, which is dominated by car sales, remained weak. Employment indexes for both services and manufacturing were positive in June, with a slight decline in the services sector but a substantial gain in manufacturing. District housing markets remained reasonably strong. Sales and construction activity have continued to slip from last year’s levels in many areas, but our contacts do not seem surprised or panicked, and we continue to get reports of a pickup in commercial construction activity. Price pressures remain elevated in the Fifth District, and expectations for manufacturing price trends during the next six months remain about where they have been since last fall, roughly 3 percent for prices paid and 2 percent for prices received. In the services sector, expected price increases for the next six months exceeded 3½ percent for the second month in a row, setting a new record high for this twelve-year-old index. Turning to the national economy, the Greenbook presents, as President Moskow noted, a distinctly different picture from six weeks ago, perhaps most notably with regard to consumer spending. Lower growth of household income since the middle of last year has led the staff to reduce its estimate of the level of real disposable income this quarter 1 percent, and they have reduced their estimate of consumption this quarter 0.4 percent. The Greenbook also marks down consumption growth ½ percent in the second half of ’06 and ¼ percent in ’07. Now, it is certainly reasonable to expect lower current income to affect current consumption expenditures, but I am inclined to revise my outlook for consumption growth by less than the Greenbook. Growth in real disposable income is forecast to bounce back in the second half. So the first-half decline looks more like a permanent reduction in the level of income than a permanent reduction in the growth rate of income. I would have expected a corresponding effect on the path of consumption, a one-time reduction in the level, with less of a reduction in forecast growth rates. The same reasoning for me applies to the downward revision that has been made to current household wealth. This quibble aside, the outlook for the real side of the economy is softer than at the time of our last meeting, but it still strikes me as broadly consistent with sustained growth fluctuating around a trend near 3 percent. True, housing market activity has fallen more rapidly since the last meeting than many, including the Greenbook authors, had expected, but the rate of decline has not fallen outside a range that at the beginning of the year would have seemed plausible. While the recent weaker-than-expected employment reports suggest slower job growth going forward, the Greenbook employment forecast seems reasonably well aligned with demographic and labor force participation trends. So on the whole, I would say that, despite the recent evolution of the economic outlook as implied by incoming information, the real side of the forecast does not seem out of the ordinary or terribly unsatisfactory to me. The inflation picture, on the other hand, does stand out and demand some attention. We have just seen our worst three-month performance on the core CPI in more than eleven years, 3.8 percent, and the core PCE numbers are likely to be equally unfavorable. I agree with the Greenbook’s assessment that special factors, such as owners’ equivalent rent, do not excuse recent CPI behavior. Fortunately for us, inflation expectations have declined recently. The survey measures and TIPS spreads have moderated somewhat since our last meeting. Still, inflation expectations appear to be fluctuating around a level suggesting PCE inflation above 2 percent. Moreover, the Greenbook forecast now has year-over-year core PCE inflation remaining at 2.2 percent throughout the forecast period. To me this forecast is unacceptable. To forecast a bulge to 2½ percent followed by a return to below 2 percent, as the Greenbook used to earlier this year, is one thing, but a plan for core inflation of more than 2 percent a year and a half from now is another thing entirely. Surely in an eighteen-month period we can improve that outcome, but I will leave until tomorrow a discussion of our policy options. For now I just want to note that recent events provide some striking evidence that I think is likely to have an important bearing on our strategy in the near term. Leading up to our last meeting, there were several instances in which markets had responded to incoming news by marking up expected inflation and marking down the expected policy path, which I took as evidence of instability in market participants’ views about our intentions regarding inflation. Similar instability was evident in the immediate aftermath of Hurricane Katrina as well. Since the last meeting, increases in the expected policy path have coincided with communications by the Committee via statements, minutes, speeches, and interviews. This was documented in this week’s Board briefings. The same appears to be true of reductions in expected inflation, I think. I take this recent history as evidence that expectations regarding inflation and the conduct of monetary policy are to a significant extent forward-looking and can be influenced by our communications. As I pointed out earlier this year, the extent to which expectations are viewed as forward-looking or backward-looking could well influence the desirability of various policy options, especially how ambitious one wants to be about bringing inflation back in line. I also take the recent history as suggesting the importance of clarifying the public’s understanding of how we intend to conduct policy, even if we cannot provide definitive advance guidance about the numerical value of future policy rate settings. Thank you." FOMC20071031meeting--175 173,MR. ROSENGREN.," Thank you, Mr. Chairman. I, too, find myself torn between alternative A and alternative B and have been anguishing over them much of the last week figuring out where I come out. The economic outcome detailed in both Boston’s and the Board’s forecasts with no change in interest rates seems reasonable. The evidence since the last meeting indicates that there may have been more strength in the real economy than we expected in the third quarter; and financial markets have been recovering, but they are certainly not back to normal. The risks are clearly on the downside, and our forecast expects a weak fourth quarter. So certainly an argument for alternative B is to cut when it is clearer that the fourth quarter will be weak or we have data of more-significant collateral damage from the housing sector. The argument for alternative A would seem to be that we should take out more insurance against the downside risks. The costs for such action are not great; and given the downside risk, some additional insurance is not unreasonable. However, we have discussed the modal forecast at some length, but our rigor around the tail is quite limited, making it difficult to determine how often and how much insurance should be taken out against downside risk. Thus, I prefer to wait until there are more data that the economy is weakening, which I think is likely to happen. Just to comment on the assessment of risks—when I look at the uncertainty in terms of GDP growth, I think of the histograms. That’s quite stark. If the major concern we have is downside pressure on prices of housing, which is my concern—that housing prices continue to decline and housing gets much worse—I think 25 basis points is probably a small premium to pay. But I doubt that I would change where I would put the weighting even with a 25 basis point cut. I think the housing scenario that is detailed in the Greenbook will still be there whether or not we cut the 25 basis points, and my guess is that between now and December we’ll have more confirmation that it is a concern. Whatever we do in terms of the language, we need it to be consistent and accurate, and I am a little worried about the language in alternative A being consistent and accurate with what we are going to portray in our uncertainty of risks if we show those histograms. So if we’re showing the histograms, regardless of whether or not we have a 25 basis point cut, I think the alternative B language is more consistent with at least what we put down. Unless people think that, with the 25 basis point cut, there is a big shift in the uncertainty and the risks to GDP growth, I do worry about how that will play out in the market and what kind of a tension there will be." FOMC20050630meeting--335 333,MR. SANTOMERO.," I found the exhibit 6 discussion on the evolution of the Greenbook forecast interesting and informative. There’s one thing that I’m still a bit puzzled by as we look June 29-30, 2005 106 of 234 next. At least some of that is a deceleration associated with import prices. I guess the question I have for you is: How confident are we that import price deceleration will give us the kind of inflation moderation that is in the forecast?" FOMC20050920meeting--29 27,MR. STOCKTON.," In terms of how the price forecast has evolved over the last couple of years, the single biggest factor is the higher energy prices. But we’ve also had to contend with an acceleration—of modest dimension, but an acceleration—in import prices and an increase in September 20, 2005 19 of 117 price inflation numbers, those are the main contributors. Beyond that, we haven’t really seen any other innovations on the cost structure on the side of businesses that we think have lifted core prices. But in our view, the persistence of higher headline and core inflation over the last few years will cause—and we do think there has been a little bit of evidence—some small deterioration in inflation expectations, and we have built that into our forecast. The way that shows up, as I think you were hinting, comes through some prospective acceleration in nominal hourly labor compensation. We haven’t seen it yet to any significant degree. But in our forecast we think there will be some indirect effects working through higher labor costs going forward. As for the time dimension over which that will occur, we think that process is probably under way. There may be some evidence of it in the TIPS-based measures that Dino cited, and the survey evidence suggests that the process may now be beginning. We’re starting to see a small but gradual erosion in inflation expectations, and that persists through our forecast horizon. Now, looking farther out, with energy prices projected to start declining and headline inflation coming down from the 3-plus percent area to more like 2 percent going forward, we would expect that process to reverse a bit in the period beyond the current forecast horizon. So those inflation pressures probably will diminish a little at that point." FOMC20080318meeting--41 39,MR. SHEETS.," Over the intermeeting period we have lived through an experience that manifests the upside risk to our inflation forecast; and I would indicate that, with the � percentage point markup to headline foreign inflation in 2008 in our forecast, the vast majority of that is a reflection of these red-hot commodity markets, which then presses the question to us, Well, what is going on there? Certainly, in the case of the demand in these markets, by now I would have expected to have seen some attenuation or a bit of softening. Really, it seems to be quite the opposite. The demand since the first of the year has accelerated. Some other factors are at work as well--idiosyncratic supply stories, electrical outages that made it harder to smelt aluminum and copper, and so on. So there are some supply factors as well. The demand side seems to be important, and to the extent that demand remains strong, I am not sure where these commodity prices are going to top out. The futures path is a reasonable guess at sort of the balance of supply and demand. There is also some upward pressure on these prices from the depreciation of the dollar. But to the extent that commodity prices move up, I would say that we will probably be marking up our forecast of foreign inflation next time. Just a broader comment on the linkages between the U.S. and the foreign economies-- again, I was surprised at the strength of demand in these commodity markets. I would have expected by this point to have seen more marked evidence of slowing in the foreign economies. So we have marked down our forecast for 2008 in line with these prospective developments, the further slowing in the United States, and the financial stresses. But we didn't mark down our forecast very much, just a tenth or two, and mainly in Canada in Q1; and the data that we have in hand are not pointing to a dramatic slowing. We are expecting more of that to come through in the second and the third quarters. " FOMC20071211meeting--84 82,MR. ROSENGREN.," Thank you, Mr. Chairman. I think I took the same pessimism pill as President Yellen this morning. The Greenbook makes very somber reading, and I would make several observations about the forecast it provides. First, Greenbook forecasts of two successive quarters of growth below 1 percent are quite rare, and often in the past have occurred shortly before or during recessions. Second, the 70 percent confidence interval for the Greenbook projection of GDP, using historical forecast errors, has a negative lower bound. Third, I would note that when the unemployment rate rises at least ½ percent, it tends to rise much further than just ½ percent. That is, historically, when we have unemployment rates rise ½ percent, we have subsequently found ourselves in a recession. These observations indicate that, while a recession is not forecast in the Greenbook—as David has been careful to state—the probability of a recession is clearly elevated. At our last meeting, the housing market was very soft, but weakness in other components was not yet reflected in the data. But now we have some evidence that consumption and investment may also be slowing, and residential investment may be even weaker than we thought. While incoming data have generally been weak, some higher-frequency data, like the recent labor report, might be consistent with a stronger outlook than the Greenbook forecast. However, I am concerned that housing prices may actually fall more than assumed in the Greenbook, potentially resulting in consequences that are difficult to forecast with models using only postwar data. I am also sympathetic to the view that disruptions in financial flows have the potential to result in significantly more weakness than would result from an econometric model that does not capture significant liquidity disruptions, in part because the occurrence of such events is quite rare. Added to these concerns is the current state of financial markets both here and abroad. The elevated rates for term lending, even over relatively short maturities, indicates significant risk aversion by market participants. Financial institutions with very low probabilities of default, as measured by credit default swap rates, are nonetheless having difficulty securing term lending over year-end. Bank supervisors of large financial institutions are beginning to report correlations in nonperforming experiences of auto, credit card, and mortgage loans. Geographic regions hard hit by mortgage defaults are also experiencing rising default rates in other types of loans. Portfolios that are not highly correlated during good times can become highly correlated during bad times, and the initial trends being reported in bank supervision are not encouraging. I would also highlight this as one of the instances in which bank supervision is providing some very relevant input into thinking about the macroeconomy. Finally, I would highlight several institutional concerns that could have broader implications. First, financial guarantors, as was highlighted earlier, have credit default swap rates inconsistent with their AAA rating. Significant downgrades would further depress CDOs but also disrupt the municipal bond market and force some banks to fulfill agreements to purchase securities that do not maintain at least an AA rating. Second, there is the potential for significant further announcements of downgrades of assets related to SIVs and CDOs. Money market funds are currently experiencing inflows. However, those flows could quickly reverse if investors lose confidence in their ability to redeem money market funds at par. Third, I would note that for securities like lower-grade bonds that have not previously shown elevated risk premiums, those premiums are now becoming quite elevated, providing evidence that what was initially a liquidity concern is now becoming a more widespread and generalized concern about the state of the economy. With core inflation a little below 2 percent, and future reductions in labor market pressures likely, we have the flexibility to respond aggressively to slowing economic growth and the ongoing financial turmoil. This seems to be the appropriate time to take significant further action, knowing that, should the economy perform much better than we currently anticipate, we could be equally nimble in raising rates as appropriate." FOMC20060920meeting--152 150,MR. MISHKIN.," Many of you know I have an upbeat personality—some might actually say loud—but certainly upbeat. The way I look at the forecast and the situation with the economy is quite positive in the sense that what we’re seeing, really, is a return to normalcy and a more balanced economy. The excesses in the housing sector seem to be unwinding in an acceptable way, so I think it is quite reasonable in terms of the Greenbook forecast to think that the spillover here is not going to be a big problem because we’re actually moving resources from a sector that had too much going into it, into sectors that need to have more resources at the present time. So in that sense, I’m actually quite positive. The other thing that I am quite comfortable with in the Greenbook forecast—though, clearly, there’s uncertainty—is that we’re going to see a decelerating core inflation rate. Furthermore, when we look at inflation expectations, they seem to be very well contained and seem also to have responded well to the pause at the last meeting. However, I should say that, although we’ve seen that inflation expectations are well anchored, there’s a question about whether they’re anchored at quite the right level. They seem to be anchored somewhere around 2½ percent on the CPI, and that is probably with a differential between the CPI and the PCE of about ½ percentage point, or 50 basis points. It still seems to be somewhat on the high side in terms of what many people on the Committee have expressed is their comfort zone. So I think that is a concern. There is a significant probability that things may not turn out so rosy on the output front—we should have a concern that things could go somewhat wrong in terms of the housing sector. If that happened, we might see much lower output growth. There is a reasonable probability of recession. It’s mentioned in the Greenbook. I think your numbers are quite reasonable. So in that context, we could actually have lower output, a wider output gap, and some actual deceleration of inflation. I agreed very much with the conclusion that you came to because it’s reasonable to think that the long-run inflation we’re moving to is around 2 percent unless we get one of the scenarios with a lot more softness. That the deceleration is not going to go much below the Greenbook forecast of around 2 percent by 2008 does cause me a bit of concern. I’m not sure that I would describe the risks as unbalanced. For me, in terms of a forecast, probably I would be comfortable saying they’re balanced. However, I think inflation is too high in the forecast and, in that context, does require much more vigilance. Of course, that will be reflected in the discussion later today. Thank you." FOMC20061025meeting--76 74,MS. YELLEN.," Thank you, Mr. Chairman. Five weeks have passed since our last FOMC meeting, and not surprisingly the outlook does not appear to have changed in any fundamental way. Recent data bearing on the near-term situation point to noticeably slower growth in the third quarter than we anticipated at our last meeting. However, the Greenbook has revised up its projection for growth during the current and next few quarters so that the overall effect on slack next year is roughly neutral. This forecast strikes me as plausible, but there are few data thus far to bear it out. Meanwhile, measures of consumer price inflation remain uncomfortably high, although the latest readings have been very slightly better. With regard to the pace of economic activity, there’s uncertainty in all directions. In fact, we seem to have a bimodal economy with a couple of weak sectors, and the rest of the economy doing just fine. Those two weak sectors are, of course, housing and domestic auto production. Autos seem likely to have only a short-lived effect. In the case of housing, we agree with the Greenbook assessment of housing activity and find it quite consistent with the reports of our contacts in this sector. Besides the falloff in activity, house-price increases have also slowed markedly. The Case-Shiller house-price index has been flat in recent months, and futures on this index show outright declines next year. However, equity valuations for homebuilders, as Cathy mentioned, have risen moderately in the past couple of months, following large declines over the previous year, and we interpret that as providing some indication that the expected future path of home prices has at least stopped deteriorating. Of course, housing is a relatively small sector of the economy, and its decline should be self-correcting. So the bigger danger is that weakness in house prices could spread to overall consumption through wealth effects. This development would deepen and extend economic weakness, potentially touching off a nonlinear type of downward dynamic that could trigger a recession. But so far at least, there are no signs of such spillovers. Consumption spending seems on track for healthy growth. Nonetheless, the growth estimate for the third quarter begins with a 1 and just barely. Any time a forecast is that low, it’s reasonable to consider the possibility that the economy could enter recession. So for this reason, we, like the Board’s staff, took a careful look at various approaches to assess this issue, including yield-curve-based models, past forecast errors, leading indicator models, and surveys. Our bottom line is that we agree with the basic results reported in Monday’s nonfinancial briefing. The highest probability of recession that we found, around 40 percent, was obtained from a model developed by a Board staff member. The model includes the slope of the yield curve and the level of the funds rate. An issue with this result is that long-term rates may currently be low, hence the yield curve inverted, for unusual and not very well understood reasons having to do with the risk premium. Estimates from the other approaches came in with lower probabilities. Finally, other financial developments that could presage future economic performance, like stock market movements and risk spreads, suggest some optimism on the part of financial market participants. So our sense is that, except for housing and autos, the economy appears to be doing quite well. Indeed, the recent rather sharp drop in energy prices could boost consumption spending even more than assumed in the Greenbook. While this is a possibility, it seems more likely to me that households ran down their savings to fill their gas tanks when gas prices rose and are, therefore, likely to use their recent savings at the pump to bolster their finances, at least partly. Overall, under the assumption of an unchanged funds rate, our forecast shows a beautiful soft landing, with real GDP growing at a moderately below-trend pace for a few more quarters and homing in near trend thereafter. But I must admit that we got this forecast essentially by averaging the strong and weak sides of the economy. I think that way of proceeding is reasonable, and I hope the landing happens that way. But I acknowledge there is plenty of risk. We may end up instead with either the strong or the weak side dominating the outcome. For example, if the housing market decline does not spread significantly to consumption, we could end up with a strong economy in fairly short order. However, if it does spread, the slowdown could last quite a while. Scenarios like this are nicely spelled out in the alternative simulations in the Greenbook. Which way things go is a key issue, given that we’re in the vicinity of full employment. The desired soft landing depends on growth remaining below trend long enough to offset the moderate amount of excess demand that appears to be in the economy so that inflation can trend gradually lower. The slight drop in unemployment, to 4.6 percent, in September did not help in that regard, and I should note that recent comments by our head office directors almost uniformly supported the idea that labor markets, especially for skilled workers, are tight. However, we do expect the unemployment rate to edge higher over the next year in response to sluggish growth. Our forecast for core consumer inflation comes down a bit faster than foreseen by the Greenbook. We have core PCE price inflation edging down from just under 2½ percent this year to just over 2 percent in 2007 and see a good chance that it may fall a bit below 2 percent in the following year. We see the relief on energy prices as helpful, although we keep trying to resist any temptation to overestimate the extent to which past energy price pass-through has been boosting core inflation. Inflation also may benefit from an unwinding of the earlier strong pressures on rents. Finally, as in the discussion we had earlier about the alternative Greenbook scenario, we think inflation may have become less persistent over the past decade, and this is one reason that we’re a bit more optimistic than the Greenbook about the possible degree of disinflation over the next couple of years. But on balance, I have to admit we don’t have a perfect understanding of why inflation has been so high over the past few years, and so I try to remain humble, as always, in my predictions. My bottom line is this. I see a non-negligible chance that the downside risks to the economy, emanating especially from housing, could produce a recession in coming quarters, but there’s a very good chance that the spillovers will be sufficiently modest that the economy will avoid a recession. I also see a significant chance that growth could modestly exceed potential. In that sense, the overall risks to the outlook for real GDP growth could be characterized as balanced. In addition, I see quite a bit of uncertainty about inflation going forward with the risks to my forecast probably being a bit to the high side." FOMC20070131meeting--170 168,VICE CHAIRMAN GEITHNER.," Thank you, Mr. Chairman. Just a few quick points. We feel somewhat better about the outlook for growth and inflation, but we haven’t really changed our forecasts for ’07 and ’08. So just as we expected over the past few cycles, we currently expect GDP to grow roughly at the rate of potential over the forecast period, which we believe is still around 3 percent, and we expect the rate of increase in the core PCE to moderate a bit more to just below 2 percent over the forecast period. We see somewhat less downside risk to growth and somewhat less upside risk to inflation than we did, but the overall balance of risks in our view is still weighted toward inflation—the risk that it fails to moderate enough or soon enough. The basic nature of the risks to both those elements of our forecast hasn’t really changed. As this implies, our forecast still has somewhat stronger growth and somewhat less inflation than the Greenbook does. The differences, however, are smaller than they have been. We see the same basic story that the Greenbook does in support of continuing expansion going forward. We have similar assumptions for the appropriate path of monetary policy—at least two, perhaps several, quarters of a nominal fed funds rate at current levels. The main differences between our view about the economy and the Greenbook’s relate first, as they have for some time, to the likely growth in hours; we’re still not inclined to build in a substantial reduction in trend labor force growth. Second, our view is that inflation has less inertia, less persistence, than it has exhibited over the past half-century. Third, we tend to think that changes in wealth have less effect on consumer behavior than does the staff. We have seen a general convergence in views in the market, as we just discussed, toward a forecast close to this view, close to the center of gravity in this room, and a very significant change in policy expectations as well. We can take some comfort from this, but I don’t think we should take too much. Markets still seem to display less uncertainty about monetary policy and asset prices and quite low probabilities to even modest increases in risk premiums than I think is probably justified. Let me just go through the principal questions briefly. Is the worst behind us in both housing and autos? Probably, but we can’t be sure yet. If we get some negative shock to income—to demand growth—we’re still vulnerable to a more adverse adjustment in housing prices with potentially substantially negative effects on growth, in part because of the greater leverage now on household balance sheets. How strong does the economy look outside autos and housing? Pretty strong, it seems. We see no troubling signs of weakness, despite the disappointment on some aspects of investment spending. What does the labor market strength tell us about the risk to the forecast? It seems obvious that on balance it justifies some caution about upside risk to growth and more than the usual humility about what we know about slack and trend labor force growth. But I don’t think it fundamentally offers a compelling case on its own for a substantial change to the inflation forecast or the risks to that forecast. Is there any new information on structural productivity growth? Not in our view. We’re still fairly comfortable with the staff view of around 2 percent or 2½ percent for the nonfarm business sector. I’m not a great fan of the anecdote, but I’ll cite just one. If you ask people who make stuff for a living on a substantial scale, it’s hard to find any concern that they are seeing diminished capacity to extract greater productivity growth in their core businesses. That’s not a general observation, just a small one. Have the inflation risks changed meaningfully in either direction? I think the recent behavior of the core numbers and of expectations is reassuring. The market doesn’t seem particularly concerned about inflation, and the market is therefore vulnerable to a negative surprise, to a series of higher numbers. Can we be confident we’ll get enough moderation with the current level of long-term expectations prevailing in markets, with the expected path of slack in the economy, and with the range of potential forces that might operate on relative prices— energy, import, and other prices? Again, I think this forecast still seems reasonable, but we can’t be that confident, and we need to be concerned still about the range of sources of vulnerability of that forecast. Another way to frame this question is, Is the inflation forecast consistent with the current expectations for the path of monetary policy acceptable to the Committee? We haven’t fully confronted that issue because we don’t get much moderation with a monetary policy assumption that’s close to what’s in the markets. But I don’t think there’s a compelling case to act at this stage in a way that forces convergence on that. In other words, how tight is monetary policy, and how tight are overall financial conditions today? I don’t think there’s a very strong case for us to induce more tightness or more accommodation than now prevails. There’s a good case for patience and for giving ourselves a fair amount of flexibility going forward, within the context of an asymmetric signal about the balance of risks and a basic judgment that we view the costs of a more adverse inflation outcome as the predominant concern of the Committee." FOMC20060629meeting--98 96,MS. MINEHAN.," New England’s economy remains in relatively good shape, though not particularly vibrant or reflective of great strength going forward. Employment growth has been positive but slow in comparison to the nation. New England usually has a lower unemployment rate than the nation does, but for the first time in a decade or so the region’s unemployment rate has converged, mostly because the national rate dropped, but the region has flattened out over the past several months. Local measures of year-over-year inflation are about on track with the nation as well, though growth of local fuel and utility costs is considerably higher. Many business people talk about their efforts to limit their energy costs by upgrading capital equipment and facilities to be more energy efficient and by looking into alternative sources of energy. They also report mild success in passing along increased costs to consumers. Perhaps reflecting this, the rising price of gasoline, or even the consistently rainy weather over the past couple of months, consumer confidence has sagged a good deal. But not all the news is gloomy. Business sentiment, as suggested by surveys and our meetings with our Small Business Advisory Group, remains positive overall as businesses report solid growth and positive hiring plans. Many continue to note how hard it is to find the skilled labor they need. Class A office vacancies have declined in both downtown and suburban markets, and rents are rising a bit. State tax collections, in particular sales and personal income taxes, are exceeding budgets in every state except Rhode Island, which appears to be experiencing an extended, though as yet unexplained, soft spot. In general, I sense a good deal of optimism among my business contacts about their own firms but uncertainty as well when they look at the evolution of both the regional and the national economies. Indeed, both the coincident regional index done by the Philadelphia Fed and the leading index for Massachusetts that’s done by the University of Massachusetts indicate that the regional economy is likely to grow only at a modest pace over the next year or so, buoyed by a resurgence in worldwide demand for high-tech and biotech products but weighed down by subdued consumer spending in the midst of high energy costs and declines in local housing markets. I just want to reflect a bit on regional residential real estate markets. Here various data sources—and there are lots of them—suggest that regional markets have slowed, with sales falling in April and to a lesser degree in May, and unsold inventories continuing to rise, with the number of months’ supply growing from about 8.7 in May of last year to more than 11 in May of this year. However, prices, depending on whether you look at median sales or repeat sales, either have fallen only slightly or have risen at about half the pace they had been rising. Most analysts see this as a soft landing or a period of stabilization after several years of strong price appreciation. Thus, while the local media and many pundits, national as well as local, wring their hands over the potential for major real estate problems, at least up to now the market correction in New England appears to be proceeding in a fairly benign way. Turning to the national scene, incoming data have served to reinforce a sense of risk on both sides of the Greenbook forecast. As I noted earlier, that forecast is not markedly different from our own, so when I talk about risk it will be the risk to our own forecast as well. To some degree, both slower growth and higher inflation were expected in the forecasts that we’ve made over the past six months or so, but recent data may be exceeding those expectations. On the growth side, residential construction has slowed a bit more rapidly than we thought. Consumer confidence has fallen off. Weaker equity markets, higher gas prices, and somewhat lower housing prices have likely affected consumer spending, and recent data on job growth have been slower. But there continue to be a good number of supports to growth. Household wealth remains high. Growth abroad remains solid. Financial conditions outside equity markets are accommodative. Businesses remain highly profitable and cash rich as reflected in the mini-boom in investment in nonresidential structures, and productivity growth remains strong. Indeed, if one averages Q1 and Q2 expected growth, it’s a bit above our earlier forecast, though clearly one needs to be mindful of the fact that the first half started with a bang and its recent momentum has been considerably cooler. Does this recent cooling portend a faster and steeper slowdown for the rest of ’06 than reflected in the current Greenbook forecast or our own? Or could there be enough underlying strength to take us back to the growth scenario of our earlier projections? In particular, I wonder a bit about the slow rate of job growth that is embedded in the Greenbook forecast for 2007. I don’t know what the possibility is of some surprise on the upside to the Greenbook’s current ’06 and, particularly, ’07 projections, but I think there may well be some. The incoming data have been more disquieting on the price front. I’m not a person who believes that a given level of inflation is bad in and of itself, within reason of course. I think it’s important to assess the level of inflation against everything else going on in the economy. So at times a level of 2 percent and change might be fine; at other times it might bear watching. And as far as I know, it’s been hard to prove that specific low levels of inflation—let’s say, below 3 percent—are bad in and of themselves. But I do believe that a rapid increase or decrease in the rate of inflation growth can portend debilitating change in the economy. Such increases or decreases need to be monitored carefully and figure importantly in the policy discussion. Thus, I have viewed the six- and three-month changes in core CPI and PCE with some alarm as the rate of change has been faster than I am comfortable with and certainly faster than our forecast expected. Looking at the first half of this year, and using the Greenbook forecast for Q2, we see that core inflation is nearly 50 basis points higher than what we, in Boston at least, had expected. Our analysis suggests that most of the reason for this surge in inflation over the past couple of years has been higher energy costs. Barring untoward geopolitical events, that should mean that inflation growth will moderate. But given the small to nonexistent output gap we see currently reflected in the low unemployment rate, there is more than a minor risk that resource pressures could begin to play a role in inflationary growth. The Greenbook forecast suggests that slower growth will provide a moderating influence on inflation. That’s our best bet as well, but prudent risk management might suggest some hedging of that bet. Thank you." FOMC20050920meeting--106 104,MS. BIES.," Thank you, Mr. Chairman. As many of you have already remarked, preparing for this meeting was a lot more challenging than preparing for other recent meetings. The economy was poised for strong growth in the third and fourth quarters before Hurricane Katrina. And the forecast that the staff has developed in the Greenbook I think is reasonable, given what we know at this time. That forecast suggests that while we may see some short-run softness, with growth below the rate we had anticipated, the rebuilding efforts clearly will add stimulus over the next year. I am also comforted that the underlying economy was strong. So while we are going to see a slight downtick due to the impact of the hurricane, the Greenbook forecast of real GDP growth in the mid-3 percent range over the next year indicates that we have sound economic expansion ahead. So while uncertainty about economic growth has increased, I still believe there are much more serious clouds on the inflation horizon. The rapid rise in energy prices in the last couple of months has pushed the level of prices high enough that more firms are likely to find that they cannot absorb the increased costs and must raise prices to protect their profit margins. This will become more so the longer that energy prices remain high. I am still hearing mixed expectations about the availability of natural gas this winter. While the impact of Katrina may not be as severe as first feared, the limited ability to expand natural gas supply, as we saw in the last two years, on top of slower fill due to hurricane damage, September 20, 2005 84 of 117 As the Greenbook notes, business spending on equipment and software has only modest forward momentum. This is despite solid economic growth, healthy profits, and favorable financial conditions. So why is business investment so limited? I’m going to answer this by referring to the most recent quarterly survey of CFOs conducted by Duke University with CFO Magazine. And I would note that this survey was concluded on August 28, the day before Katrina hit. I want to read to you the lead on their press release for this survey. It says: “Corporate Optimism Plummets in Response to Housing and Fuel Concerns.” For the first time in the four- year history of this survey, more CFOs are pessimistic than optimistic about the U.S. economy. Their number one concern is high fuel costs, ranking above health care costs for the first time. Interestingly, the survey also noted a jump in what they call their terrorism index, with one-third of the firms responding that costs to improve security and business recovery response has negatively impacted their bottom line. I think after Katrina there will be more firms looking at their business recovery plans. As some executives have told me, with the rising costs of benefits, energy, and financing, they are closely managing discretionary items, including capital spending. Over the next 12 months, the CFOs who participated in the survey are planning slower growth of investment; they now expect to increase capital spending by only 4.7 percent. The survey indicates that CFOs are also worried about the housing market. They believe the market is overheated and that a necessary and expected decline in housing prices will negatively affect their firms. This echoes comments I’ve heard from others that a reversal in the housing market might have negative September 20, 2005 85 of 117 find the survey results consistent with other comments I’ve been hearing that the business pessimism we’re seeing is due in large part to growing concerns about rising prices on several fronts. While recent inflation numbers are very well behaved, the Greenbook does reflect a rise in the core inflation forecast over the next year. The volatility we saw yesterday in the energy futures market, clearly due to Rita and other concerns, indicates how much the market is focusing on the unknown path for inflation that companies are facing. While the impact on inflation may be unclear—and we know the damage to platforms out in the Gulf and the effects on refinery capacity are still being assessed—the nervousness about costs is a factor that is affecting business behavior, and it is something that we can’t ignore. The fiscal stimulus of Katrina and the rebuilding that will result is only going to add to inflation—and that’s on top of a transportation bill that has a lot of spending on infrastructure that some of us think should have less priority than rebuilding around the Gulf Coast. The chart on page 21—and I also love these new charts—helps us keep things in perspective, in terms of the historical trends in inflation as we’ve been tightening up from meeting to meeting. And we have to keep that in mind as we look to the future. We know that there is still ample liquidity in financial markets, so the risks of higher inflation to me right now are much greater than the risks to economic growth. I think it’s important that at today’s meeting we give the market assurance that we will continue to focus on and be diligent in dealing with inflation, because rising costs appear to be at the heart of companies’ concerns. To me that’s very important, and I want to support an increase September 20, 2005 86 of 117" FOMC20070131meeting--83 81,VICE CHAIRMAN GEITHNER.," I have two questions. The first is about our inflation forecast. We’ve discussed several times the basic question about whether the now-prevailing level of long-term inflation expectations in markets is likely to provide support for forecasts of further moderation or likely to constrain the prospects for further moderation in core inflation. My recollection of that discussion, although a little hazy, is that expectations might be a bit of a constraint. Am I right in my recollection? Has your view on that changed?" FOMC20080430meeting--148 146,MR. DUDLEY.," But forecasts don't change that fast, so it is hard to know; but that could be one factor. " FOMC20050202meeting--95 93,CHAIRMAN GREENSPAN.," Do you have a forecast of current account balances for the world, including the discrepancies?" CHRG-109hhrg31539--12 Mr. Bernanke," Yes, Mr. Chairman. First of all, you are absolutely correct that what matters to the average person is overall inflation, including energy prices and food prices, and we take that very seriously. Overall inflation is probably also what guides inflation expectations as people think about what inflation rate is likely to occur in the future, and that is another reason to be concerned about overall inflation. There are two reasons why we look at core inflation as well as overall inflation. The first has to do with forecasting. Historically oil prices, energy prices have been rather volatile, and if you look even today at the futures markets, the futures market predicts energy prices will be relatively flat over the next couple of years. If you take that forecast as correct, then today's core inflation rate is actually a reasonable forecast of tomorrow's total inflation rate if energy prices do, in fact, flatten out as the markets seem to expect. " CHRG-110shrg50409--28 Mr. Bernanke," Well, as your point about the first quarter makes clear, even after the fact, it is sometimes hard to know exactly how much growth there was. Yes, our forecast calls for growth in the second half, but relatively weak. Part of what seems to have happened is that perhaps the fiscal stimulus or other factors--some of the growth that we anticipated--has been pulled forward into the second quarter, which looks to be doing somewhat better, frankly, than we anticipated. So our forecast---- Senator Bennett. You mean pulled forward into the first quarter? " CHRG-111hhrg51698--5 Mr. Lucas," Thank you, Chairman Peterson, for calling today's hearing. We appreciate the opportunity to examine your draft legislation that addresses concerns with the derivatives industry and its impact on the U.S. economy. During the past several months, the Committee has spent a great deal of time monitoring the issue of trading activity in the futures market, as well as exploring the role credit default swaps have played in our current financial crisis. The draft legislation we are considering would impact a wide array of financial instruments, and what the ultimate effect will be in the marketplace is unknown. My main concern is how the legislation will impact risk management for agricultural producers. How far will this legislation go beyond credit default swaps and derivatives in general? I support greater transparency and accountability in respect to the over-the-counter transactions. However, I also believe any legislation to regulate financial markets has to strike a delicate balance between protecting the economic workings of this country and creating opportunities for economic growth, business expansion, risk management for our agricultural producers. To that end, I believe this Committee must work to ensure that the Commodity Futures Trading Commission, the CFTC, plays a leading role in appropriately regulating the derivative and commodity markets once the Committee decides what level of additional regulations are needed. We should also work to ensure that the CFTC has the tools it needs, human resources, technical resources, economic resources to effectively carry out its statutory mandate. It must be noted that the CFTC has a proven track record in clearing futures contracts, and to date has not lost a single dollar of a single customer's money due to failure of a clearinghouse. Finally, I would like to thank the participants of our two panels today. We appreciate your time and your commitment to the public policy process, and we look forward to your testimony and answers to our questions. Thank you, Mr. Chairman. " FOMC20070807meeting--89 87,MR. ROSENGREN.," The Boston staff forecast is broadly consistent with the Greenbook forecast, with export-led growth being significantly offset by weakness in residential investment, resulting in a gradual increase in the unemployment rate and core PCE inflation settling around 2 percent. The Boston staff forecast is somewhat more optimistic on residential investment but also has somewhat higher potential than the Greenbook forecast. My own view is that residential investment is likely to be as weak as in the Greenbook forecast but that potential may be closer to Boston’s estimate. Taken together, weak residential investment and somewhat stronger productivity, along with the possibility that construction employment will be more depressed going forward, may result in more of an upward drift in unemployment, helping to reduce some of the concerns with labor market pressures on inflation. However, given the similarities in the forecasts, well within standard errors, at this time it is probably more important to highlight the risks to the forecast. It is notable that the rather benign outlook of the forecasters is in marked contrast to the angst I hear when talking to asset and hedge fund managers in Boston. The angst is new and reflects heightened concerns with the financial ramifications stemming from subprime mortgages. Recent developments in residential markets are of potential concern. They have been raised by many around the table. Over the past several years, large homebuilders have been able to increase their market share. Given the use of subcontractors and with little obvious economies of scale, the primary advantage of large homebuilders would seem to be access to external finance, which allows them to purchase large tracts of land. When housing and land prices were rising, particularly in fast growing areas of the country, this access provided a significant advantage over the small builders that could not tie up significant resources in land. However, what provided a competitive advantage in the first half of this decade now places a significant strain on large homebuilders. A large investment in land whose price is falling is aggravating the problem these builders have with unsold inventory and depressed prices for new homes. Not surprisingly, the largest homebuilders, which account for nearly a quarter of homes sold, have equity prices trading lower than at any time in the past year, and recent earnings announcements have highlighted significant write-downs in land values. The low equity prices of homebuilders seem broadly consistent with residential investment remaining quite weak well into 2008. Financial market disruptions are likely to be a further impediment to the housing market and potentially provide a channel for problems to extend beyond residential investment. A number of financial instruments, such as the 2/28 and 3/27 mortgages that were widely used last year, are no longer readily available. Furthermore, the originate-to-distribute model has been disrupted by the heightened uncertainty surrounding CDOs and CLOs that we heard about earlier this morning. There seem to be two significant developments. First, the liquidity of these instruments has declined, making valuation assessment difficult. As lenders have made margin calls, forced liquidation of collateral in illiquid markets has further depressed the market. While of concern, I would hope that this is only a short-run effect. The second development of concern is that many investors have been relying on rating agencies to evaluate credit risk but the underlying credit risk is relatively opaque and the correlations between tranches may not have been fully appreciated. If investors have lost confidence in the rating agencies to accurately assess credit risk for structured products, the market could be impeded until confidence is restored. Since similar structures are used for financial instruments besides mortgages, getting secondary market financing for a broader range of financing needs could be difficult, and external financing for some borrowers could be affected. This has been reflected in the widening spreads for riskier corporate bonds, where the spreads have widened from unusually low levels and are still relatively narrow compared with earlier periods of significant financial disruption. While recent problems are not compelling enough for me to have a significant disagreement with the forecast presented in the Greenbook, the risks surrounding that forecast on the downside have increased. I remain concerned that higher oil prices, a falling dollar, and tight labor markets pose upward risks to the forecast of inflation, but recent events have significantly raised my estimate of the risk of a slower economy than I would have predicted a few weeks ago." FOMC20080916meeting--128 126,MR. EVANS.," Thank you, Mr. Chairman. The unfolding financial situation is injecting enormous uncertainty into the economic outlook and policy picture. Although this analogy is imperfect, today's uncertainty reminds me of March 2003. Then, on the eve of the invasion of Iraq, the FOMC decided that geopolitical uncertainty was so great that the Committee could not characterize the balance of risks at all in the policy statement. Today, the downside risks to output are almost too dispersed to characterize. In one or two weeks, we may know better that either the economy will somehow muddle through or we're likely to be facing the mother of all credit crunches. I think that the first outcome would be quite an accomplishment under the circumstances, but at the moment it's very hard to say how this will turn out. Nevertheless, we have to offer an opinion. With respect to the economic landscape before the developments of last weekend, one thing that I kept hearing was that uncertainty and caution in the business community had increased in recent weeks and that they were causing many firms to hold back on spending and committing to financial investments. But a number of my contacts indicated that the weakness was not out of line with their earlier expectations. On the plus side, I got the impression that, with the exception of housing, there are not many excesses on the real side of the economy that needed to be worked off. Notably, I did not hear of inventory overhangs or unused capacity, and Manpower even indicated that their clients had been careful not to go overboard earlier in the hiring cycle, and so we're not left with bloated workforces. Still, this sentiment and the incoming data did not paint a pleasant picture with regard to the national outlook. As one of my directors said, turning the common phrase against me, the economic problems that we are facing appear to be remarkably resilient. Even before last weekend's events, the economic risks had increased somewhat. We had the large rise in the unemployment rate, the recent weak consumption data, and heightened caution by firms. Now, of course, the financial risks have increased substantially and further threaten the growth outlook. At a minimum, credit standards are likely to tighten further and crimp spending. I'm not looking forward to putting a forecast together in October. Dave and the Board staff have my sympathy and respect for doing this each meeting. It's unfortunate, Dave, that we haven't had the time to spend talking about the excellent special memo that you and your staff put together on gauging the effective stance of policy. I thought that was very helpful. I had on previous occasions mentioned that it would be nice to have some markers that we could look at, and at least for me, that was quite helpful. Now, it's not a large stretch to expect that inflationary pressures will recede, given what we're facing. We could see enough weakening in the economic outlook that the projected slack in the economy will point inflation more clearly down and below 2 percent over the medium term. Just last week I was still a bit skeptical that these forces would be large enough to achieve this disinflation. But we need to be forward looking, and that would be how I would mark my inflation forecast down today. So what does this mean for policy today? I favor alternative B. In my view, we've kept the policy rate low so that we would not be far from appropriate policies if and when the risks to growth intensified enough relative to the risks to inflation. So we are well positioned to act if we need to. I agree with President Stern that, if we were to act, we should do something significant on the order of 50 basis points. But I think we should be seen as making well-calculated moves with the funds rate, and the current uncertainty is so large that I don't feel as though we have enough information to make such calculations today. We will know much more in a couple of weeks, I hope at least about the changes in underlying financial conditions, and will thus have a better sense of the risks to both elements of the dual mandate and the associated policy actions. Thank you, Mr. Chairman. " FOMC20070628meeting--245 243,MR. POOLE.," Another observation somewhat in the same vein—regarding the economic projections, as I commented earlier, we have been thinking about this during a period in which the forecast hasn’t changed much. The situation has been pretty benign from the point of view of anybody who has been doing this for very long. One thing that I think we need to work on is how this would have worked—would it likely have been constructive—at a time like the fall of 1998, the time of September 11, 2001, or the time in early 2001 when the economy was sinking really rapidly? We need to work on those cases and not just think about the projections in the context of the relatively benign period that we’ve had. I realize that that involves more staff work, but it seems to me essential that we think all of that through before we start to do it. One other comment: I view the whole communication process that we’ve been going through as incremental, and I’m a little worried that we’re biting off too much at once here. We should think about a really pared down set of releases here if we’re going to expand the process with the idea if all that works well, then we’d take the next step." FOMC20070131meeting--431 429,VICE CHAIRMAN GEITHNER.," Finally, I have just a few quick points about the external dimension of the discussion. I’m in favor of exploring a narrative that describes the story of the Committee’s central tendency about the outlook. It’s worth doing, and the range of issues on the table today in that direction I feel really quite comfortable with. I’m in favor of doing it quarterly, but I wouldn’t want to make that decision without thinking through very carefully whether it makes sense. I would want to explore different ways of expressing the variance across the Committee. I like the histogram approach. I’d even be open to the fan chart device, as Janet described it, for trying to capture different forms of uncertainty. I don’t think we should try to agree as a Committee on a path for what appropriate policy means. Therefore, I would not be in favor of working toward disclosing an agreed-upon path, for many of the reasons that are familiar to all of us. I want to experiment with a minutes-like iterative process for coming to some level of comfort with how that central tendency is described, but I’d be willing to give the Chairman the role of final arbiter of what gets presented, to save the staff from endless negotiation. I think the horizon question is very interesting. I was inclined to think that three years makes sense. A concern I have about three years—apart from the one that Janet raised, which is that it probably tells you only a little about your view of potential or your objective, and it may not have much information beyond that—is the following. If we’re thinking about the merits of a regime in which we will not have a defined period that we commit to for bringing inflation back to target, we need to be comfortable with showing a forecast that maybe has inflation above target for possibly a significant period of time. If the period is two years, it will be easier not to get ourselves in a position in which we feel compelled to show a more acute decline in that path. If we’re at three years, it will be harder to avoid that. We will be uncomfortable, I think, if we’re in a three-year regime going for sustained periods with inflation staying outside that range. Therefore, I am a bit tentative about three years. Whatever we do, we should experiment first. We should be careful not do any damage to a staff forecasting process that has worked very, very well and serves the Committee very, very well. Also, we should recognize the ignorance we all live with and should be careful not to start down a road that would give the markets false comfort, a false sense of precision, false confidence in our view of the world, and all those other things many people have spoken about. Let me say something about skepticism. Skepticism is a very important virtue, but its virtue is not in the service of inertia. Its virtue is in the service of trying to figure out how we can improve what we do and how to save ourselves from mistakes along the way. So I don’t want to be “outskepticked” by anybody. [Laughter] I think it’s important to think about it that way. As all this implies, I don’t think it makes sense to have uniform conditioning assumptions imposed on our individual forecasts, certainly not uniform conditioning assumptions on the monetary policy path, but also not on any of the important dimensions that are the focus." FOMC20060328meeting--138 136,VICE CHAIRMAN GEITHNER.," Thank you, Mr. Chairman. Like all of you, we think the underlying trajectory of demand and inflation seems quite favorable, perhaps a bit more so than it did in January. We expect real GDP to grow at a rate slightly above the rate of increasing potential in ’06 and to slow to the range of potential in ’07. We expect the core PCE to rise at a rate in the neighborhood of 2 percent over the forecast period. Differences between our forecast and the Greenbook’s are minor. In our forecast, we assume that inflation expectations remain anchored and the term premium remains low and that we are now at a point where little or no resource slack is left in the domestic economy. The monetary policy assumption we adopt is the path currently priced into the futures markets. The major sources of uncertainty in our forecast are the size of the wealth effect we might see accompanying any slowdown of housing, the flexibility of profit margins, and the sustainability of this present configuration of low risk premiums. We view the risk to the growth forecast as roughly balanced, although the usual suspects provide a source of concern. The risk to our inflation forecast, in contrast, still seems slightly tilted to the upside. On the growth front, as I said, we think the underlying pace of demand growth is pretty strong, and we don’t see any signs yet that would point to evidence of a significant slowdown relative to potential in prospect. We think productivity growth is likely to remain quite high, rising perhaps a bit faster this year than in ’05. With the labor market growing on trend and some increase in labor’s share of national income, we expect consumption growth to remain reasonably strong. Stronger income growth offsets the expected deceleration in housing-price appreciation and the effect that might have on consumption. We expect a slight increase in the contribution of business fixed investment to demand growth, due principally to a rise in spending on equipment and software. We expect, of course, the contribution of residential investment to slow with the forecast period. World GDP growth seems stronger and more broadly based. We expect net exports to be a persistent drag, shaving about ½ percentage point off growth for each of the next two years. Despite this forecast of pretty strong spending growth and high levels of resource utilization, we believe core inflation is likely to remain moderate. Under the assumption of a relatively stable dollar and with the energy-price assumption taken from the futures curve, we expect headline inflation to slow to a rate closer to the core over the forecast period. But this forecast rests on three important foundations. The first is that we succeed in keeping inflation expectations reasonably well anchored. The second is that demand growth not only does not accelerate to a rate substantially above trend but also slows to potential over the forecast period. And the third is that the expected rise in compensation and unit labor costs results in a rise in labor share of income—in other words, that compensation growth accelerates but the increase is absorbed by some compression of profit margins and does not lead to a significant acceleration in core inflation. Now, the sources of potential upside risk to the inflation forecast are several. One, of course, comes from the interaction between our views about productivity growth, compensation, and profit margins. If the pace of productivity growth slows significantly relative to our assumption and if, at the same time, conditions in labor markets continue to improve, unit labor costs are then likely to accelerate. A rise in compensation, however, would not by itself portend a troubling increase in core inflation. The extent of this risk, as I said, depends on the degree to which rising unit labor costs are absorbed in shrinking profit margins rather than triggering output price increases as firms attempt to defend existing margins. And because the labor share of income seems somewhat low and, as historical averages suggest, there’s room for unit labor cost growth to be absorbed in profit margins rather than causing price increases, we need to be attentive to the risk that this process may produce a short-term increase in core inflation, perhaps also in inflation expectations. A second potential risk comes from what we think we know about the pace of demand relative to potential supply globally. A continued increase in commodity prices around the globe and, more recently, some modest increase in capital goods prices may suggest that global pressures on resource constraints are pushing up prices. This raises the risk that the recent weakness in core goods prices in the United States may not be sustained. Service price inflation in the United States has shown signs of slowing. Our central forecast, as I said, is conditioned on little movement in the dollar over the forecast period, but any sizable depreciation of the dollar would still carry the risk of some acceleration in core goods prices. For nearly two years, overall inflation, as what is measured by the PCE or the CPI would suggest, has been running substantially above core, and this is true for a range of alternative measures of underlying inflation. If the underlying inflation rate were closer to 1.5 percent than to 2 percent, we might view these potential sources of upward pressure with more equanimity. Although the probability seems low that these forces will act to produce a significant acceleration of core inflation or a significant deterioration in inflation expectations, we need to be careful about those risks. So with underlying inflation at the upper end of the inferred inflation preference of the Committee, we need to be more attentive to these risks. On the growth side, the most obvious sources of downside risk to growth are a substantial rise in energy prices from current levels, a slowdown in productivity growth, a sharp rise in risk premiums, and a more-adverse effect on saving and consumption from the expected adjustment in housing markets and prices. Like the staff forecast, we think it’s reasonable to expect household saving to rise a bit and consumption growth to slow, in part because of changing expectations about the pace of future appreciation in the value of home equity. But we believe that, absent some large, negative shock to perceptions about employment and earned income, the effects of the expected cooling in housing prices are going to be modest. Of course, this view may prove optimistic. We take some reassurance from the fact that the average growth forecast in the private sector probably anticipates a significant cooling in housing and a significant effect of that cooling on saving and consumption. Developments in asset prices and risk premiums over the past several months seem to support this picture of stronger confidence in the growth and inflation outlook because real rates seem to have risen. Equity prices and credit spreads suggest considerable confidence in the prospect for growth. Implied volatilities remain quite low. We don’t know how much of this is fundamental and how much will prove ephemeral. At the moment, though, overall financial conditions seem pretty supportive of the expansion. So with this forecast of growth in the vicinity of potential, core inflation at around 2 percent, and the risk somewhat to the upside for inflation, we think the principal responsibility of monetary policy remains to preserve the sense that we will act to keep long-term inflation expectations contained at levels consistent with price stability." FOMC20060920meeting--191 189,VICE CHAIRMAN GEITHNER.," I was fairly comfortable with our decision in August, and I am fairly comfortable with that decision in retrospect. Whether we were wise or we have been lucky is something only history will judge. I would be more comfortable if there were a slightly positive slope to expectations about the future path of policy and less certainty around that path, but I don’t know how to achieve that responsibly with language today. As Governor Kohn said, despite whatever discomfort one may have with that path in markets today, we can’t say that path is fundamentally getting in the way of our confidence or the world’s confidence in our capacity to achieve our objectives. So I’m comfortable with not moving today and basically fine with the language in alternative B. I have just two other observations to make. It is striking that we have an asymmetry in the growth paragraph and in the inflation paragraph in that we have slipped into giving a forward-looking view about the likely path of inflation in a qualitative sense but have not done so in the growth paragraph for lots of reasons. I think that the asymmetry creates a bit of a problem for us today in trying to explain how we view the outlook and the risks to the outlook. The absence of any language about the future path of growth makes me more uncomfortable than I felt about the path today, and so I think we should come back and think about whether we want to correct that. Correcting that asymmetry might help a bit in explaining to the world any difference between the staff forecast, which will be clearly reflected in the minutes, and the implicit forecast of the Committee. My second point is just about the minutes. I think that there is an issue regarding the minutes in that the staff forecast gets expressed with a clarity that is not expressed about the Committee forecast. The Committee forecast is necessarily described more vaguely: It’s harder to find what the center of gravity is, and even the tails don’t necessarily come through. We probably saw the reaction we did to the minutes last time because, even when the Committee’s judgment is much different from the staff’s, that difference is hard to characterize in the minutes. That is another topic for future discussion. Thank you." FOMC20071211meeting--144 142,MR. PLOSSER.," Thank you, Mr. Chairman. In the last two meetings, the Committee cut the funds rate 75 basis points. We did so because the outlook for the economy has clearly deteriorated relative to our views in early August. We have argued that we have been acting preemptively to help forestall and to mitigate potential fallout from the deteriorating housing market and financial disruptions. How successful have those rate cuts been? I think it is too early to tell. It is still true that the effects of monetary policy on the broader economy— especially on spending, output, and employment—operate with a considerable lag. It is my guess that our previous cuts or anything we do today will not have measurable effects on the broader economy in terms of spending and output until late in the first quarter of next year and more likely in the second and third quarters. So I don’t think anything we do today will have an appreciable effect, if any, on the economy’s first-quarter performance. Thus, one’s view about the future path of the economy during the second half of ’08 depends critically on what you think the effect of our decisions will be going forward. Now, contrary to what some may think, I am not immune to the drum beat of downbeat news that we have heard. I am keenly aware of the concerns expressed around this table and by others who are more concerned and anticipate a much more prolonged period of reduced growth. I have marked down my forecast for the first half of ’08, but my view of the second half has not changed very much. Thus, while I am okay with the 25 basis point cut at this meeting, I would like to highlight that there are risks to that decision. I would oppose a 50 basis point cut. As suggested in my earlier remarks, I do think that there are increasing underlying inflation pressures, and although we have not seen inflationary expectations change very much in the data, I do think they are fragile. Before I stop, I would just like to give one example of that concern. In the last Philadelphia Fed Survey of Professional Forecasters, conducted in early November, we asked a special question. We asked panelists whether they believe that the FOMC has an inflation target. About half the survey respondents said that they believe the FOMC has an inflation target, and of those, close to 90 percent responded that they thought our target was for core PCE inflation. They also provided their views on what the target was. The median estimate of that target was between 1.6 and 1.7 percent. Among these forecasters, almost all those who thought that we had a target also indicated that their long-term—that is, their ten- year—forecast of PCE core inflation was systematically 50 basis points, ½ percentage point, higher than what they thought our target must be. We asked the forecasters, if their forecast was different from the target, why it was. Almost all the forecasters presented a variation on a very similar theme. Many of them said, “Well, the Fed really has goals other than inflation,” or “they wouldn’t stick to it,” or “they would find it painful and, therefore, not commit to the goal,” or “they lacked credibility.” Now, this is a small subsample of people. Nevertheless, I find it interesting that these professional forecasters are really not terribly sure about our commitment to price stability. The issue is not what they thought the target was per se but what the differential between their forecast and the target was. Finally, just regarding language, I have been uncomfortable for some time with the practice of summarizing the balance of risks, and I share President Lacker’s concern in that I would like to get rid of it. So I would support alternative B with the language. I will also reiterate the point that, while we may be making ourselves feel better, the fact is that we need to be prepared to act quickly if things reverse themselves and we have to reverse the rate cuts. I agree with that. On the other hand, I think the history of this institution is such that it is in fact more difficult to do than it is to say, so I think we need to have some caution. So I favor alternative B and the language as expressed. Thank you." FOMC20070918meeting--68 66,MR. STOCKTON.," On that last point, I think it probably would have been a little higher. But if we hadn’t revised the NAIRU, we might also have had a higher unemployment forecast going forward. It wouldn’t be just like “everything else equal” if we lowered the NAIRU. I think it did contribute to a slightly larger output gap in this forecast, but also contributing to the larger output gap in this forecast was a weakening of activity relative to potential that we are assuming is going to be driven by this. We are really splitting hairs because, as I indicated, we changed the forecast only 0.1 in each year, but it would have been a little less than that had we not changed the NAIRU. On the first point about our interpretation of employment, I was trying to convey a sense that a lot of people were very surprised at how weak employment was. We have been expecting weak employment. I think we were less surprised. We also, as I indicated, had written off some of this weakness in employment as sort of extracyclical labor hoarding, and we hadn’t really bought in fully to that. We let that show through in lower labor productivity. Now that we have actually seen some of the weakness that we were expecting all along, we don’t think there was as much labor hoarding as we previously thought. So it wasn’t as big a surprise. Still, there is just no denying the fact that the labor market report was weaker. Even if we had gone back to where we were, we weren’t expecting things to be that weak. So I think there was some small negative signal attached to the labor market report but probably not as much as would be suggested by the market reaction." CHRG-109shrg21981--124 Chairman Greenspan," That is correct. Senator Bennett. And it becomes--when it gets to 2018 or 2020--again, economic forecasts are never exactly accurate. When it gets to that point, we will already on a unified budget point of view have had to raise our external borrowing, whether it be Senator Stabenow's concern of China or whatever, to make up the amount that we were not getting from the Social Security. It will begin to produce a cashflow problem. When it crosses the line, we will have to borrow that much more because at that point the Social Security trust fund will come to the Government and say redeem this bond, and the Government will have to redeem the bond. It is a legitimate claim on the Government. And then the Government says, in order to redeem that bond, we will sell a bond to the Japanese or the Europeans, or whoever, so that we can have the money to redeem that bond. At that point the interest on the bond to the Japanese or the Europeans will hit the unified budget pressure, cashflow pressure, differently than the interest on the Social Security bond. Isn't that true? " FOMC20080625meeting--90 88,VICE CHAIRMAN GEITHNER.," Thank you, Mr. Chairman. I think we face an extended period of relatively weak economic growth, quite weak domestic demand growth, and overall growth significantly below trend. I think this is both likely and necessary. It's likely because we have more weakness ahead as the housing drag continues, financial headwinds remain acute, the economy adjusts to the very large and sustained energy price shock, the saving rate increases, and global demand moderates. It's necessary to achieve a reasonable inflation outcome over the forecast period. Our central projection has the U.S. economy growing, though at a rate significantly below potential, and then recovering gradually toward trend over the next year. This is our modal forecast; and in this forecast, the economy just skirts a recession. The output gap begins to narrow over the forecast period. Housing prices begin to stabilize only late in '09, after a cumulative peak-to-trough drop of roughly 12 percent, using the OFHEO repeat sales purchase-only index. Net exports provide a significant, though fading, boost to GDP growth this year and next. We project a very gradual, very modest moderation in core inflation over the forecast period. Of course, this forecast depends on a lot of things happening. It depends on expectations remaining reasonably well contained, energy and commodity prices following the futures curve, the dollar only modestly weaker, somewhat diminished pressure on resource utilization here and around the world, and continued moderate growth in compensation and unit labor costs. Our policy assumption builds in significant tightening--a significant move up in the fed funds rate over the forecast period--though not as soon as the market now expects. The uncertainty around and risks to this central projection are substantial. On the growth front, although we believe the risks of a very deep, prolonged economic downturn have diminished--not on their own but because of the force of the policy response so far--we still think the risks are weighted significantly to the downside. The main risks remain: the ongoing stress on financial markets; the risk that this further restricts the supply of credit, exacerbates financial conditions, pushes home prices and other equity prices down more further tightening credit conditions, et cetera; a steeper-than-expected rise in the saving rate; and the adjustment to the ongoing drag from energy prices. On the inflation front, we--I think like the rest of you--see the risks ahead tilted somewhat to the upside for many obvious reasons. I think it's true that, looked at together, the mix of measures of inflation expectations suggests that private agents may have less confidence in the FOMC's commitment to price stability than they did in previous periods when total inflation was running significantly above core. So this is going to be a very challenging period for policy. It's not all terrible. Productivity growth is a little higher than we thought. Underlying inflation and long-term inflation expectations certainly could already have been showing signs of a more compelling, immediate danger. Spending has been somewhat stronger than confidence measures would have suggested. The current account balance has narrowed significantly. We are seeing very substantial changes in behavior across the U.S. economy in the consumption of energy. So there are good things to point to. But in the two dangerous areas--in the financial sector and in the global inflation environment--I think things are materially worse than at our last meeting. Again, the risk of inflation is readily apparent. Apart from the numbers, I agree with many of you who said that the alarm and concern is materially higher and materially different today across a broad range of firms in different industries than it was even as recently as two months ago. We have to be worried about intensified pressure on compensation growth even with the degree of slack that we now see in the labor market. Although firms are absorbing in margins a significant part of the increase in unit costs--and a lot of the complaining that we hear is about margins that are coming down and those that are expected to come down--I do think that firms are demonstrably able to pass on more than they would have been before. Of course, what makes it very hard for us is that the pressure on resources is coming largely from outside the United States and the other major economies, from countries that are growing significantly above trend with central banks that are not independent and are running very expansionary monetary policies. I think we are really seeing an alarming acceleration in inflation rates in large parts of the world for the first time in a couple of decades. If these countries do not tighten monetary policy sufficiently and reduce energy price subsidies materially, then we will have to be tighter than we otherwise would have to be. In the financial world, although I think it's true that the market believes there has been some significant reduction in the risk of an acute systemic financial crisis, I think we have a long period of acute fragility ahead. We're in the midst right now of more material erosion in sentiment, spreads, asset prices, balance sheet pressures, and liquidity in some markets. Overall financial conditions are probably somewhat tighter than when we last met. The financial headwinds have intensified again, and they are likely to remain intense for some time. Again, I think this is going to be a very challenging road ahead. It is important to recognize that the current stance of policy embodies not just the fed funds rate today, relative to our best measure of equilibrium, but also the expectations about policy that are now built into the Treasury curve. That policy today does not look that accommodative. If you look at the Bluebook charts and at a range of measures of real fed funds rates today relative to different measures of equilibrium, policy is less accommodative just on that simple measure than it was at the most accommodative point of the last two downturns. That said, we're going to have to tighten monetary policy, and the question is when. My sense is soon but not yet. Right now we still face a very delicate, very fine balance and have to be careful not to declare victory prematurely on the growth front or on the financial front. I think it's going to be hard for us to do that until we see that we are closer to the point at which we can confidently say that we start to see the bottom in housing prices. Also, we have to be careful not to raise expectations too much that we're on the verge of an imminent, significant tightening in policy. It is a difficult balance. We should take some comfort from the fact that the market believes we will do enough soon enough to keep those expectations down. On the projections front, I have a complicated view, Mr. Chairman. I apologize. If we are going to change, we should focus on stuff that will change things significantly. I don't see huge gains from the changes in these options to our current communication regime. If we're going to change, a trial run in the fall is fine. But I think the fall is too soon to change. We need to get through this thing. We have a very challenging period with a lot of stuff going on, and I think we need to use every molecule of oxygen in the System to get through this mess. I don't think this projections change materially helps the communication challenge in getting through this mess and may complicate it in some ways. If we are going to do something beyond our current regime, I would favor doing something slightly different from this. I would favor at least considering publishing the average of our individual views on what the desirable long-run rate of inflation is, an average of our judgments of what trend growth is today, and maybe what the natural rate of unemployment is today. We know very little about what those latter variables--trend growth and the natural rate of unemployment-- are five to ten years ahead. It is very hard for us individually to put much confidence on whatever the path is toward that point. Our current regime for aggregating our forecasts the way we do, tossing out the individuals, makes our basic forecast not particularly useful as a prism. So I would focus on doing something slightly different to change the regime, and I wouldn't do it this soon. If we're going to change, let's debate the big things and not spend too much time on things at the margin, which fundamentally aren't going to offer too much promise relative to the level of ignorance we have or relative to the complexity that people face in reading any particular meaningful value in the aggregation of our forecasts the way we now do them. " FOMC20071211meeting--66 64,VICE CHAIRMAN GEITHNER.," Thank you. My first question is an extension of President Evans’s question. Dave, there are two things to your monetary policy assumption in the Greenbook. One is that you lowered the path 50 basis points over the forecast period, but the way you did it was sort of interesting. You did 25 now, and you did the rest just at the point where I think in your forecast the economy is coming back up toward trend growth. Can you say a little about the shape of that path?" FOMC20080625meeting--86 84,MR. EVANS.," Thank you, Mr. Chairman. Most of my contacts continued to report sluggish domestic demand, and they are not currently seeing any improvement in activity. In addition, their comments often focused on the substantially higher costs that they are facing for a wide range of nonlabor inputs. With regard to business activity, much of what we heard about the District and the national economy was a rehashing of preexisting developments. At our last meeting, we felt that there was substantial risk of a further softening in second-quarter growth, so the absence of new news is a positive development. With regard to specific sectors, exporters I have talked with continue to thrive, and steel producers are doing quite well. But any business associated with housing markets is very weak, and the motor vehicle outlook continues to worsen. All Detroit Three CEOs are expecting light vehicle sales to be less than 15 million units in 2008. The Seventh District has experienced substantial flooding in recent weeks, particularly in Iowa. We have been in contact with state officials and numerous businesses. The corn and soybean crops have experienced significant losses, though the range of estimates is wide. Higher estimates for lost corn output in Iowa are about 10 percent. That substantial loss would represent a national crop loss of just about 2 percent. In addition, although there have been transportation disruptions, especially on the Mississippi, our contacts expect these to be short-lived. So overall, our sense is that the economic damage seems to be relatively contained, especially in comparison with the floods in 1993, which hit a much wider geographic area and affected activity for a longer period of time. Turning to the national picture, the incoming data regarding growth generally have been positive. Indeed, the string of upward quarterly forecast revisions continues. In particular, I have been impressed by how much second-quarter GDP growth forecasts have moved up. This is not to say that we are out of the woods. Clearly, the continued difficulties in the housing and credit markets as well as the unrelenting increases in energy prices pose important downside risks to activity. Our Chicago Fed national activity index continues to be in territory I would characterize as a recession--the three-month moving average is minus 1.08 this past month. Still, the risk of the adverse feedback loop that concerned us so much clearly seems less likely today. Importantly, the financial situation seems better. Though conditions are still far from normal, institutions have had time to cope with bad portfolios, much as President Bullard mentioned. They have made significant progress in raising capital and have increased provisions against losses. I think our lending facilities have helped financial institutions gain time to facilitate the adjustment process. It seems well beyond our abilities, however, to engineer a return to ""normal financial conditions,"" given the extent of financial losses and overbuilding in housing. With regard to our economic projections, we expect growth this quarter to be similar to the Greenbook; but unlike the Greenbook, we are looking for the momentum to carry forward to a better second half of the year. Beyond this year, we think growth will run near potential. This is based on a fed funds rate path close to that in the futures markets. We are assuming a fed funds rate of 2� percent by the fourth quarter and 3� percent by the end of 2009. Turning to inflation, a number of factors present a concern for inflation expectations and our ability to bring inflation down. As I mentioned, my contacts spent a good deal of time talking about materials cost pressures, and many around the table have talked about those as well. Many manufacturers were citing large increases in energy and most commodity prices, and everyone was passing along some portion of these cost increases. I have one anecdote on this: In retail, Crate&Barrel reported on recent buyers' trips to Asia, saying that prices for items purchased there would be 15 to 20 percent higher for next year. Finally, wage pressures have been subdued thus far. Still, econometric analysis by my staff reminded me that wage inflation tends to follow price inflation not the other way around. So by the time we see wage pressures, either we are not behind the curve now, or it is ""Katie, bar the door!"" It is probably one or the other. [Laughter] Indeed, I am concerned that large and persistent changes in costs and in relative prices of high-profile items, such as energy, could change the inflationary mindset of businesses and households. The resulting increase in inflation expectations would pose a difficult challenge for monetary policy. Maybe it will end up being okay; maybe surveys will be right. But it is a big risk, and that risk is a bit large for my comfort. Looking ahead, we all see the substantial upside risk to price stability posed by the passthrough of higher costs and any possible increase in inflation expectations. While I hope I am wrong, I feel that we may need to accept a somewhat longer period of resource slack than we would like in order to address these risks and put inflation more firmly on a downward trajectory. Under our projection for GDP growth, the economy does not close the modest resource gaps we project will be in place at the end of 2008 until beyond the forecast horizon. Along with a flattening in energy and other commodity prices, such gaps should be sufficient to contain inflation expectations and bring overall PCE inflation near 2 percent in 2009 and 2010. That is our expectation. But my base case does not have inflation moving below 2 percent until after 2010, and that is even with more aggressive policy tightening than the Greenbook path. Now, turning to the long-term projections, I think that our forecasts for 2010--or at least the way that I think about it--do suffer from some difficulties. We would like to mention in the write-up that, at the end of the period, the range is between 1� percent and 2 percent, and we can infer policymakers' preferences from that. That is one interpretation. Given the inflationary pressures, that is harder and harder for many people to come up with. I think in some cases it requires a monetary policy response that is beyond what most people would expect that we could actually do. So I don't try to force my inflation forecast into my preferred range if it is too hard. Based upon monetary policy, it is more medium term. So I do tend to favor a longer period. I am somewhat indifferent between the first and the second options. I don't really see a lot of difference, but something that has a five-year forecast I think is useful. Whether or not it has the fourth year and whether or not it is core PCE or total are less important issues. One argument for this is an interesting body of research, which I have been exposed to only at conferences--and Jim probably knows it better than most--on learning and whether individuals in the economy can learn these rules without a variety of information. Some of the better papers that I have seen on that remind us that you need more pieces of information than just what the target is, whether it be 1� percent or 2 percent. You need some type of contour when people are learning with simplistic learning rules, like least squares learning. So I think a bit more contour on the forecast would be helpful. In my mind, that pushes you toward the five years of forecasting as opposed to a steady state or a five-to-ten-year forecast. I think that's an important element. On the trial run, I think we could do it sooner than that, but I know a lot of staff resources are involved. So I favor sooner rather than later. Thank you. " FOMC20050202meeting--92 90,MR. SLIFMAN.,"3 Thank you, Mr. Chairman. We’ll be referring to the package of materials entitled “Staff Presentation on the Economic Outlook.” As you know from reading the Greenbook, the only material change in our forecast since the December FOMC meeting concerns prospects for the near term. So, after briefly reviewing some of the recent high-frequency indicators, I’ll focus my discussion on the fundamental forces that we see driving economic activity over the next two years. With regard to the very near-term outlook, your first chart shows a variety of data series that have informed our judgments. The upper panels highlight two “production side” indicators. As illustrated in the upper left, private nonfarm payroll employment rose 181,000 per month, on average, in the fourth quarter, a noticeable pickup from the third-quarter pace. In addition, the Board’s index of industrial production continued to show above-trend gains in manufacturing sector activity. Most forward-looking indicators of production, such as the regional business surveys conducted by the Reserve Banks and the ISM [Institute for Supply Management] manufacturing report that was released yesterday, also point to continued near-term gains, although perhaps not as robust as late last year. The data on private final sales also look quite favorable. Real PCE excluding motor vehicles (the middle left panel) rose rapidly in the fourth quarter, and motor vehicles (the panel to the right) continue to sell at a brisk pace. After the Greenbook was published, we received information on orders and shipments for nondefense capital goods. As shown by the inset box in the lower left panel, shipments excluding aircraft rose 2.2 percent and orders advanced 1.8 percent in December. These figures were about in line with our expectations. All told, our estimate of fourth-quarter real GDP growth, shown on line 1 of the table, was fairly close to BEA’s [Bureau of Economic Analysis]—especially after BEA factors in an error in the Canadian trade statistics that apparently depressed estimated U.S. exports. Karen will have more to say about the Canadian numbers shortly. In any event, we see no reason to alter our first-quarter forecast as a result of the BEA’s fourth-quarter GDP estimate. Your next chart presents an overview of the forecast. As described in the first bullet of the upper panel, our forecast is predicated on a continuing withdrawal February 1-2, 2005 69 of 177 of monetary accommodation over the next two years, with the federal funds rate reaching 3 percent in the fourth quarter of this year and 3½ percent in the latter part of 2006—a path quite similar to that implied by futures quotes. Regarding fiscal policy, we’ve reduced our deficit projection for fiscal year 2005 more than $20 billion, primarily reflecting stronger incoming data on corporate tax receipts; the deficit in 2006 is unchanged from the previous Greenbook. But the change to our deficit estimate has virtually no effect on our preferred indicator of fiscal stimulus, FI, which is designed to capture the macroeconomic effects of exogenous policy changes. FI is expected to be neutral in 2005 and to provide only a small positive impetus to GDP growth in 2006. Although oil prices have moved higher in recent weeks, the futures market continues to see the likely path as pointing downward from here forward, and, as usual, we have conditioned the forecast on their views. Karen and I will both have more to say about oil prices. And, as Karen will discuss, the staff expects the foreign exchange value of the dollar to drift down. As for asset values, stock prices are assumed to rise 6½ percent this year and next, which would roughly maintain risk- adjusted parity with the yield on long-term bonds, while the rate of increase in house prices is expected to slow considerably from last year’s torrid pace. As shown in the bottom panel, real GDP is projected to rise at a 3¾ percent rate, on average, over the projection period, about half a percentage point faster than our estimate of potential GDP growth. Spending on private consumption and fixed investment (line 2) is the main contributor to GDP growth, although some of the growth in that demand is expected to be satisfied by foreign producers (line 3). Domestic production is also boosted by export demand and government purchases (lines 4 and 5), while inventory investment is roughly neutral. Exhibit 3 examines the forces that we think will be working to produce two more years of above-potential growth. Monetary policy continues to be an important factor. As shown in the middle left panel, even with the assumed policy tightening over the next two years, the real funds rate is projected to remain below its long-run average and on the stimulative side of the short-run measures of r* shown in the Bluebook. February 1-2, 2005 70 of 177 As I noted earlier, after the rapid run-up last year, we expect oil prices to drift down over the next two years, which should be a small plus for domestic spending power and GDP growth. Turning to the final bullet in the upper panel, we estimate that the higher oil prices in 2004 reduced GDP growth by three-fourths of a percentage point last year. In our forecast, the negative effects wane to a quarter of a percentage point in 2005 as oil prices begin to recede; the projected decline in oil prices then boosts GDP growth a couple of tenths in 2006. Exhibit 4 focuses on the household sector. Consumption outlays (the blue bars in the upper left panel) grow at a 3¾ percent rate this year and next, a shade less than in 2004. We expect income growth (the red bars) to step up as the labor market strengthens. Moreover, household financial positions—as summarized by the financial obligations ratio, to the right—seem solid. However, the downdrift in household net worth relative to income that we project in the baseline forecast, and depicted by the black line in the middle left panel, imparts a slight drag on spending. In addition, the strength of consumer spending last year pushed the saving rate (not shown) to an unusually low level, and, as a consequence, consumer spending also is expected to be restrained a bit during the forecast period by a desire on the part of households to rebuild savings. One risk to the forecast that we discussed in the Greenbook is the possibility of a real estate slump. In the Greenbook alternative simulation, depicted by the red line in the middle right panel, we assumed that house prices fall a little more than 10 percent cumulatively over the next two years, leaving the level 20 percent below the baseline. Such an outcome, especially if accompanied by a drop in consumer confidence, would restrain PCE and GDP growth appreciably over the next two years. But, even with the implied loss of household wealth, the ratio of net worth to income that comes out of the alternative simulation (the red line in the middle left panel) is still quite high by historical standards. Accordingly, we don’t see this scenario as causing a serious debilitation of household sector financial health, on the whole. In the housing market, the lower panels, annual single-family starts are projected to remain close to the 1.6 million unit mark over the next two years. Favorable mortgage rates are expected to provide ongoing support to housing activity in our forecast. And, as with consumer spending, solid income gains also support housing demand. February 1-2, 2005 71 of 177 longer-run average. Demand is supported, in part, by a shrinking margin of unused capacity over the next two years, as depicted in the panel to the right. However, as shown in the middle left panel, the rate of return on capital is projected to ebb over the next two years, which tempers our forecast slightly. We interpret the results of the special questions on capital spending asked by the staffs at the Reserve Banks—summarized in the table to the right—as being broadly consistent with our view that this will be a pretty good year, on balance, for business equipment investment, although probably not quite as brisk as in 2004. The usual accelerator effects were the primary reason given by survey respondents for boosting capital spending this year; additionally, a sizable fraction of respondents pointed to replacement needs as an important consideration. The remainder of the chart highlights two of the risks to the forecast for equipment spending. An upside risk that we highlighted in the Greenbook is the possibility that we have been wrong about the effects of partial expensing. If so, the alternative simulation of FRB/US, shown by the blue bars in the lower left panel, suggests that equipment and software spending could increase considerably faster than in the baseline. One downside risk to the forecast for high-tech equipment, which Governor Ferguson noted in a speech recently, is the possibility that the pace of technical advancement in computers is slowing. As you know, the speed at which quality- adjusted computer prices fall is a rough indicator of the pace of technological progress for that equipment. The constant-quality price index for desktop computers that we use for constructing industrial production is shown in the lower right panel. The price declines are decomposed into declines that we attribute to improvements in production processes—for example, Michael Dell figuring out better ways to assemble boxes—and the price declines that we attribute to technological improvements—for instance, Intel designing better chips to go inside the boxes. As you can see from the red portion of the bars, this decomposition suggests that the rate of technological improvement for computers has slowed appreciably. A further slowing in the pace of innovation going forward would imply less spending for upgrades than is implicit in our forecast. However, recent announcements by Intel and AMD regarding introduction schedules for their next-generation chips give a hint that a return to a faster pace of technological improvements may be in train. If this speed-up in planned improvements to semiconductors is, in fact, realized, that should translate into faster technological progress for computers. Sandy will now continue our presentation. February 1-2, 2005 72 of 177 job creation last year. Businesses reportedly have become convinced that the economic expansion is on a solid footing, and we are anticipating that they will be hiring more aggressively. That said, we do not think firms are abandoning their focus on boosting efficiency. As shown in the upper right panel, we expect structural labor productivity to continue to rise at a brisk pace over the forecast period, albeit below that experienced from 2001 to 2003. Given our investment forecast, we expect a rising contribution from capital deepening (the blue shaded area), while the rate of multifactor productivity [MFP] growth slows from the extraordinary pace witnessed in recent years. We think a good part of the 2001-2003 acceleration reflected one­ time changes in the level of productivity, as firms implemented managerial and organizational changes, rather than a speed-up in the underlying rate of technological progress. Such organizational changes are expected to diminish in importance as the upswing proceeds, and we are forecasting structural MFP growth to move back towards its longer-run average. With this slightly slower rate of structural productivity growth and the pickup in hiring, we are projecting the level of actual labor productivity (the black line in the middle left panel) to move back into line with the level of structural productivity by the end of next year. We also are anticipating that the more favorable labor market conditions will begin to attract workers back into the labor force. As shown in the middle right panel, the labor force participation rate is projected to move up over the projection period after the large declines of recent years. However, the progress here is only modest, and the participation rate remains below its estimated trend. The combination of above-trend economic growth and rising participation rates is sufficient in our forecast to keep the unemployment rate (shown in the lower left panel) on a gradual downtrend, reaching 5 percent—our estimate of the NAIRU—by the end of next year. The ratio of employment to population—a measure of slack that combines movements in both the unemployment rate and the labor force participation rate—increases slightly over the projection period. February 1-2, 2005 73 of 177 middle left) have drifted upward slightly in response to the increases in energy prices, and we expect this to be reflected in wage demands this year. In addition, the lagged effects of the acceleration in structural labor productivity also should result in somewhat larger gains in compensation. Moreover, the depressing effect of labor market slack (shown in the middle right panel) is projected to diminish over the projection period. These forces are manifest in our projection of a somewhat faster rate of increase in the growth of wages (shown on the lower left), but this is offset by slower growth in benefits. This slowdown reflects smaller increases in employer contributions to retirement and saving plans, after these payments surged in 2004. Your next chart reviews recent price developments. As shown in the upper left panel, the 12-month change in consumer prices moved up sharply last year, mainly in response to higher energy prices (shown in the upper right panel). As you know, higher world crude oil prices and supply-driven fluctuations in domestic refining margins were responsible for the swings. Increases in food prices (the middle left panel) were relatively stable. As indicated in the middle right panel, the rate of increase in core consumer prices moved up to about a 1½ percent rate in early 2004 and held at about that pace for the remainder of the year. As indicated in the table on the lower left, all of this acceleration occurred in goods prices, where, in addition to a large, idiosyncratic swing in used cars, price increases were broad- based. In our view, the underlying acceleration in goods prices reflects the run-up in intermediate materials prices shown on the right, the pass-through to the retail level of higher energy costs, and the weaker foreign exchange value of the dollar. Your next chart presents the outlook for inflation. The rate of increase in total PCE prices (shown on the upper left) is expected to slow to a 1¼ percent pace in 2005 and 2006. Energy prices (shown on the upper right) are expected to retrace part of last year’s run-up over the projection period, while the rate of increase in food prices (not shown) slows by about ¾ percentage point. Core inflation (shown on the middle left) is projected to remain at a 1½ percent rate. This projected stability of core inflation reflects several offsetting factors. The slower pace of structural labor productivity is expected to result in somewhat faster growth in trend unit labor costs, and the declining margin of slack in labor and product markets is projected to exert less downward pressure on wages and prices. Offsetting these influences, the rate of increase in core, nonfuel import prices (shown on the middle right) is forecasted to fall back to zero in 2006, and the indirect effects of lower energy prices are expected to put downward pressure on retail prices. February 1-2, 2005 74 of 177 markup (shown on the lower left) at its present level. Under these circumstances, core PCE inflation (shown as the red line in the lower right panel) rises to almost 2½ percent in 2006. In the lower-inflation alternative, we assume that the rate of increase in structural multifactor productivity growth does not slow as in the baseline forecast but holds at a 2¼ percent rate over the 2004-2006 period. In implementing this simulation, we have assumed that financial markets have already incorporated this expectation, and thus there is no additional effect on asset prices. With the faster rate of structural MFP growth boosting aggregate supply, core PCE inflation slows to 1 percent in 2006. Karen Johnson will now continue our presentation." FOMC20080625meeting--62 60,MR. STOCKTON.," Again, we want to step back a bit from taking this regime-switching too seriously as implying that there are just two states of the world or maybe three states of the world. There are lots of different states of the world. What we are trying to do is look at the residuals in our spending equations and ask how they behave in various kinds of periods. In periods with substantial increases in the unemployment rate, weak payroll employment, and big declines in consumer sentiment, there also are substantial negative residuals in our spending equations, particularly on the consumer spending side. That is still built into this forecast. So we have not interpreted the last six weeks of data as suggesting that recession concerns are all behind us, that we were just completely wrong, and that we are now on a much stronger growth path than we previously thought. If, in fact, you're worried that the incoming data might be signaling a stronger growth path, then I would take a look at the ""upside risk"" scenario that we show in the Greenbook. There we take out all of our spending residuals--those that are incorporated because we thought we might be in this low-growth or recessionary-like state and the ones that are associated with financial turmoil--and you get growth in that case that is a little above potential growth and a path for the fed funds rate that is even steeper than the current market expectations. Now, although we kept these negative residuals in our forecast, we did have to acknowledge the fact that underlying aggregate demand appeared stronger than we thought it was going to be at the time of the last FOMC meeting. There is an underlying strengthening of aggregate demand in this forecast that shows up as an increase in the equilibrium funds rate of roughly � percentage point. So we're trying to acknowledge the strength of the incoming data, but we want to be clear that this forecast still embeds some significant negative add-factors on spending going forward. That could be wrong. Maybe the incoming data are signaling that we are just fundamentally wrong about that aspect of the forecast. As Larry showed, given the stunning decline in consumer sentiment, the continued weak business sentiment, and the fact that the unemployment rate has risen as much as it has and has done this in the past only in periods of recession, we felt comfortable still presenting you with a forecast that anticipates that aggregate demand is going to be very weak over the next several quarters. " FOMC20070628meeting--301 299,MS. PIANALTO.," Thank you, Mr. Chairman. I, like President Moskow, find it very difficult to find any disagreement with what you propose. I’m very supportive of the approach you’ve laid out for the reasons that you articulated so clearly. I support extending the forecast period. You mentioned going to a third year; you also suggested maybe a three- to-five-year average. I’m leaning toward the three-to-five-year average because I had proposed a five-year extension of the forecast period—the two years that we currently use and then adding the fifth year. But your three-to-five-year average makes perfect sense to me. I’m very supportive of using a total inflation number. President Hoenig mentioned that he had a preference for the total CPI and so do I for the reasons that you mentioned: It’s a measure that the public currently understands, and it gets a lot of publicity. But as you point out, if we start using the PCE deflator, the public will start to focus on that measure. I like the approach of having quarterly releases of our projections. That seems appropriate. Last year we saw that when we release our forecasts only twice a year, they can become outdated rather quickly. So giving more information on a quarterly basis would allow us to keep our forecasts more current. I would like us to spend more time talking about whether we assume an optimal policy because, as Governor Kohn pointed out, we’re going to get pressure to release our fed funds rate path because people are going to want more clarification of what we mean by “appropriate” monetary policy or “optimal” monetary policy. Finally, I like the fact that your approach retains the current structure of the Federal Reserve System and allows us to give our own forecasts, letting the public see the diversity of opinion around that forecast. We are going to have to discuss when it will be appropriate for us to talk about our individual forecasts because, once we start to give the public more information about the Committee’s views on certain things, the public will want to find out where the differences are. Then we will have to have some agreement about whether it’s appropriate to talk individually about how we see our differences from the Committee. But these are details that we can talk about with more time. In general, I’m very supportive of the approach that you’ve laid out today. I know we’ve been asked to answer some of Vincent’s questions and respond to some proposals that Governor Kohn put out, and I’ll just make a few comments. I do want to proceed with the projection. I mentioned that quarterly would be fine. Regarding when the projections should be finalized, I support doing it at the end of the week and using the same rules that we use for the minutes currently—not to bring in new data that we receive. In terms of the benefits and costs of further expediting the minutes, I think, like President Moskow, that the benefits are minor compared with some of the costs. The current process is giving more time for members to give thoughtful input into those minutes, and I wouldn’t want to change that. Those items complete my comments. Thank you, Mr. Chairman." FOMC20060808meeting--31 29,MS. MINEHAN., But you still have it growing pretty fast over the forecast period— 4 percent or so. FOMC20070321meeting--212 210,VICE CHAIRMAN GEITHNER., That wording has the virtue of being true in that it is the basis for the central forecast. CHRG-111shrg50814--26 Mr. Bernanke," The actual forecast was a little under--was under 9 percent. Senator Reed. Under 9 percent? " FOMC20060808meeting--83 81,MR. MADIGAN.,"2 As shown in the top panel of exhibit 1, the probability of a 25 basis point firming at this meeting implied by federal funds futures quotes trended down over the intermeeting period. Policy expectations were boosted briefly by higher-than-expected inflation readings, but those increases were more than offset by Federal Reserve policy communications and several economic data releases—most recently, the July employment report—that came in weaker than market participants had anticipated. The pattern of declining expectations of firming at the upcoming meeting stands in sharp contrast to the previous experience in this tightening cycle, in which market expectations of firming generally rose over intermeeting periods, converging to a level close to 100 percent by a day before the FOMC meeting. But the current situation is similar to the previous episodes in that markets arrived at a high degree of certainty about the outcome several days in advance of the meeting. Still, as shown in the middle left panel, primary dealers responding to the Desk’s survey have, since last November, evidenced both increased disagreement among themselves (the light blue bars) and greater uncertainty individually (the dark blue bars) about policy actions to be taken at the next meeting two weeks ahead of that meeting. Presumably these developments reflect a realization that, with policy accommodation essentially removed, policy actions have become less pre-programmed and more dependent on the evolving outlook. Regarding your statement today, as indicated in the right-hand panel, dealers anticipate language that expresses more conviction that economic growth has moderated, acknowledges the recent elevated inflation readings, expresses concern about inflation risks, and indicates that future policy actions will be dependent on the data. Although dealers expect your statement to cite inflation risks, implying a likelihood of further policy firming, slightly less than half see any further tightening in this cycle, and all of those anticipate at most ¼ point either today or in September. As shown by the black line in the bottom left-hand panel, the peaking of rates implied by fed funds futures at just 5.31 percent suggests that investors see only 1-in-4 odds that you will take another firming step in this cycle. Indeed, looking further ahead, the black line in the middle panel illustrates that market participants continue to anticipate policy easing to commence before long, and their projected downward trajectory for the federal funds rate steepened somewhat over the intermeeting period. Investors seems to remain surprisingly assured in these views: As shown in the right- hand panel, measures of market uncertainty about policy six and twelve months ahead, the black and the blue lines, respectively, have crept higher of late but are quite low by historical standards. Reflecting our own sense of uncertainty about the Committee’s future actions, in the August Bluebook we presented four, rather than the usual three, alternatives for 2 The materials used by Mr. Madigan are appended to this transcript (appendix 2). Committee consideration, spanning a fairly wide range of policy approaches: alternatives A and B, which would keep the stance of policy unchanged at this meeting but are distinguished by different risk assessments; and alternatives C and D, which would involve a 25 basis point firming today but are similarly differentiated by their risk assessments. A case for holding the federal funds rate unchanged today is summarized in the top left-hand panel of exhibit 2. Based on an assumption of an unchanged federal funds rate, the staff forecast is for economic growth to run slightly below the expansion of the economy’s potential over the next six quarters. As shown in the top right-hand panel, real GDP growth is projected to average about 2¼ percent over the second half of 2006 and 2007, and the unemployment rate is forecast to creep up to 5¼ percent. The negative output gap that develops by the end of next year is small and exerts only very modest restraint on inflation; but the leveling-out of energy prices that was assumed in the staff forecast has a more noticeable effect, and core PCE inflation in the Greenbook edges down slowly over the forecast period. Should the Committee find this outlook likely and, in the circumstances, acceptable, it might be inclined to maintain its current stance at this meeting. The model-based estimates of the equilibrium real federal funds rate portrayed in the middle left panel present another perspective that might be seen as arguing for holding steady at this meeting. Over the past two years, seventeen consecutive policy actions have brought the real federal funds rate from a quite low level to the middle of the range of estimates of the equilibrium (shown in red). This configuration might provide some comfort that leaving the stance of policy unchanged for six weeks is unlikely to turn out to be a serious mistake—that is, unless the Committee is particularly concerned that inflation expectations could become unmoored by further bad news on inflation in circumstances in which policy evidently had gone on hold. Moreover, some monetary policy rules reported in the Bluebook suggest holding policy steady at this meeting. For example, the first-difference rule using an inflation target of 2 percent, which is portrayed to the right, points to only ¼ point of additional policy firming through the end of next year, based on the staff baseline forecast. However, even if the Committee thought that leaving the stance of policy unchanged was appropriate for this meeting, it might—as noted immediately below the panel—continue to see several sources of upside risks to inflation: most notably, high levels of resource utilization, which might be a larger concern now that labor cost pressures look to be greater than previously perceived; elevated energy and other commodity prices; and the potential for further increases in those factors—the latter possibility highlighted by yesterday’s news from Alaska. In these circumstances, the Committee might see the language of alternative B, communicating a judgment that “some inflation risks remain” and referencing a potential need to address those risks, as appropriate in conjunction with an unchanged stance of policy. At the same time, the Committee might perceive emerging downside risks to the economic outlook, as noted in the first bullet in the bottom left-hand panel. Output and employment have decelerated substantially in recent months, and certainly a sharper-than-expected further deceleration cannot be ruled out. In particular, housing may be slowing more quickly than anticipated. The housing slump scenario presented in the Greenbook illustrates the possible consequences of a realization of that risk. Under that scenario, not illustrated in this exhibit, policymakers following the Bluebook’s outcome-based rule respond to emerging slack by lowering the federal funds rate to 4¾ percent by the end of next year. Even without particular concerns about such risks, an outlook along the lines of the Greenbook baseline forecast might be consistent with alternative A if policymakers judge such inflation performance to be satisfactory in light of the below-trend projection for output growth, as in the optimal control policy path with an inflation target of 2 percent. Moreover, the Committee’s past behavior as captured in the estimated forecast-based rule would, as shown in the bottom right-hand panel, suggest a slight easing of policy, given the staff outlook. In these circumstances, the Committee might find it reasonable to leave the stance of policy unchanged at this meeting and not have any predilection for the likely direction of policy going forward, as in alternative A. However, as discussed in the top panel of exhibit 3, even if the Committee thought that downside risks to growth were becoming more palpable, it might still wish to firm policy another notch at this meeting. If the Committee saw significant potential for inflation to exceed expectations, it might believe that another 25 basis point increase in the federal funds rate is necessary to balance the risks. Alternatively, the Committee might feel, given the already relatively high level of inflation, that a significant upside surprise to inflation could be quite damaging and would exceed the cost of a downside surprise to growth. If so, the Committee might be willing to tighten policy a bit further to provide more insurance against persistent high inflation. The Committee might also believe that a rate increase today could be a useful signal of its anti-inflationary resolve while, as under alternative C, suggesting that it was not necessarily expecting to firm policy further. All that said, members may have reservations in current circumstances about suggesting that the risks are balanced, even after the 25 basis point firming of alternative C. Such reservations may motivate the Committee to consider alternative D, discussed in the remainder of your exhibit. Under this alternative, the Committee would both raise the federal funds rate 25 basis points at this meeting and imply that further increases may well be in store. As noted in the middle panel, members might be inclined to adopt alternative D for several reasons. First, the Committee might agree that the staff forecast presents the most likely outcome for the economy and inflation should the federal funds rate be held at its current level over coming quarters, but it may prefer a steeper decline in inflation than in that forecast and be willing to tolerate a slower pace of economic growth to achieve it. Indeed, as reproduced in the bottom left-hand panel, the optimal control simulations presented in chart 7 of the Bluebook suggest that considerable policy firming lies ahead if the Committee wanted to pursue a 1½ percent inflation objective—especially should it seek to attain that rate within a few years. The Committee also might believe that appreciable further policy firming could be in prospect because it does not expect growth to slow as much as the staff expects or because it is concerned that inflation pressures could turn out to be more durable than forecast by the staff, a risk that is illustrated by the “persistent inflation” scenario. As shown by the black line in the bottom right-hand panel, if those incremental inflation pressures were fully anticipated, optimal policy would call for boosting the federal funds rate about 75 basis points above baseline over the next year. In the optimal control case with gradual learning (the dashed red line) or with the empirically estimated rule that reacts only to outcomes (the dashed blue line) the policy response is more drawn out but is eventually of similar dimensions. Should the Committee see a significant risk of persistent inflation pressures along these lines, it may wish to continue to point to upside risks in its announcement if it firms 25 basis points at this meeting, as in alternative D. Your final exhibit is the version of table 1 that was distributed on Friday. Thank you. That concludes my prepared remarks." FOMC20051213meeting--54 52,MR. STOCKTON.," And we think that shift would have a small negative effect for aggregate demand. The negative effect is not as big as you might imagine because, obviously, to the extent that the income distribution is going toward capital, the stock market would be strong, so the wealth effects on consumption would be a little larger or capital spending would probably be stronger. Still, if we’re wrong about this piece of the forecast, I think it goes in the direction that things could be a bit weaker in terms of overall spending by 2007 than we’re forecasting." CHRG-109shrg30354--90 Chairman Bernanke," To comment on your first part of your question, we cannot do anything about this month's inflation number because our policy works with a lag. And so we have to be looking at a forecast or a future to make those judgments and to assess the risks. I do not know the answer to your second question. Senator Sununu. First of all, the second question was the good one. I did not have a first question. I think we are working under the assumption that the forecast for inflation is in the, I think you said 2.25 percent, 2.5 percent, that is still above the 1 to 2 percent target. " FOMC20071211meeting--136 134,MR. POOLE.," Thank you, Mr. Chairman. I favor alternative B, including the language, and let me outline how I get there. First, I think that it is important to recognize that the Greenbook outlook already takes account, as best we can or as best the staff can, of a lot of the dismal financial news that is out there. There is a probability distribution around that. We don’t want to double-count the financial distress. It is already in the baseline forecast, and we don’t want to think of all the weight of the financial distress effect as being down from there. So there could be an outcome that is certainly stronger than the Greenbook outcome. In fact, I think it is true historically, if you look at forecast accuracy, any forecaster, including the Greenbook staff, does not have a standard error all that much below a very naïve outlook that just says that GDP will grow at potential. So I believe that there is genuine weight above the Greenbook forecast in the probability distribution, and I think the Greenbook forecast is a very good baseline for our discussion. Second, clearly, should the unemployment rate rise significantly, credit problems are likely to multiply rapidly. We could have a great deal of distress that would accumulate, possibly very quickly. On the other side, should the nonhousing sectors prove more resilient than the Greenbook forecast, we could be faced by upside surprises, especially on inflation. Certainly, I would come down hard on the side that following a policy that temporizes on inflation only builds in a much deeper problem in the future, and it is better to take the medicine early, if necessary, to deal with inflation. I would also note that, over next year, there will be an increasingly high bar on any change in the federal funds target. There is an election in November. I have tremendous confidence in the nonpolitical outlook of every single member of the Committee, every single participant; indeed it is a very deep part of the culture of the institution. Nevertheless, there are tricky issues involved with maintaining the appearance of impartiality, and I think historically during an election year there is a strong presumption to try to stay as low key as possible. The way you do that is not change the fed funds rate target at all unless there is a really good case, and that is increasingly true as you come up to the November election. So as we go through the year, there is going to be an increasingly high bar, it seems to me, and if we overshoot on the easing side, it may be difficult to come back until ’09. I think that every cut is likely to be permanent through next year in any event. That tells me that we should pursue a strategy—I say “we,” but it is more “you” because the next meeting is my last." FOMC20050322meeting--107 105,MS. MINEHAN.," Thank you, Mr. Chairman. Economic activity seems definitely on the upswing in New England. As we discussed conditions with our Beige Book contacts, met with our small business advisory group, and talked in some depth with local temporary-help agencies and software developers—as we did our usual round of contacts—the themes of solid growth and increasing confidence were repeated with some frequency. Manufacturers, especially those that have some defense business, report very good sales, and, at least in the case of one large manufacturer, an inability to keep up with demand. Labor markets have strengthened as well, and benchmark revisions to employment data indicate that 2004 was a better period for job growth in New England than previously thought. Temporary help agencies report good demand for labor, and help-wanted is stronger, as judged by both traditional measures and the indexed data on the region that are available from Monster.com. Housing remains strong, though we don’t see much sign of speculation and there is some softness at the upper end of the price range. Retail business is reported to be good, and both business and consumer confidence has increased. Contacts in the regional economy appear to be moving from a focus on concerns about March 22, 2005 45 of 116 of small businesses in the period since our February meeting, and they almost uniformly report rising costs of raw materials and labor that are starting to impact their prices. In a growing number of cases, these firms have been able to make price increases stick, even to big buyers like Wal-Mart, though, largely, the price increases have been in the form of surcharges. Skilled workers are becoming difficult to find. Businesses report that they’re in a hiring mode and have to pay up to get the people they need. Some companies have begun to hire in advance of need, simply to have a pool of available workers. Capital spending plans seem quite solid, and now there is a mixture of firms spending not only to further increase productivity but also to expand to handle increased business. Two areas of concern emerged beyond those related to rising costs. The first involves tourism in northern New England. Evidently, while this was a snowy year in the southern part of our region, the northern areas have suffered from both too little snow and the timing of storms, which created weekend travel problems. The second is a continued sluggishness in commercial real estate markets. Given the number of large mergers affecting the region, both in the financial services industry and elsewhere, and the reduction of headquarters staff that has resulted, commercial vacancy rates remain high and rents low—especially in downtown and suburban Boston. I should say the rents are relatively low, since Boston rents tend to be high anyway. This has not, however, seemed to put much of a crimp in the market for purchasing commercial buildings, which continues to be quite strong. Turning to the national scene, I’ve been struck by the strength of the incoming economic data, as has everyone else. We in Boston have adjusted our forecast upward, especially in the near March 22, 2005 46 of 116 Greenbook over the forecast horizon, though our calculations suggest some greater economic capacity and less downward pressure on the unemployment rate. However, there is not a lot to argue about here, given the continuing upside surprises in overall economic growth and in price pressures. Indeed, it seems clear to me that the underlying rationale we have used in moving policy slowly and gradually to a less accommodative place is becoming questionable. Unlike last year when growth seemed fragile and uncertain, economic growth now seems solid and resilient and in less need of policy accommodation. Overall credit and financial conditions are supportive, if not encouraging, to spending and growth. Business investment is not taking a breather with the ending of the tax incentive, and consumers aren’t either, except in their post-holiday purchases of autos. Surely it is possible to see downside risks from a rise in the saving rate, from an untoward increase in oil prices that impacts demand, or from an impact arising out of the external deficit. But I think it’s even easier to imagine upside inflation surprises as rising energy, raw material, import, and labor costs get embedded into economic activity. In that regard, I found the Greenbook alternatives focused on a spending boom and on a boom with rising inflation expectations very interesting. I should also note that while my admiration for the FRB/US model is enormous, I think it’s difficult for any model to correctly anticipate the full interplay of economic factors once the unexpected happens. The baseline, I think, is still pretty much a good, solid forecast. Continued solid productivity growth will keep nascent cost pressures and inflation expectations under control. However, the risks that this will not happen seem to me to have grown and to have become a bit more one-sided. That is, I think we need to be more focused on the risks that rising cost pressures will get out of hand. March 22, 2005 47 of 116 case could be made for moving faster rather than slower toward that so-called neutral place. Taking larger steps now would have the benefit of affecting market attitudes toward risk in a positive way, largely because it is not what markets expect us to do. That option has some attraction to me. But it could be too much of a surprise and indicate too much concern about future prospects than perhaps is necessary. However, we could take advantage of this point in time by preparing the markets for greater policy flexibility. That is, we could change the language of the announcement by following the Chairman’s example in taking out the reference to a measured pace. In my view, anyway, that would have two benefits. It would continue the process of removing policy accommodation, and it would focus markets better on the uncertainties of the future." FOMC20070509meeting--202 200,MS. MINEHAN.," I take Vice Chairman Geithner’s comments very seriously, but I want to raise just one thing because I would like it to get into the survey. We were offered one way of reflecting uncertainty regarding forecasts. There might be other ways—for example, alternative scenarios, qualitative discussions of risk, or that sort of thing—that seem to some of us preferable. If you can phrase a question that would draw out of us other ways in which we might like to characterize the risks around our forecast, I think that would be helpful because I, for one, find the range of distribution of errors kind of difficult." FOMC20060629meeting--111 109,MS. BIES.," Thank you, Mr. Chairman. I continue in my concern, which I expressed at the last meeting, about the recent pickup in inflation, especially given the news that we’ve had since the last meeting. In the past three months, core CPI prices and core PCE prices have grown, respectively, at 3.8 percent and 3.4 percent, twice their rate of growth in the previous three months. It has been interesting to listen to and read the analyses that many folks are doing, trying to parse the reasons for the jump in the inflation rates, no matter what index people are following. The question, as several of you have mentioned, is really whether the reason is persistent inflation or whether it’s one-off kinds of changes. We’ve already had several thoughts about how to look at the relation of energy-price increases and their persistence to the rate of inflation. I won’t add any more to what has already been said, but I thought Mr. Wilcox had a good discussion of the owners’ equivalent rent problem. What are we really looking at here? Some of the possibilities I found amusing. One of them, for example, pointed out that the index used to look at the cost of bank services was up significantly because the opportunity cost on demand deposits had gone up. If that’s the problem, we can cure it by just stopping the raising of rates. [Laughter] So I do think we need to really focus on where we are. Without being able to really understand the underlying framework here, I am very concerned about the trend. When I looked at the dramatic drop in forecast growth, at first I became very pessimistic about the outlook, as several of you have also commented. But the more I looked at the numbers, the more I came to realize that the reduction is all coming from residential housing construction. Everything else is basically a push from the last forecast for this year and next year. When I look at the forecast with that perspective, I see things differently. I’ve been concerned about the amount of speculation in housing construction throughout the country. To the extent that what’s coming out of the housing sector is this excess speculation, that’s healthy both for the long-run economy and for the stability of the financial system. One of our challenges in looking at some of the recent indicators is to determine whether we will really have a soft transition to more sustainable long-term growth of new housing or whether the transition will be bumpier or perhaps more abrupt. A chart in the Greenbook that got my attention was how rapidly the cancellation of sales orders for new housing had jumped within the past five months, from its long-run trend of 22 percent since ’95 to a high rate of 30 percent. Some of these sales data or permit data that we’re seeing today may mean more additions to excess inventory, and so we may see more of a blip; that’s something I think we need to watch. I think we can’t be complacent that a nice easing into long-term sustainable growth of housing is a sure thing at this point. At the same time, because the drop in the forecast is all housing, the question is how to look at the relative growth of the rest of the economy. Since on net it’s basically moving the way it was, I said to myself that I was comfortable with that. But why am I uncomfortable going forward? I, too, hear anecdotes about companies’ optimism about what they can do in terms of increasing revenues and profits. Regarding the capacity issue, we need to realize that a lot of the resources in housing construction are not necessarily transferable to other sectors, except perhaps to commercial real estate. That sector is forecast to pick up, and so some of the growth could happen there. But the inability to transfer resources still raises issues, in terms of both fixed investments and people, and I don’t believe that the apparent slowdown to below trend, since it is driven by housing construction, is really going to create much excess capacity. So that situation makes me concerned about inflation. Finally, I’d like to talk about how housing affects liquidity and monetary policy and our accommodation. Several of you and the staff said earlier that we have seen a bit of adjustment in debt spreads since the last meeting—and volatility is up—but we all agree that spreads are still very narrow by historical standards. Focusing on the staff’s forecast of the flow of funds for the next two years, I found an interesting thing if you look at what’s happening when housing drops to the level forecasted in the Greenbook. Households, in borrowing for mortgages, basically have been the major user of net borrowing in the past couple of years. The forecast is for households’ need for funds, the net borrowing, to drop one-third between 2005 and 2007. The amount by which net household borrowing drops is more than the borrowing by all other sectors combined last year. So part of the issue is that, because households are such a powerful engine in net borrowing, there will be plenty of funds available. Also, as to the extent that bank borrowing and funds provision are forecast to drop, the bankers I talked with said that they aren’t going to let the amount of loans that they extend drop as much as I think is in that forecast. So I really believe that the drop in housing is actually on net going to make liquidity available for other sectors rather than being a drain going forward and that will also get the growth rate more positive than the current Greenbook forecasts." FOMC20080318meeting--46 44,MR. STOCKTON.," We have thought about that, and the difficulty at this point is trying to identify the truly exogenous features of the current financial stress that is operating over and beyond the channels that are normally incorporated in our models. Our models, obviously, have asset prices, such as house prices and stock prices, and have interest rates and interest rate spreads, and as those things have changed, we have been able to incorporate them into our forecast. But then, over and above that, we think that the model doesn't really capture a lot of the credit-availability channels. There is a lot more stress in the market beyond that captured by the interest rates in our models. So taking this with more than a grain of salt, we think roughly � percentage point on the level of GDP this year--over and beyond the effects of lower house prices, the weaker stock market, and the higher interest rate spreads--that basically lingers on into next year and only then begins to gradually phase out. That is an important factor as to why this forecast is based on such a low real federal funds rate. Obviously, if you came to a different conclusion either about the depth of what is likely to be occurring in the next few months in terms of the restraint--not just from these financial stress conditions but also from our call that we are moving into a recession--or about the way that restraint fades out over the forecast, that would have a huge influence on the projected path for the funds rate. So it is important to recognize that this forecast is conditioned on one in which those effects linger quite significantly into next year. " CHRG-109shrg21981--121 Chairman Shelby," Thank you, Senator. Senator Bennett. Senator Bennett. Thank you, Mr. Chairman. It has been a most illuminating morning, Mr. Greenspan, and you have helped focus a lot of issues on this debate. The debate, of course, has been primarily on Social Security. I had some questions on the band of interest rates similar to Senator Sarbanes, but I think you exhausted those with Senator Sarbanes with your stating that the band of normal keeps changing, and normal keeps changing. I would just hope in the Federal Open Market Committee you might think that around a 3-percent band has become normal in the present economy and not feel the need to go to higher levels, which may have greater historic patterns to them. And I am encouraged by your comment on that. But the Social Security debate has dominated the morning, so I will get into it as well and make the general statement that I always make. There is no such thing as repetition in the Senate, I have discovered, so you just keep saying it. Any economic forecast that goes out more than 6 months is wrong. I do not know whether it is wrong on the high side or the low side. I just know that the way the economy works and all of the changes that go in, if you get beyond 6 months you are getting into difficult territory. I believed that about the $5 trillion surplus. I knew that number was wrong. I believed that about the projections of a $4 trillion deficit. I think now that number is wrong. It will be different. The one thing that is not wrong, that is much more inexorable than an economic forecast is the demographic forecast. The demographics are destiny, and they change very slowly and over long periods of time. So, I am delighted to have you in your presentation here and in your written statement say that the demographic pressure on Social Security is going to begin in 2008, not 2018, not 2042, not 2052 or whatever, because that is the date when the demographics kick in and say that we are going to have a 30-year period of dramatic increase in the percentage of Americans who are over 65. I am delighted to hear Senator Schumer, as you talk about the fact that the present system is not working, say nobody disputes that. I can quote some statements on the floor during morning business where there are a lot of people who dispute that and say this present system is working beautifully and we do not need to do anything about it. And I am also delighted to have Senator Schumer say in your dialogue that we should have started on doing something about Social Security 10 years ago, and it would be easier if we had started then instead of waiting this long. With that, let me get, however, to the point once again that you were debating with Senator Schumer as to whether or not a personal account would increase national savings. Your point here is a block of tax money, 12.4 percent of payroll, and you are saying if that portion which is currently coming out of the employer's side goes to a personal account, it produces no net increase in savings because the employer would save that if he did not have to pay it and presumably would invest it in capital stock, whatever, that would increase the productivity and, therefore, the reason you want national savings. So you could increase the national savings by saying to the employer do not pay that anymore, invest it. But that portion that comes out of the individual's side gets invested in capital assets, which is different than how it is being invested now. So doesn't that shift in the investment strategy to capital assets as opposed to an accounting number somewhere in the unified budget mean that you will, in fact, get some increase in capital investment and, therefore, make a contribution toward increasing the productivity of the economy? " FOMC20050630meeting--340 338,MR. LEAHY., I think forecasting asset prices has a high standard error around it; it’s not a very precise art. FOMC20071031meeting--16 14,VICE CHAIRMAN GEITHNER., Is the monetary policy path that you reveal in the Greenbook based on the modal forecast? FOMC20070131meeting--446 444,CHAIRMAN BERNANKE., Okay—updates of forecasts are to be sent in by Friday. Thank you very much. The meeting is adjourned. END OF MEETING FOMC20081029meeting--195 193,MR. STOCKTON.," We made a deliberate decision in constructing the forecast, given the enormous uncertainty about both the size and the composition of those fiscal packages. We had so many moving parts in our baseline forecast that we wanted to present you with that and then show you what the consequences might be, first, of a stimulus package that looks a lot like the one we had this year--which we think probably gave a shock, but a very short-lived shock, to aggregate demand and then faded away. That doesn't really have many important consequences for the outlook. The second was a much larger package that delivered some stimulus over the next two years. That had a bit of an effect in terms of raising GDP growth and lowering the unemployment rate. But even that $300 billion fiscal package wasn't enough, in our baseline forecast, to lift the funds rate assumption off the floor. So I think one of the messages would be that, to have a fiscal package that would actually influence your current policy discussion, you have to think both that it would be extremely large and that it would deliver stimulus over an extended period of time to be effective that way. " FOMC20051101meeting--73 71,MS. JOHNSON.," The staff forecast for real GDP growth and inflation abroad is little changed this time from the forecast in the September Greenbook. This is the case despite additional hurricanes, volatile energy prices, and a notable rise in long-term interest rates in several foreign industrial countries during the intermeeting period. The futures path for WTI [West Texas intermediate] crude oil prices retraced somewhat in October. Accordingly, we have incorporated into this forecast global oil prices through 2007 that are about $2 per barrel lower than in the previous forecast. Nevertheless, the outlook for global crude oil prices remains elevated at about $60 per barrel for WTI and is more than $8 above the level six months ago. Clearly, factors related to crude oil supply have contributed at times to upward pressure on global crude oil prices. In addition to disruptions as a result of the hurricanes, there are market concerns about the change in leadership in Saudi Arabia, politics in Iran, Venezuela, and Russia, and reduced production as a result of violence in Iraq. However, the trend increase since 2003 in not only spot prices but also in far futures prices occurred despite expansion of global oil production, evidence that underlying global demand for crude oil is also importantly responsible for the price pressures. This persistent, strong, underlying demand for energy reflects fundamental robustness in global economic activity—perhaps more than has been generally recognized. As a consequence, we have observed during this year further moves up in energy prices and in prices for nonfuel primary commodities along with average real growth abroad that has remained moderately strong, although a bit below the rapid pace of 2004. As in September, we are calling for real GDP abroad on average to expand at about 3 percent in the current quarter, following growth at that pace in the third quarter, and to accelerate a bit in 2006 and 2007. This favorable picture incorporates a return to steady expansion in Japan and solid, albeit slightly moderating, growth in the emerging Asian region. In addition, real growth in Mexico should recover from a disappointing outcome during the first half of this year. November 1, 2005 18 of 114 mixed, but in Germany industrial orders have come in strong and the October Ifo measure of business climate jumped to a five-year peak. Among the emerging- market economies, Chinese industrial production accelerated through September, and retail sales growth remained above 12 percent. Korean real GDP growth rose to 7.5 percent in the third quarter, and Brazil continues to enjoy very strong export sales. The mix of sustained global growth and upward shifts in commodity prices, particularly crude oil prices, naturally heightens concerns about higher consumer price inflation. Headline inflation rates abroad have moved up significantly with the rise in crude oil prices. Our outlook, however, is for these prices to decelerate over the forecast period given our projection (and that of the futures markets) that crude oil prices will be about flat next year and edge down in 2007 and given that the effects of previous increases in crude prices on inflation will wane and then end. Such an outcome depends upon an absence of significant second-round effects of oil prices on domestic prices and wages abroad. To date, core inflation in the major foreign countries confirms this is the case. The combination of continued growth and contained inflation pressures sounds optimistic. Rest assured, we have found numerous risks about which to worry. The elevated energy prices could sap consumer demand more than we expect, undermining the pace of real growth. In the face of higher costs, business spending on new capital could falter, particularly in emerging Asia where few countries have petroleum production sectors. Wage demands could react to the increase in headline inflation and threaten to ignite a set of second- and third- round effects. We do not see evidence of these developments at this time, but it is too soon to conclude that the danger of such actions has passed. A second feature of the international forecast that merits a few minutes is the approximately neutral contribution of real net exports to U.S. real GDP growth in the third quarter, following a positive contribution in the second quarter. The third-quarter NIPA [national income and product accounts] data released last Friday imply a slightly smaller, less positive, contribution than we had incorporated in the Greenbook baseline forecast or in the September forecast. However, in the current quarter, compared with the September forecast, we are assuming a greater rebound in exports and have reduced our assessment of the extent to which the external sector will provide a drag on GDP growth. Accordingly, we expect that on a four-quarter change basis, the external sector will record a slightly positive contribution to U.S. real GDP growth for the year— the first annual positive contribution since 1995. However, we are not ready to declare that external adjustment has arrived, and we expect a return to a small drag on U.S. growth from the external sector in the current quarter and on balance over the forecast period. November 1, 2005 19 of 114 imports. But recently we have experienced weakness in other components of real imports. During this intermeeting period, imports again surprised us on the downside, with August data for nominal imports much weaker than expected. This negative surprise included both goods and services, and within goods, it was particularly the case for imports of consumer goods and industrial supplies. For the near-term forecast we have included some effects as a result of the hurricanes and the disruption to general trade they caused. As a result, there is some implicit payback in the forecast for real imports in the fourth quarter. Nevertheless, compared with the September Greenbook, we have lowered the growth of real imports in 2006 and 2007 in response to the somewhat softer outlook for U.S. activity and to a higher path for import prices. Growth of third-quarter real exports was also revised down, although not by enough to offset weaker imports. Hurricane effects also figure in our estimate for third-quarter exports. More significant has been the recent strike at Boeing. We judge that the strike had a more pronounced impact on September=s exports than we previously thought, leading us to weaken real exports for last quarter. But the rapid conclusion of that strike also led us to strengthen real exports for the current quarter. For 2006 and 2007, we expect export growth will average a bit above 5 percent per year, consistent with our outlook for steady real output growth abroad. In sum, actual trade data through August, our estimates of how the turbulent weather of recent months has affected exports and imports, and our projections of global primary commodity prices, particularly crude oil, combine to imply unusual quarter-to-quarter fluctuations in growth of real exports and real imports. Some of these developments have surprised us since the September Greenbook. Going forward, however, we expect that the transitory weather effects will fade by early 2006. We look for real exports and imports to expand at similar rates on balance in 2006 and 2007. With imports substantially greater than exports, this outcome implies a negative contribution from the external sector of about ⅓ percentage point each year. David and I will be happy to take your questions." FOMC20061212meeting--41 39,MR. STOCKTON.," To answer the latter question: If we really threw away the information in the nonfarm business compensation that is taken from the national income accounts and focused solely on the ECI, we’d have a lower inflation forecast. In our overall price inflation projection, we use a variety of models. I talked about this a little earlier in the year when we got that big upward surprise. We have some models that just say, “Don’t pay any attention to the labor market data: They’re all so bad and they have so little predictive content for prices that you’re better off just circumventing them altogether.” Now, we have never felt comfortable that the right thing to do was to give zero weight to the labor market side of things; so in the projection we have looked at some of the models that incorporate those effects and used the ECI in some models and compensation per hour in others. Again, if you went totally with the nonfarm business compensation per hour in those models, you’d probably be at or maybe slightly above our current forecast. So I think there’s a lot of uncertainty here. One of the things that we wanted to signal was that there are huge amounts of uncertainty about what the NAIRU and potential output are. We show a simulation with a lower NAIRU. In constructing our forecast, we have to take a stand because we have to show you a forecast that is moving an economy back toward equilibrium. Sitting in your chair, however, you would obviously want to view this from a risk-management perspective and understand that our ability to be very precise there is quite weak. The recent compensation data put back on the table the possibility that we’re getting a signal from the labor market that not as much pressure is coming from the labor cost side as we had earlier thought." FOMC20060510meeting--75 73,MR. LACKER.," Does the baseline Greenbook forecast treat inflation expectations as evolving relatively sluggishly, or are they capable of jumping?" FOMC20050809meeting--59 57,MS. JOHNSON.," The staff outlook for real GDP growth abroad is little changed this time from that in the June Greenbook. Economic expansion in our foreign trading partners has rebounded from its subdued first-quarter pace, and we expect that it will firm somewhat more later this year and next. Nevertheless, three elements of our baseline outlook this time are sufficiently changed from the previous forecast that they warrant attention today: first is the very sizable, positive change that recent data have implied to the contribution to U.S. real GDP growth from the external sector; second, the long-awaited announcement by Chinese officials of a change in their exchange rate regime; and third, yet another discrete upward revision in our projection for global oil prices. We now estimate that net exports made an arithmetic positive contribution of 1.4 percentage points to real growth in the second quarter, a figure slightly less than that reported by the BEA in the advance real GDP data for the quarter. With June nominal trade data yet to be released, both the BEA and we must guesstimate that number in constructing a second-quarter figure for real GDP. Our estimate of the contribution is now significantly larger than the 0.55 percentage point that we had incorporated into the June forecast. The nominal trade data for May surprised us with stronger exports and a bit weaker imports than we had anticipated. These data account for 0.5 percentage point of the revision. The remainder of the revision to the contribution owes to a markdown of imports in line with the advance NIPA data, which contained a different translation gap between the balance of payments data and the national income data than that for Q1, which in turn had been the basis of our projection. The overall revision to second-quarter imports is somewhat greater than that to exports. We now estimate that real imports of goods and services actually declined in the second quarter whereas real exports grew at over a 12 percent annual rate; very strong nominal exports in April were followed by even slightly larger exports in May. August 9, 2005 18 of 110 this quarter in our baseline forecast and is about minus 0.4 percentage point over the next year. The July 21 announcement by Chinese officials of a change in their exchange rate regime ended speculation about when such a move would come but left many other questions unanswered. Following the initial 2.1 percent revaluation of the renminbi in terms of the dollar, the exchange value of the Chinese currency has fluctuated very narrowly. Essentially no information has yet been provided about the composition of the Areference@ basket of currencies that is now part of the regime. Scope has now apparently emerged for future moves in the exchange rate in terms of the dollar, but some official statements have emphasized that such further change will be gradual. To construct our forecast of activity abroad, we needed to make a specific assumption about the Chinese exchange rate regime going forward. Holding the renminbi pegged at its current dollar exchange rate seemed to give too little recognition to the major step we thought was implied by the announcement. But we saw as arbitrary any specific projection we might make of further bilateral appreciation of the renminbi against the dollar. Accordingly, we chose to harmonize our treatment of the renminbi and most other currencies. For the purposes of the forecast, we have projected that the renminbi will appreciate slightly in nominal terms—at a rate comparable to that we project for the euro, the yen, the Canadian dollar—and have made small adjustments to other Asian emerging market currencies as well. This trend nods in the direction of the downward pressure that we judge will at some point be visible on the dollar as a result of the financing burden of our growing external indebtedness. We realize that when it occurs this pressure is not likely to be evenly distributed across all bilateral dollar exchange rates with other currencies. Nor is it likely to occur smoothly and gradually over time. However, we do expect that the real index of the dollar in terms of all our important trading partners is likely to move down on balance over a reasonably long horizon because of global imbalances. Adding the renminbi into that mix has resulted in a slightly more rapid rate of real dollar depreciation than we had previously been incorporating into the staff forecast. August 9, 2005 19 of 110 Various factors appear to have contributed over the past six weeks to the upward pressure on oil prices; most of them relate to risks to the available supply reaching the market. Destruction by fire of a large oil platform owned by India was particularly important because it provided light, sweet crude. The death of Saudi Arabian King Fahd appears to have raised political risks in the world=s largest oil exporter, even though the new king, Abdullah, had been managing most of the kingdom=s business during the 10-year illness of the late king. Warnings of an unusually active hurricane season have raised concerns about a possible repeat of the kind of supply interruptions experienced last year. Other issues of regular maintenance or delays in completing new sources of supply have arisen as well. These various events all occurred against a background of perceived strong world demand and little spare capacity. Possible political risks are seen as creating uncertainty with respect to supply from Iraq, Iran, Venezuela, Russia and other global trouble spots. In the event of any serious disruption in such a trouble spot, there is little scope for other sources of supply to fill the resulting excess demand. As a result, market participants see little likelihood that prices will decline in the future. The far-dated contract for delivery in December 2011 is up to $59 per barrel. To date, the global economy has absorbed the rise in prices with few signs that overall economic activity will ease off in response. Higher oil prices have boosted consumer price inflation in some regions. However, inflation expectations appear to remain well anchored, and our baseline forecast calls for CPI inflation abroad to recede a bit next year. This projection depends importantly on oil prices remaining elevated but flattening out early next year, as anticipated in the futures curve. Renewed upward pressure on global oil prices remains a risk to the forecast, however, as higher oil prices for consumers tend to erode domestic demand in importing countries and regions, and oil exporters take some time before increasing their expenditures. David and I will be happy to answer any questions." FOMC20050503meeting--30 28,MS. JOHNSON.," The staff forecast for average real GDP growth abroad over the forecast period has changed little from that in the March Greenbook despite swings in global oil prices, nonfuel primary commodity prices, and exchange rates, plus a significant near-term revision to the outlook for U.S. growth. However, the only minor revisions to our projection for average foreign growth mask significant differences across countries and regions—differences that reflect the varying influences of recent developments. In order to explore further these differences, I will highlight those developments over the intermeeting period that were unexpected and offer our thoughts on their implications for the outlook abroad and our forecast of the U.S. external sector. Despite continued expansion of global activity, long-term sovereign interest rates in the major foreign industrial countries have dropped significantly on balance since the previous FOMC meeting. For example, the German 10-year rate moved down from about 3.7 percent at the time of the March meeting to reach an all-time low of 3.38 percent on April 29 and has remained near that low so far this week. Rates in Canada and the United Kingdom fell almost as much, and even Japanese rates decreased nearly 20 basis points. Although by themselves lower interest rates might be expected to raise equity prices, the major stock price indexes abroad have fallen over the period from 2 to 7 percent. May 3, 2005 14 of 116 Euro-area economic sentiment fell in April to its lowest level in a year and a half. The Tankan survey in Japan dropped noticeably in the first quarter. In contrast, recent developments in the emerging-market economies, although mixed, are positive on balance, and we have revised up slightly our outlook for average growth there for this year. This outcome reflects the fact that several of the emerging-market economies export oil and/or other primary commodities whose prices have remained high. It also reflects the unexpectedly strong first-quarter growth that was recorded in China. We now calculate that China=s GDP grew at a 14 percent annual rate last quarter, almost double our projection in March. Although we expect some moderation in Chinese output growth over the remainder of this year, its robust pace should support somewhat stronger expansion in the region than we previously projected. Exchange market developments also contained some surprises. The dollar appreciated broadly over the intermeeting period, particularly in terms of the Canadian dollar and the euro. Domestic political tensions appear to be weighing on the Canadian dollar. Although we continue to build into the Greenbook baseline slight real dollar depreciation, the higher starting point for the current quarter leaves us with a forecast path for the dollar that is above that in March throughout the forecast horizon, a change that boosts imports and restrains exports. Particular focus on the Chinese exchange rate regime and the timing of any modification to that regime emerged at the time of the G-7 meeting in mid-April and again last week when market participants reacted quickly to a short-lived anomaly in the renminbi/dollar rate. Since your March meeting, the amount of appreciation priced into NDF [non-deliverable forward] contracts for Chinese renminbi has risen at 1-month, 3-month, and 12-month horizons. U.S. Treasury officials have made public statements calling for Chinese officials to act soon, and the U.S. Congress has raised the possibility of action on its part if the Chinese do not move. The heightened public debate appears to have raised the sensitivity of markets to any indication that something might be happening. In the absence of any reliable information on when and in what way the Chinese might alter the present regime, we have not incorporated any such change into the forecast. The extent to which other Asian currencies will move against the dollar when the Chinese do act remains an additional major uncertainty. May 3, 2005 15 of 116 percentage points from the figure in the March Greenbook. We estimate that real growth of core imports, non-oil imports other than computers and semiconductors, was about 18 percent—far faster than historical relationships with U.S. activity and relative prices would suggest. No component among real imports stands out, leaving us with no special factors that would explain the rapid growth. This quarter, we look for the pace of core import growth to moderate substantially to one more consistent with historical determinants, particularly given the downward revision of projected U.S. real GDP growth to about 3½ percent. In addition, on a seasonally adjusted basis the volume of oil imports is projected to contract sharply. Accordingly, imports of goods and services are projected to grow only 1¼ percent this quarter and then to expand at annual rates of 6 to 7 percent over the forecast period. Putting these pieces together leaves us with a first-quarter negative arithmetic contribution to U.S. real GDP growth from net exports of about 1¼ percentage points, about the same as in the fourth quarter. With import growth forecast to drop sharply, the projected contribution swings positive for the current quarter. In the second half of this year and during 2006, the contribution is small but negative. The near-term fluctuations in imports should be evident in the nominal trade balance as well. By the second half of this year and during 2006, we expect the trade deficit to widen further. Net investment income is also projected to deteriorate. Given current position figures, we see that balance as finally turning negative next year. Together these forecasts imply a current account deficit of more than $900 billion in the fourth quarter of 2006. Dave and I will be happy to answer any questions." FOMC20071211meeting--57 55,MR. STERN.," Dave, I’m having difficulty reconciling the employment and hours data for the current quarter with your forecast of no growth whatsoever. It seems to me that, even if domestic final demand doesn’t grow or grows little, we still have inventories and exports that could take up whatever output turns out to be, and we don’t know very much about those two components for the current quarter, if I understand the situation right. Alternatively, obviously you can get a very bad productivity number, and that would square the circle. But I’m wondering what we know in particular about inventories and exports that would lead us to something as weak as this forecast." CHRG-110hhrg46593--322 Mr. Feldstein," I think there is a built-in flaw in a system that provides a government guarantee, even if it is with a wink, a government guarantee for a for-profit corporation. And I think we have seen the adverse consequence of doing that. So I would hope that gradually over time that gets wound down. The economic studies of the effects of Fannie and Freddie, in terms of helping the home mortgage market, is that it lowers the cost of mortgages by a very small amount. And so, for most individuals, the gain that comes from that is very small relative to what we now see was a major risk for the system as a whole. So my own view is the challenge going forward is to find a way to gradually reduce the role of Fannie and Freddie. " FOMC20060920meeting--69 67,MR. POOLE.," I have an observation and a question. Your outlook for employment is growth at just 25,000 per month. If that’s what we’re going to see, we’re going to have a major communication challenge to explain it because it is going to look and feel like a recession to almost everybody who sees those numbers. However, you don’t have a recession; you have continuing slow growth. So that’s just my observation. I have a question about the alternative simulations and the market-based funds rate. If I understand what you do, you have your baseline forecast, and then you just impose a lower funds track, and that yields higher growth. Another way of looking at the market-based funds rate is essentially to invert the Taylor rule and say how weak economic activity would have to be for the Taylor rule to lead us to cut rates. In that case, particularly if you take a version of the Taylor rule that has a lot of interest smoothing in it, it takes a lot of downside surprises, some combination of activity and prices, to get us to reduce rates to match the market. I just want to throw out that observation and ask whether you have any response to it." FOMC20070918meeting--193 191,MR. MISHKIN.," I was completely fine with the proposal. The only thing it mentioned that I would slightly differ on is that I would like the box on uncertainty to come out with every forecast narrative—you know, the four times a year deal. The negative is that it would be the same each time, so there would not be much that is new. But when you look at inflation reports that people have done, they frequently have a box that’s the same each time. In my view, the issue of making sure that people understand that there’s a lot of uncertainty about our forecast is so critical that, even if they ignore a bit because we’re putting it out every time and it’s just a standard part of the package, I think it is extremely important." FOMC20070628meeting--257 255,MS. MINEHAN.," That’s all right. I have one question and a plea. The question is, Have we decided about how many times we’re doing these forecasts and I just missed the decision?" FOMC20050630meeting--299 297,VICE CHAIRMAN GEITHNER., No. What happens to the current account if you project out a little longer than the forecast horizon you have now? FOMC20050202meeting--98 96,MS. JOHNSON.," We have several tables that cover all of the countries we forecast and then February 1-2, 2005 79 of 177" CHRG-111hhrg49968--121 Mr. Bernanke," It is very difficult to forecast that far in advance. If the fiscal program is not effective, then of course that would be a negative going forward. " CHRG-111hhrg53244--87 Mr. Bernanke," Our forecasts are based on our best projections of what government spending is likely to be. And, in particular, it includes the fiscal stimulus package. " FOMC20050202meeting--184 182,MR. REINHART.," If you follow the staff forecast, the answer is “not really.” It could shift these colors over a bar or two but it would not materially influence the story." FOMC20050202meeting--102 100,MS. MINEHAN.," So, depending on how one feels about the likely path of the dollar, there is some definite sense of risk to the forecast associated with that." FOMC20060328meeting--54 52,MS. JOHNSON.," I don’t have as good an answer for you as I wish. One of my concerns for some time now has been that the forecasts I observed from other reputable folk, and Macroeconomic Advisers is among them, do not contain as much deterioration in the external sector as our forecast because I interpret at least one possible resolution of that is that they and others and their customers are going to be surprised when they turn out to be wrong and we turn out to be right. [Laughter] And I ask myself, “What are these people drinking for breakfast?” [Laughter] I have some papers with me, and I can give you a quick answer. Looking through to 2007, so over the whole forecast, they have lower real imports than we have, yet they have a stronger U.S. growth rate, on balance, and higher exports than we have. Their dollar forecast is about like ours. It has a small dollar depreciation in it. The rest-of-the-world picture is not as fully articulated as ours, so I cannot really say, but I doubt very much that they have the rest of the world just growing like gangbusters and that just explains everything. I have to assume that down deep they have something structural in their model that is either some combination of less asymmetry in the income elasticities on real imports versus real exports and/or more sensitivity to the exchange rate than the roughly 1 percent elasticity that we have. How much is each of those pieces? I do not know. Let’s put it this way: The number they have down here for the annual average for 2007 is below the $900 billion in the nominal current account balance that we have already achieved. I cannot imagine that anybody looking right now at the global economy thinks that we have peaked in terms of the current account and that we are going to start improving. I cannot imagine why anybody would think that." CHRG-110shrg46629--122 STATEMENT OF SENATOR DANIEL K. AKAKA Senator Akaka. Thank you very much, Mr. Chairman. Mr. Bernanke, it is good to see you in person here. And I want to tell you my role here on the Banking Committee has come down to being very concerned about the consumers of America. Here I have looked upon this as trying to improve the quality of life for consumers, as well as to help them improve themselves. Consumer protection is important, and also equipping them with the skills and knowledge that will help them with their understandings and also to empower them with economic empowerment. So this area has been important to me. Our modern complex economy depends on the ability of consumers to make informed financial decisions. Without a sufficient understanding of economics and personal finance, individuals will not be able to appropriately manage their finances, evaluate credit opportunities, and successfully invest for long-term financial goals in an increasingly complex marketplace. Mr. Chairman, I really appreciate your personal involvement on the important issues of financial literacy. I also wanted to take the time to thank all of the Federal Reserve employees, and I want to include Sandy Bronstein in that, and all of those who have taken such an active role in helping improve the financial knowledge of consumers and evaluating the effectiveness of education programs. As you know, approximately 10 million households in the United States do not have accounts at mainstream financial institutions. Unfortunately, too many of these households depend on high cost fringe financial services. They miss out on opportunities for saving, borrowing, and lower cost remittances found at credit unions and banks. And so the unbanked has become one of my concerns. My question to you is what must be done to bring these households into mainstream financial institutions? " FOMC20070321meeting--3 1,MR. DUDLEY.,"1 Thank you, Mr. Chairman. Financial markets have become much more turbulent since the last meeting—especially in subprime mortgages and associated securities, in U.S. and global equities, and in foreign exchange markets. The good news is that markets have generally remained liquid and well functioning, with a minor exception on the New York Stock Exchange on February 27. Moreover, there are few signs of significant contagion from the subprime mortgage market into the rest of the mortgage market or from subprime mortgage credit spreads to corporate credit spreads more generally. In general, the debt markets have been mostly unruffled by recent developments. I plan to focus my attention on four major market developments. First, the substantial turmoil in the subprime mortgage market—I talked about the risk that this market might unravel at the January FOMC meeting; that certainly occurred more quickly and more forcefully than I anticipated. Second, I want to talk a little about the decline in U.S. equity prices and the accompanying rise in actual and implied price volatility. Third is the sharp correction in the so-called “carry trade” in foreign exchange markets. The low interest rate currencies such as the yen and the Swiss franc have appreciated, with the greatest moves coming against their higher-yielding counterparts. Finally, I’ll talk a bit about the sharp downward shift in market expectations about the path of the federal funds rate target over the next year and a half. Two key questions motivate my comments. First, is the market turbulence driven mainly by fundamental developments, or does it reflect mainly a shift in the risk appetite of investors? Second, what is the ongoing risk of contagion from the market area that has experienced the most stress—the subprime mortgage market—to other markets? Regarding the subprime mortgage market, the deterioration appears driven mostly by fundamental developments. As you know, the delinquency rates for subprime adjustable-rate mortgages have risen sharply. In contrast, as shown in exhibit 1 of the handout, there has been little change in delinquency rates for fixed-rate mortgages. Most significantly, delinquency rates for the 2006 vintage of subprime adjustable-rate mortgages have climbed unusually quickly. As shown in exhibit 2, the last vintage that went this bad so fast was the 2001 vintage, and that had a much different economic environment—one characterized by a mild recession and a rising unemployment rate. The deterioration in the quality of subprime mortgage credit has led to a sharp widening in credit spreads for the ABX indexes. The ABX indexes 1 Material used by Mr. Dudley is appended to this transcript (appendix 1). represent the cost of default protection on a basket of collateralized debt obligations that are backstopped mainly by subprime mortgages. As shown in exhibit 3, although this widening has been most pronounced at the bottom end of the credit quality spectrum (BBB-minus and BBB), it has rippled upward to the higher-rated tranches that are better protected. Exhibit 4 shows how the credit deterioration initially registered in the ABX indexes as market participants sought to buy protection. In milder form, this deterioration also registered in the underlying collateralized debt obligations and asset-backed securities. The widening of the credit spread in the ABX indexes was probably exaggerated by the fact that there was an asymmetry between the many that were seeking loss protection and the few that were willing to write protection. This can be seen in two ways. First, as shown in exhibit 4, the spread widening was more pronounced in the ABX index than in either underlying collateralized debt obligations or asset-backed securities. Second, as shown in exhibit 3, the ABX spreads have come down a bit from their peaks even as the underlying market for subprime mortgages, as reflected in the ongoing viability of many mortgage originators, has continued to deteriorate. The deterioration in the subprime market has undermined the economics of subprime mortgage origination and securitization. This is especially true for those mortgage originators with poorer underwriting track records. Their loans can no longer be sold at a sufficient premium to par value to cover their origination costs. In addition, the costs that they must incur to replace loans that have defaulted early have increased sharply. In several cases, these difficulties have caused banks to pull their warehouse lines of credit. Several of the large monoline originators are bankrupt, distressed, or up for sale—they are highlighted in red in exhibit 5. Moreover, several of the diversified lenders, such as HSBC, have indicated that they are tightening credit standards and pulling back from this sector. The result is that the volume of subprime mortgage originations is likely to fall sharply this year—perhaps dropping one-third or more from the 2006 rate of slightly more than $600 billion. This tightening of credit availability to subprime borrowers is likely to manifest itself through a number of channels. These channels include (1) a drop in housing demand, as borrowers who would have been able to get credit in 2006 no longer qualify under now toughened underwriting standards; (2) an increase in housing supply, as the rate of housing foreclosures increases (notably, the Mortgage Bankers Association reported last week that the rate of loans entering the foreclosure process in the fourth quarter of 2006 reached a record level of 0.54 percent, the highest level in the history of the thirty-seven-year-old survey); and (3) additional downward pressure on home prices, which in turn threatens to increase the magnitude of credit problems, delinquencies, and foreclosures. In considering these channels, it is important to emphasize that the credit strains in the subprime sector are unlikely to have peaked yet. The reset risk on the adjustable-rate portion of the subprime loans originated in 2005 and 2006 will be felt mainly over the remainder of 2007 and 2008. Most of the adjustable-rate loans are fixed for two years at low “teaser” rates. When yields adjust upward once the teaser rate period is over, some borrowers may have insufficient resources to service these debts. The good news—at least to date—is that spillover into the alt-A mortgage and conforming mortgage areas is very mild, both in terms of credit spreads and in terms of loan performance. Although there has been some rise in delinquency and foreclosure rates for higher-quality residential mortgages, these rates are still low both qualitatively and historically. Moreover, there is little evidence that the subprime problems have hurt mortgage loan volumes. For example, the Mortgage Bankers Association index of mortgage applications for purchase has increased in the past three weeks. Turning next to the U.S. equity market, it is less clear-cut whether the decline in prices and the rise in volatility are fundamentally based. As several observers have noted, equity valuations do not appear to be excessive. If that is the case, then why have equities been more turbulent than corporate and emerging-market debt, for which spreads remain unusually narrow? Although this point is legitimate, two fundamental developments that make U.S. equity prices less attractive deserve mention. First, equity analysts have been reducing their earnings forecasts for 2007. Although the top-down view of the equity strategists for the S&P 500 index has not changed much, on a bottom-up basis, earnings expectations have dropped sharply. As shown in exhibit 6, the aggregate forecasts of the individual sector analysts now indicate a growth rate in S&P 500 earnings for 2007 of about 6 percent, down from about 9 percent at the beginning of the year. In contrast, S&P 500 earnings have grown at an annual rate of more than 10 percent for four consecutive years. It should be no surprise that falling earnings expectations could weigh on equity prices. Second, uncertainty about the growth outlook has increased. This shows up clearly, for example, in our most recent primary dealer survey. Because greater uncertainty about the growth outlook presumably implies greater risk, the rise in uncertainty should—all else being equal—result in lower share prices. In contrast, it is easier to explain the modest widening of corporate credit spreads. In theory, lower share prices and higher volatility imply a greater risk of default, which should imply wider credit spreads. Corporate credit spreads have behaved in a manner consistent with this. Josh Rosenberg from the research group at the Federal Reserve Bank of New York recently investigated this issue. He found that the spread widening in the high- yield corporate debt sector was consistent with past periods in which the implied volatility for equities rose sharply. Exhibit 7 summarizes one key result. The widening in the BB-rated corporate spreads in the week after the February 27 retrenchment was of a magnitude similar to that of other instances in which implied equity-price volatility as measured by the VIX index rose sharply. In the most recent episode, the VIX index rose 848 basis points, and the BB corporate spread rose 27 basis points. This rise compares with an average rise of 21 basis points in the BB spread in the ten cases in which the VIX rose most sharply. The rise in the most recent episode is well within the range of historical experience. In many other areas in which asset prices have moved sharply, risk-reduction efforts appear to have played the biggest role. For example, in the foreign exchange markets, the biggest currency moves were in the currency pairs associated with so- called carry trades, such as the yen and Swiss franc for the low-yielding currencies and the Australian and New Zealand dollar for the high yielders. Exhibit 8 indicates the change in the yen versus the Australian dollar, the New Zealand dollar, the euro, the British pound, and the U.S. dollar during three separate periods—the week before the February 27 stock market selloff, the week of the stock market selloff, and the past two weeks. The high-yielding currencies appreciated the most during the run-up to the February 27 selloff, fell the most during the February 27 week, and have recovered the most against the yen over the past two weeks. The changes in speculative positioning in foreign exchange future markets tell a similar story. Exhibit 9 shows the change in the share of the open interest position held by participants in the noncommercial futures market. Over the past few weeks, net short positions as a percentage of the overall open interest in the yen have dropped, and long positions in the British pound and Australian dollar have dropped. An examination of how Treasury yields, stock prices, exchange rates, and credit spreads have moved also indicates that risk-reduction efforts have been important. Exhibit 10 shows the correlation of daily price and yield movements in 2007 before February 27. As one can see, the correlations were quite low. In contrast, the correlation matrix in exhibit 11 shows the correlation of daily price moves for the period beginning on February 27. Most of the correlations have climbed sharply, suggesting that risk positioning is driving price and yield movements. Finally, short-term interest rate expectations have shifted substantially since the last FOMC meeting. As shown in exhibit 12, near-term expectations have shifted, with market participants now expecting a modest reduction in the federal funds rate target by late summer. However, the federal funds rate futures curve is still above the curve at the time of the December FOMC meeting. In contrast, longer-term expectations have shifted more sharply, with a larger move toward easing. As shown in exhibit 13, the June 2008/June 2007 Eurodollar calendar spread is now inverted by about 60 basis points. This calendar spread is more inverted than it was at the time of the December 2006 FOMC meeting. Compared with the shift in market expectations, the forecasts of primary dealers have not changed much. Exhibits 14 and 15 compare dealer expectations with market expectations before the January FOMC meeting and before this meeting. The horizontal bold lines represent market expectations. The blue circles represent the different dealer forecasts. The green circles represent the average dealer forecast for each period. The two exhibits illustrate several noteworthy points. First, the average dealer forecast has not changed much since the January FOMC meeting—the green circles in the two charts are in virtually the same position. Second, the amount of dispersion among the dealers’ forecasts has not changed much—in fact, the range of the blue circles is slightly narrower currently. Although many dealers now mention that their uncertainty about the growth outlook has increased, that does not appear to have been reflected in their modal forecasts. Third, there is now a substantial gap between the dealers’ average forecast and market expectations—the gap between the horizontal bold lines, which represent market expectations, and the green circles, which represent the average dealer’s view, has increased. Why is there a large gap between the dealers’ forecasts and market expectations? I think there are three major explanations. First, the dealers’ forecasts are modal forecasts and do not reflect the downside risks that many dealers now believe have emerged in the growth outlook. Second, dealer forecasts often lag behind economic and market developments. Only when “downside risks” grow big enough to pass some threshold are dealers likely to alter their modal forecasts. Third, some of the downward shift in market expectations may represent risk-reduction efforts. An investor with speculative risk positions that would be vulnerable to economic weakness might hedge these risks by buying Eurodollar futures contracts. This hedging could push the implied yields on Eurodollar futures contracts lower than what would be consistent with an unbiased forecast of the likely path of the federal funds rate. Nevertheless, the potential gap between market expectations and the Committee’s interest rate expectations may pose a bit of a conundrum for the Committee. If the Committee were to shift the bias of its statement in the direction of neutral, market expectations with respect to easing would undoubtedly be pulled forward and might become more pronounced. After all, most dealers expect that the Committee will not change the inflation bias of the January FOMC statement. In contrast, keeping the bias unchanged in order to keep market expectations from shifting further in the easing direction might be inconsistent with the Committee’s assessment of the relative risks regarding growth and inflation. If the Committee were to keep the bias unchanged even when its views had changed, the communication process might be impaired. On a housekeeping note, I wish to bring to the Committee’s attention the changes to the “Morning Call” with the Trading Desk. They were discussed in a memo distributed to the Committee last week. Under the new format, which we plan to implement on Thursday, the call will be open to all members of the Committee, and you will have the option of participating in the 9:10 a.m. discussion of reserve management issues, the 9:20 a.m. portion covering recent developments in global markets, or both portions. The March 15 memo outlines the new procedures for joining these calls. Finally, there were no foreign operations during this period. I request a vote to ratify the operations conducted by the System Open Market Account since the January FOMC meeting. Of course, I am very happy to take questions." FOMC20080805meeting--95 93,MR. ROSENGREN.," My question is for Steve. There have been judgmental adjustments to the domestic forecast reflecting financial headwinds in the United States. I'm wondering if we made the same adjustments for financial headwinds in Europe. You highlighted that residential investment looks a bit different in Europe, but they do have a lot of capital losses in their banking system. Their LIBOR�OIS spread is quite elevated, and at least in some European countries-- Ireland and Spain as well as the United Kingdom, which you mentioned--housing has been quite soft. Are you doing judgmental forecasts to reflect those headwinds, or do we do it on the domestic side but not for the European outlook? " FOMC20080430meeting--74 72,MR. PLOSSER.," Thank you, Mr. Chairman. I have two questions. One, in comparing the staff's forecast with a lot of the private-sector forecasts--what it looks like and its shape--one thing that is striking about the forecast is the very large adjustment swing that occurs in inventories. My interpretation is that one thing that is occurring in the way you've made adjustments to your forecast--or maybe this is more of a question--is that the spending of the tax rebates appears to be occurring out of inventories. Therefore, there is no production response, or less production response, to the presumably increasing demand that may materialize. Can you give me some feeling about why you chose that way of treating this? The second question goes back to inflation. I thought your discussion of the uncertainties around inflation was excellent. Part of what you talked about in the Greenbook was the uncertainty about pass-throughs of commodity price increases and oil price increases into various measures of consumer price inflation, which you indicated were imprecise and which we don't really know much about. I was struck that, if there is more pass-through than the baseline says, we're going to get more inflation in the near term, and then disinflation will be more rapid when you assume that commodity prices are going to come down. But if commodity prices only stabilize and don't come down, then it's going to be a more complicated picture. You do have an alternative scenario that says that commodity prices keep rising, but you allow expectations to move up only fairly modestly in the model. It seems to me that, particularly if expectations become more unanchored than that, the time paths of the funds rate that are implicit in the simulations become much more aggressive on the other side. I just want to make sure that my intuition is correct here. " FOMC20081029meeting--220 218,MR. PLOSSER.," Thank you, Mr. Chairman. I'm not going to say much about the District conditions. In the Third District, as many of you have noted, they've weakened considerably. I will make just a couple of observations that I think might be pertinent. Our last Business Outlook Survey, the one that was released a week ago, had actually gone into positive territory in September to 3.8, which was the first positive reading we had had since January--since, I guess, last December, actually. And it dropped from that plus 3.8 to minus 37.5 in one month. Now, it's relevant to know the timing of this a bit. Our survey is done during the first 2 weeks or the first 10 or 12 days of each month--which meant that the September survey was closed on September 12, 4 days before that weekend. So what we see is a very precipitous, dramatic change in the tone that had as much to do with events and perhaps policy actions as with what was actually going on in the economy. I share a bit of President Lacker's concern to try to disentangle a little the tone and feel of the economy, which really did feel as though it fell off a cliff in September, unlike any other month that I've seen during this episode. We have to think carefully about disentangling that effect not just because something fundamental happened to the economy but also to see to what extent policies, whether our policies or Treasury's policies, have contributed to a change in tone and increased uncertainty and aggravated what might be the real fundamentals going on. I don't know the answer to that question, but it suggests something that many of us have argued over time--that moreconsistent and more-predictable policies can help us avoid some of that. One special question that was asked in this survey in October was whether firms had trouble getting credit. Interestingly enough, only 14 percent of the respondents reported that they had trouble obtaining credit, but twice that number, almost 30 percent, reported that they believed that their customers were having trouble getting credit, which was an interesting dynamic going on that leads to a bit of uncertainty. I guess the best thing I can say about the Third District right now is ""Go Phillies!"" [Laughter] Maybe that will turn things around in the Third District. Anyway, let me turn briefly to the national outlook. It has deteriorated, certainly more than I expected, from what I thought in June. In our conference call on October 7, I indicated that I was revising my forecast downward. I expect the economy to contract during the second half of this year and perhaps in the first quarter of next year--but that's less clear to me--and then gradually approach what I would consider trend growth over 2009, so that by the end of 2009 we're getting back toward what might be considered trend growth, which I consider to be about 2.5 to 2.7 percent. In essence, for 2010-11, I pushed out my recovery of the economy by somewhere between six and nine months because of the current turmoil. I expect the unemployment rate to peak around mid'09 at about 7� and then to decline gradually to its long-run rate of about 5 percent by the end of 2010. Inflation pressures have subsided somewhat since June, and inflation expectations have remained contained. I expect core inflation to decline gradually from the current levels to my goal of about 1.7 percent by 2010. Now, my overall forecast is considerably better than the Greenbook baseline forecast. In fact, it's similar to what we talked about as the ""more rapid financial recovery"" scenario, which makes some of the adjustment for the financial turmoil somewhat quicker and somewhat less dramatic than in the baseline. The fed funds rate path underlying my forecast is less accommodative than the Greenbook. I assume that the fed funds rate remains at 1� percent through the spring of next year and then gradually begins to rise, reaching 4� percent by the end of 2010. Now, there are certainly risks around that forecast. Somebody at this table has to be a little more optimistic after all, and we have risks around all forecasts in this environment. Certainly mine is no exception. In particular, the effect of the financial markets, as we've all been talking about, remains highly uncertain and highly risky, and I am not trying to disregard that. Every day it seems as though there's a new development, usually negative, although I guess 900 points on the Dow today should be considered good news. But in fact, I believe that the risks around the Greenbook baseline forecast are to the upside, as I have alluded to. First, the baseline entails a sizable downward adjustment based at least partly on the volatile financial data, especially spreads. Spreads can fall dramatically, although they don't always do so. But they can rise and fall very quickly, and I think it's very risky to base monetary policy, which ought to be taking a longer-term perspective, on week-to-week movements in such volatile variables. If spreads do continue to fall over the next quarter or two as they have in recent days and if the financial market tools we've put in place have the desired effect, we could see the economy becoming much stronger than the Greenbook's baseline. Second, in the Greenbook, inflation falls and remains low despite a very low fed funds rate path. In fact, it's reminiscent of the funds rate path in 2003-04. This apparently is due to the sizable output gaps that open up in the forecast period. Now, these output gaps arise in the forecast because the effects of the financial turmoil show up mainly in aggregate demand. However, as I've suggested in previous meetings and as President Lacker alluded to, I think a plausible alternative view is that the financial market disturbances we've experienced--resulting in a restructuring of the financial system and a lowering of the efficiency of financial intermediation--act on the supply side as well, much like a somewhat persistent productivity shock with an associated damping effect on measures of potential GDP for some period of time. If so, we'll see much smaller output gaps opening up, and that means the risk of higher inflation than in the Greenbook, especially if the baseline funds rate path is followed as they lay out. In thinking about the appropriate monetary policy going forward, it's important that we not let our policy be whipsawed by volatile market data. We have been lowering the funds rate since January, largely in anticipation of a recession or to mitigate the chances of one occurring. Now, it may finally have arrived. Does that mean we have to lower more? A difficult question. The level of the funds rate is always a difficult question. Clearly, if we experience a sustained slowdown in real economic activity, which suggests a lower equilibrium in the real rate of interest, policy needs to allow the funds rate to fall with the equilibrium rate, and I based my recommendations throughout the year on such a forecast. But I think it's a mistake to overreact to volatile data, especially when it's the stock market. Although there has always been the desire and much pressure from markets to do something when we see such swings in the market, in my view, the economy is better served if monetary policy is a steadying hand, taking appropriate action when the intermediate-term view dictates, but not overreacting to fluctuations in the market with an inappropriate tool. Thank you, Mr. Chairman. " FOMC20060629meeting--77 75,MR. STERN.," Thank you, Mr. Chairman. I continue to think the outlook for the national economy is reasonably positive. As best I can judge, housing activity is slowing largely as expected. The pace of increases of home prices is decelerating. Prices may be declining in some markets, but surely if we had put confidence intervals around our earlier forecasts of housing activity and of price behavior, what we are currently observing would have fallen within those intervals. Other components of aggregate demand look reasonably well maintained to me. In this regard, comments from our directors and from others with whom I have talked indicate that, except for the agricultural sector, persistently high energy prices are having at most a modest negative effect on business activity. Moreover, and equally important in my mind, the respective paths of productivity and of aggregate hours suggest to me that the economy should continue to expand at a respectable pace going forward. To sum up, my forecast of real activity is for slightly more growth than the Greenbook this year, and there is a wider positive divergence between my forecast and the Greenbook forecast for 2007. In this regard, I have tended at these meetings to emphasize the underlying resilience and flexibility of the economy. I still have a lot of confidence in those characteristics, and I think they augur well for the longer-run performance of the economy. But I have been asking myself whether I am too sanguine about this. Is there more to the second-quarter slowing in growth or to persistently high energy prices or to the housing situation—is there more to be concerned about than my previous statements might suggest? My tentative answer to that question is that I think we should not be overly concerned at the moment about the economic outlook in terms of growth for several reasons. As I already suggested, the effects of persistently high energy prices, although not trivial, do not appear to be devastating either. Furthermore, the financial system remains sound and flexible. Interest rates for the most part are still relatively favorable, and those factors should help to sustain demand both from households and from business. I think it is worth recalling that situation at this point; certainly bankers report, at least typically, fierce competition for customers in the current environment. Finally, the low levels of initial claims for unemployment insurance as well as anecdotes, from our District at least, suggest continued expansion in employment. On the price front, however, current circumstances and the outlook do not now appear to me to be favorable. Earlier I had thought that the acceleration in core inflation that we were observing was likely to be similar to the experience in early 2004, when we had an acceleration but it was relatively quickly reversed. But a quick reversal doesn’t look all that likely to me at the moment for several reasons. First of all, as people have already commented, the recent surprises have been on the upside, and in light of that, I have to conclude that there is a bit more underlying momentum to inflation than I earlier thought. I have the sense that other central banks around the world are seeing and responding to the same thing. If this assessment is correct and there is more inflationary momentum, then the bulk of the analytical work that has been done seems to suggest rather strongly that arresting that momentum or reversing it is not going to be easy in the short run. Inflationary expectations apparently have not deteriorated recently, and here I am referring to the past couple of years, but I am not sure I would make the same statement with regard to the path of inflationary expectations relative to the earlier years of this decade. Overall, I have the impression that, on the margin, a little more inflation is both characterizing the economy and being accepted by households and by businesses." CHRG-111hhrg46820--2 Chairwoman Velazquez," Good morning. I call this forum to order. Last month, the National Bureau of Economics made it official. The country is in a recession, and it has been for over a year now. Of course, most Americans already knew this. From plunging consumer confidence to soaring unemployment, the signs were and continue to be everywhere. In December alone, we lost a half million jobs, bringing last year's job loss to a 63-year high. Work has already begun to turn the economy around. The end goal of this recovery effort should be growth and job creation, two areas in which small businesses excel. After all, small firms are the engine of our economy. They not only create 80 percent of all new jobs, but they also represent 99 percent of American businesses. Today, however, they are struggling to play their traditional role of economic catalyst. In this morning's forum, we will look for ways in which small firms can assume that role once again. We will also discuss the current economic climate and the roadblocks it has created for our country's entrepreneurs. From the local tech to the mom and pop restaurant down the street, small businesses are suffering everywhere. Many have been forced to close up shop all together. At a hearing in November, this Committee met Thomas Franke, an entrepreneur whose 83-year-old family business had managed to ride out the Great Depression but was unable to endure the current downturn. In November, his business closed its doors for good. All across the country entrepreneurs like Franke are struggling to secure the capital they need to survive. According to the Federal Reserve Senior Loan Officer Survey, 75 percent of commercial banks have tightened lending standards to small firms. On top of that, 90 percent of respondents said that they have upped the cost of small business credit lines. During past downturns, small businesses have managed to survive on loans from the Small Business Administration, but today even those loans are disappearing, with lending down almost 60 percent since last year. As funding dries up, many entrepreneurs are taking desperate measures, from maxing out credit cards to draining 401(k)s. It doesn't have to be this way. The resources of the SBA loan program could be leveraged to help break the financing logjam. Our Nation should use targeted tax incentives to increase investments, generate cash flow and encourage small firms to hire workers. Tax policies can also help spur innovation and encourage investors to put resources behind promising startups. If we have learned anything in the last year, it is that there is no single silver bullet fix for our financial woes. With that said, we also know that if we are going to bring our economy back on track we are going to have to start with the fundamentals. That means job creation and economic growth. As the backbone of the American industry, small businesses can help accomplish both. But before small firms can revive the economy, they will need to survive the recession. In today's forum, we will look for ways to ensure that they do both so that they can play their historic role as economic catalyst. I am delighted everyone could join us for this discussion and I look forward to your input on this issue. Now I would like to yield and welcome the new ranking member of the minority side, our colleague, Sam Graves. I look forward to working with you. As you all know, we had a great relationship with the previous ranking member. I have really enjoyed the work that we have done in the past on the 7(a) and SBIR programs, and I look forward to two productive years. " FOMC20080130meeting--284 282,MS. YELLEN.," Thank you, Mr. Chairman. I support alternative B in the Bluebook. If we cut the federal funds rate a further 50 basis points today, we will have done a lot in just a week and a half, but I think these actions do represent an appropriate response to a substantial deterioration in economic conditions. As I said in my comments on the economic situation, I basically agree with the Greenbook forecast for this year and perceive the risks to be to the downside. With the fiscal package, a funds rate of 3 percent will likely promote growth in the second half of this year that's moderate after a brush with recession in the first half. I'm comfortable with this action because I believe our inflation objective is credible, and I do have confidence that we will be able to reverse the accommodation we're putting in place when it's appropriate to do so. But our discussion does highlight the important point that alternative B seems to be appropriate monetary policy in the context of the modal forecast. It just brings the real funds rate down to the Greenbook estimate of neutral, around 1 percent. If the economy were to go into a recession, additional easing would be needed and would be appropriate. Also, as Governor Kohn and others have emphasized, alternative B still doesn't seem to incorporate much of anything for insurance against recession. So, indeed, there is a case for doing more than B. There is a case for A, but I wouldn't go there today. I think we can wait, and I think we can watch as developments unfold and monitor data. With respect to language, the skew in the risks toward a downside surprise and the possible need for insurance against that possibility, especially if we see some further deterioration in financial conditions--that strongly inclines me toward the assessment of risk sentences in alternative B with their asymmetry toward ease. We need to be absolutely clear, to state clearly today, that we recognize the continued existence of downside risk and communicate that we stand ready to cut further if necessary. Therefore, I would definitely retain the sentence in alternative B, paragraph 4, that states, ""However, downside risks to growth remain."" However, I could see a case, following President Plosser's suggestion, to substitute the wording from the last sentence of the December 11 statement to the wording in the last line in alternative B. That is, we could substitute the words ""will act as needed to foster price stability and sustainable economic growth"" for the words ""will act in a timely manner as needed to address those risks."" This seems to me to be a small change that would, taken together with the new first sentence in paragraph 4, slightly dial down the perceived odds of further cuts relative to the proposed wording in B. Even without the change that President Plosser suggested, though, the fact that we have added the new first sentence in paragraph 4 does seem to me to change the wording of the assessment of risk enough relative to our intermeeting statement to communicate to markets that we will view future policy moves after the one today somewhat differently going forward. Today's move and the intermeeting move are essentially catch-up, to put us where we think we need to be, and moves going forward will respond to the evolution that we see in the markets. " FOMC20060808meeting--70 68,VICE CHAIRMAN GEITHNER.," Thank you, Mr. Chairman. Growth has moderated, but the economy still seems, to us at least, likely to grow at a reasonably good pace over the forecast period, somewhere in the vicinity of 3 percent. We expect core inflation to moderate gradually from current levels, declining to around 2 percent in ’07. This forecast assumes that monetary policy follows a path fairly close to what’s in the market and in the Greenbook. The key difference between our view of the outlook and that of the Greenbook forecast is in the strength of demand growth relative to potential next year. We have reduced a bit our estimate of potential and also of actual growth, but we still expect the economy to expand at a rate close to potential. This is a very favorable forecast, and we have to recognize, of course, that the economy is going through a set of extremely complicated transitions, including a large, adverse, sustained relative price shock of uncertain duration and a substantial adjustment in asset prices that is now concentrated in housing. Our capacity to anticipate the evolution of these forces and to assess their effect on growth and inflation is, of course, very limited. The forces that now appear to be working on the economy still present the unpleasant combination of upside risk to inflation and downside risk to growth; but for the moment we believe that the former, the possibility that our forecast is too optimistic on inflation, remains the predominant risk. I have a few points on the growth outlook. The economy has clearly slowed, and the composition of growth within the United States and here relative to the rest of the world has changed. These changes were inevitable, and if they continue to occur smoothly, they seem desirable and necessary. As a share of aggregate demand within the United States, residential investment had to contract and consumption had to slow. And U.S. domestic demand had to slow relative to domestic demand growth in the rest of the world. The key issue we face is judging whether we have significantly more weakness ahead of us than we are now expecting. In our view, most signs at present point to fundamentally healthy economic conditions. The survey-based measures of confidence are holding up okay. Real household income growth seems likely to be good going forward. Businesses have the resources and the motivation to sustain fairly strong rates of investment growth. Structural productivity growth, even post- revision, still seems strong. Inventory levels remain relatively thin, and the tentativeness that characterized much of the expansion in terms of investment and hiring should be a source of some comfort. Global demand is still quite strong, of course, and together these forces will offset part, but not all, of the weakness coming from the adjustment in housing and consumption growth. The principal risk to this outlook for growth lies in the possibility that households will slow consumption more sharply because of rising energy costs, higher interest rates, greater pessimism about future income gains, or the effect of the housing adjustment on perceived wealth. Financial markets are showing a little more concern about future growth, but not a lot. This concern is most evident in the greater inversion in the yield curve that has emerged at the one-year to two-year horizon. I think you can see in the market some moderation of exuberance in credit markets, but just a little. Overall, the markets seem to reflect a reasonably favorable view of future growth prospects. On the inflation side, as I said, we expect core inflation to moderate, not quickly and not dramatically but by enough and soon enough to bring core PCE inflation down to just below 2 percent over the next 18 months. The issue we face is not so much about the acceleration in core inflation that occurred in late 2003 and 2004. After that acceleration, core inflation was sort of trendless, in the vicinity of 2 percent for much of the two-year period, until the past six months, when we saw this uptick. The real problem we face is assessing the extent to which the very recent acceleration in core inflation reflects transitory factors, such as the indirect effects of energy prices, and the extent to which it may reflect pressures from higher resource utilization and other things less benign and less transitory. Energy pass-through, of course, seems part of it, but probably not all of it. Shelter doesn’t account for all of it either. This judgment is critical for us, and we need to be careful that we’re not assuming away the more uncomfortable explanation, such as a broader inflationary impulse or a rise in pricing power that could reflect increasing acceptance of higher inflation. How confident can we be that the pressures that have induced this rise in core inflation will moderate sufficiently to bring down the rate of increase in core PCE prices to the vicinity of 2 percent or below? Reasonably confident, I think. With the economy growing at or slightly below trend, with growth of unit labor costs peaking and decelerating a bit as the Greenbook forecast anticipates, with inflation expectations moderating at short horizons and pretty stable at longer-run horizons, with energy prices flattening out, and with the dollar falling only a little, this forecast seems reasonable. But note the number of assumptions and conditions this forecast depends on. Also, the expected path for inflation implies only a very gradual moderation and a period of sustained inflation above what is presumed to be consistent with this central bank’s long-term preferences. The risks of this forecast, as I said, still seem to lie on the upside. It may be some time before we can be confident that the forces are in place to produce the necessary moderation. More generally, however, we face the very difficult consequential challenge of trying to figure out the longer-term consequences of having been in an exceptionally long period of exceptionally low real interest rates—both real short rates and forward rates—that were induced by monetary authorities here and around the world. Real short rates now look as though they were perhaps lower relative to the estimates of equilibrium even than we thought. Perhaps more remarkable was the low level of forward real rates during much of our tightening phase. These financial conditions may have produced more inflation momentum than we thought, and this may be the case even though there is some reassurance in the stability of long-term expectations. Those expectations are substantially below the peak in ’04 at the long horizon. However, the rise in asset prices and residential investment and the leverage caused by this long period of very expansionary monetary policy may lead to a process of adjustment in asset prices that could be more sustained and more damaging in terms of confidence and of demand than we expect. This risk is greater if we end up allowing more inflation than our forecast anticipates, for the required monetary policy response could induce an even sharper adjustment in risk premiums and asset prices. This possibility argues for a lot of humility in judging the appropriateness of the present stance of monetary policy and what will be appropriate over time, and it argues mostly for having as much flexibility as we can going forward, emphasizing that the inflation risks remain the predominant concern of the Committee. Thank you." FOMC20081216meeting--80 78,MR. EVANS.," Thank you, Mr. Chairman. I, too, would like to add my thanks to the staff for an excellent set of memos--very good analysis. I would agree with pretty much everyone that the economic outlook and financial stress warrant further relief for financial conditions, so I am going to be supporting, ultimately, further quantitative easing as needed. I have to admit that I am not quite sure what the most effective form of that easing is. It just doesn't seem obvious to me. But I certainly embrace your suggestion, Mr. Chairman, of continuing the regular briefings, and when necessary, those should be meetings to affirm certain programs that are on the table. I agree with all of your comments about how important confidence is. Let me turn to some of the specifics of the questions about the standard policy issues with the fed funds target. With a deep recession looming and inflation receding, I see no reason to keep our fed funds powder dry. There is no reasonable uncertainty at this point about the deepness of the recession or the financial stress, and I think the economy would benefit from further financial accommodation. Because we can't really hit our fed funds target because of the breadth of our lending programs that are on our balance sheet today, I think the damage to the Treasury repo and money market mutual funds is unavoidable at this point. For our policy actions, I think that we should continue to communicate in terms of our objectives. In my opinion, this strategy covers most of the issues asked of us. The fed funds rate will be low for some time under our forecast. I don't think there is much doubt about that, and our forecast helped with that. Disinflation risks are part of this outlook, and I think that should be well understood. We can communicate that in our speaking. If our inflation target were explicit and we talked about it more--higher future inflation expectations than just, if it were the case, � percent or lower--that would be part of the communication calculus. As things stand, our long-term projections may be adequate here, but more explicitness in general would be helpful. It is interesting to me that alternative A encompasses all of these in relatively muted language. Frankly, if we are expecting a big impact from that statement, I think we need to include a bold font typeface, [laughter] because I don't think it will be picked up necessarily. But I think it is really well done. In terms of the questions on particular interventions, the memos brought forward pretty clearly that the effect of the interventions depends on the size of the operations and where the markets are. The memos were very good about talking about individual markets and making me aware of a number of details, but they were often pretty much in isolation of how they would flow through to other markets. It is not exactly clear to me how important that segmentation or separation is to achieve the goals that we are hoping for from those interventions. I suppose in well-functioning markets you might expect more of those funds to be flowing across those markets, and so you would be generally providing market liquidity. It would flow around. In the current situation, with more stress, there probably is more separation. Is that ultimately going to mean we are more effective? I am not even sure because there is the added stress that has to be dealt with. So the particular interventions are not exactly obvious to me, and portfolio rebalancing could have implications. In one of them, there was a correlation matrix--for a particular size of operation, where agencies are influenced in one way or Treasuries are influenced--about when we would see other prices move around. That is possibly a guide to this leakage. But, of course, those are unconditional correlations, as I understood them, and I am not exactly sure how the exogenous interventions that we are talking about would translate from those correlations. It is really an identification problem at some level. My takeaway from that is that I find most comforting the quantitative easing additions that improve total market liquidity. It seems to me that the Treasury and agency purchases are the safest. When we get into credit allocation, we have these facilities in place, and we will probably need to do more. Mr. Chairman, you talked about the unwinding consequences that the Committee will have to worry about, and I think that they are also pretty important. Last, on the nonstandard approaches for quantitative easing and what that means for the Desk, I guess this is a harder problem with the dual governance issues than I had really anticipated. I would have thought that it was relatively straightforward--once we hit the zero bound on the funds rate that we would identify that we need to expand the balance sheet. I kind of like it in terms of the asset side. The Committee could authorize a broad range of what that would mean. We could reaffirm the existing lending programs--not approve them, for that is the role of the Board--and point to the important role that they are playing. Our statement could provide guidance on the sizes, which would pretty much just be a restatement of the existing sizes of the programs. But we could provide ranges of how the Committee might expect that to be conducted over the intermeeting period if something arose that required an addition, or we were being briefed on new programs as they were rolled out, that could be part of it. All of that said, I accept your good faith approach--the more we talk and the more that we understand this and are consulted, it should be adequate. In terms of communicating to the public, under the approach that I just mentioned we would basically state that the fed funds target is essentially zero because of all of the lending facilities. We'd have some statement about the range of the balance sheet, something that is not supposed to be so constraining but that would be somewhat helpful. The descriptions of the Fed lending programs would be part of that--they are well done--and the term sheets, and we would reinforce our commitment to the policy mandates that we have in our statements and our forecasts. So, just to conclude, I think we can go further down the quantitative easing policy path. I am not really convinced that this is going to do everything that we are hoping, and I am a little concerned as we get to the point where we have an intense desire to effect more that we might tend to disagree a little more. But I am confident that we will think it through very carefully. Thank you, Mr. Chairman. " FOMC20060808meeting--56 54,MR. GUYNN.," Thank you, Mr. Chairman. In our last meeting I reported that, while our Southeast economy still seemed reasonably solid, we were beginning to pick up anecdotal signs that activity might be slowing. Well, that sluggishness is now gradually showing up in the data as well. The slowing is perhaps most noticeable in our labor markets. Although we are still hearing that businesses in some sectors are having problems finding workers, especially in areas such as construction, accounting, and housekeeping, payroll employment figures for June in our states were disappointing. They showed seasonally adjusted contraction with absolute declines reported in Georgia, Tennessee, and Mississippi and less-than-expected job growth in Florida. Employers seem to be trying their best to hold the line on staffing, given the sense that they have of a slowing in the pace of growth and an uncertain outlook. Manufacturing activity in our region is mixed. Consumer spending remains softer than earlier in the year, and the tourism outlook is reported to be guardedly optimistic. The bright spot in some ways is the Gulf Coast outside New Orleans, where the demand for most construction materials and labor and for replacement household and personal goods is strong; but that pocket of elevated spending is not enough to offset the sluggishness elsewhere. The big semiannual apparel and gift mart show in Atlanta, where buyers just came to place their major orders for expected year-end holiday sales, was reported to have been slow. The regional bankers are reporting slowing in loan demand, particularly in the consumer housing sectors. However, the experience in C&I lending is more mixed. At the same time, credit quality, in the words of two bankers with whom we talked, was “unsustainably” or “embarrassingly” good. Banks are also pulling back on their lending into the softening housing market. Our data indicate that single-family construction remained relatively strong in the District. Home sales have slowed, and there now have been sharp corrections in some markets, especially coastal Florida. Perhaps the most-talked-about new worry in our region, and something I mentioned for the first time at our last meeting, is the growing problem of obtaining affordable wind, flood, and related insurance in our coastal areas, resulting from the huge losses incurred by insurance companies from hurricanes in recent years. Some carriers have quit offering coverage at any price, and costs of policies that are available have increased at extraordinary rates. That problem is affecting residential construction and sales and causing some businesses to pull up stakes and move elsewhere. Together, the various developments that I have just ticked off have taken considerable momentum out of the strong economic growth and outlook we were seeing in our region earlier in the year. Our sense of what’s happening at the national level is much the same. It now seems reasonably clear that we have settled into a pattern of slower and probably subpar growth. We saw evidence of that in the second-quarter GDP data and in the markedly slower employment gains in recent months. The several models that our Atlanta staff now employs to forecast real growth are suggesting somewhat slower growth in the 2½ percent to 3 percent range as being most likely over the second half of this year and through 2007. Getting a good handle on the inflation outlook is a bit harder. Our most recent Atlanta modeling work produces a somewhat encouraging inflation path over the next 18 months, which suggests that core inflation should stop its upward drift and gradually begin to move back toward 2 percent. That optimistic outlook is consistent with the most likely path laid out in the Greenbook and with the central tendency of the forecasts we all submitted for the recent congressional testimony. At the same time, even those optimistic forecasts do not seem to indicate that core inflation is likely to move comfortably to within the ranges many of us have indicated we would like eventually to see. Of course, these encouraging longer-term or medium-term, as some have been calling it, outlooks are very much at odds with the discouraging headline numbers and the increasingly higher core inflation readings in recent months. There seems to be good reason to expect that some of the coming near-term inflation data could well be disappointing before we begin to see the expected improvement, and these current data help to shape inflation expectations. In one of our recent briefings, an economist humbly observed that, despite all the work that has been done and continues to be done in the profession, our models for forecasting inflation are still less than stellar as judged by past experience. So we go into the policy discussion with some encouraging inflation forecasts but having to acknowledge wide error bands and considerable uncertainty around those forecasts. I look forward, I think, to an interesting but probably difficult policy discussion. [Laughter] Thank you, Mr. Chairman." FOMC20051213meeting--39 37,MR. STOCKTON.," Well, I’m certainly uncertain about it. [Laughter] There’s no doubt about that. But I actually see some risks on both sides of that forecast. On the upside, we are banking on a rather steep increase in the saving rate over the next two years. If our large-scale quarterly econometric model wants to extend the surprisingly low saving rate that we’ve seen over the past couple of years forward into the future, that suggests the possibility of a greater step-up in consumer spending. So there is some upside risk. On the downside, some of the step-up that we have in consumption over the next two years is related to our forecast of an acceleration in compensation per hour, which, thus far, has remained very low. And if we don’t get that step-up in compensation growth, we’re not going to have the labor income immediately to support this pickup in consumer spending going forward. And I think that constitutes an important downside risk. So I feel comfortable that we have the risks reasonably well balanced, but there are some big question marks, I think, on the consumption forecast going forward." FOMC20061212meeting--29 27,MR. STOCKTON.," Thank you, Mr. Chairman. As I worked my way through a final reading of the Greenbook this weekend, I was reminded of the old joke about the man who is told by his doctor that he has only six months to live. The doctor recommends that the man marry an economist and move to North Dakota. The man asks whether this will really help him live any longer than six months. The doctor says, “No, but it sure will feel a lot longer.” [Laughter] Part 1 of the Greenbook was its usual twenty pages, but with lengthy discussions of motor vehicle mismeasurements, PPI inventory deflator anomalies, income revisions, and footnotes on errors in Okun’s law, it sure read as though it were a lot longer than twenty pages. So, in the kinder spirit of the season, I thought that I would jump straight to the bottom line of this forecast. The bottom line is that our outlook for economic activity has not really changed much from the one presented in the October Greenbook—or for that matter, the September Greenbook. The economy still appears to us to have entered a period of below-trend growth that will eventually relieve some of the pressures on resource utilization that we believe have developed over the past few years. As in our previous forecast, the current and expected weakness in aggregate activity is being led by a steep contraction in homebuilding. Indeed, the recent readings on housing starts and building permits were a little softer than we had been forecasting, and we have marked down our forecast of residential investment a bit further. We currently estimate that the drop in residential investment is taking about 1¼ percentage points off the annualized growth of real GDP in the second half of this year, and we are expecting a similar-sized subtraction from growth in the first quarter of next year. We were also surprised to the downside by the October reading on construction put in place in the nonresidential sector. As you may recall, we had been expecting some slowing to become apparent by early next year as a deceleration of business sales, smaller employment increases, and less-rapid growth of equipment spending reduced businesses’ needs for space. Moreover, while fundamentals have improved in commercial real estate markets in recent years, they are best characterized as only moderately favorable; vacancy rates for office and industrial buildings are still elevated by historical standards, and rental income has been rising at only a tepid rate. All told, we have interpreted the softer readings of the past couple of months as suggesting that the slowdown in nonresidential construction has arrived a bit sooner than expected, but we don’t see an outright slump as the most likely outcome in this sector. Business spending on equipment has unfolded pretty much as we had expected. The report on durable goods orders was widely read by others as surprisingly weak. In part, that weakness resulted from a 25 percent drop in orders and shipments of computers that we are extremely skeptical about and that the BEA will significantly downweight in estimating investment spending. Among the pieces that actually matter for gauging capital outlays, the report was close to our forecast. We have been expecting some slowing in real spending for equipment and software in the current quarter, and it looks as though that is what we are getting. But with order backlogs still ample, corporate balance sheets flush with cash, and the cost of capital low, we continue to anticipate modest gains in equipment spending in the near term. Meanwhile, the consumer appears to be chugging along. Our forecast for 3 percent growth in real consumer spending in the current quarter is unchanged from the October Greenbook and close to the average pace of the past few years. Steady gains in employment and income, the drop in energy prices that has occurred since the summer, and higher stock prices appear, at least to date, to have offset any restraint coming from higher borrowing costs and decelerating house prices. We have had a few upside surprises as well. In particular, government spending, at both the federal and the state and local levels, has been somewhat stronger in the second half than anticipated in our October forecast. Also, as Steve will be discussing shortly, net exports are expected to make a slightly larger contribution to current-quarter growth of real GDP. On net, we read these data as suggesting that growth in aggregate output in the second half of this year has been slightly weaker than in our previous projection, largely on account of the softer construction figures. That’s not easy to see in our top-line forecast of real GDP because of some serious problems with the BEA’s measurement of motor vehicle output. As you know, we simply don’t believe the BEA’s estimate that motor vehicle output added ¾ percentage point to the growth of real GDP in the third quarter, in light of the fact that vehicle assemblies fell 600,000 units at an annual rate. By our estimates, the BEA’s faulty methodology caused the growth of real GDP to be overstated about 1 percentage point in the third quarter. We expect that the unwinding of some of that glitch in the fourth quarter will trim real GDP growth about ½ percentage point. So, we believe that, on net, the published growth of real GDP will be overstated about ¼ percentage point in the second half of this year. Adjusting for the measurement problems, we estimate that real GDP probably rose at an annual rate of 1½ percent in the second half, about ¼ percentage point less than in our previous forecast and noticeably below our estimate of the growth of potential. Our view that there has been a perceptible slowing in the pace of activity has received some independent support from our measures of industrial production. Factory output increased at an annual rate of about 5 percent over the first half of the year but seems likely to increase at roughly half that pace in the second half. The cutbacks in auto production and construction, in addition to their direct effects on aggregate output, are leaving an imprint on the production in upstream industries. Even beyond these two areas, industrial activity appears to have weakened some of late. The recent slowing in IP has occurred amid signs of some backup of inventories. Whereas a few months ago any problems seemed to be confined largely to the motor vehicle sector, there are now more widespread signs of unwanted inventory accumulation—most notably for steel, fabricated metals, mineral products, wood, paper, and plastics. The impression left by the hard data is reinforced by purchasing managers, more of whom report that their customers’ inventories are too high than was the case a few months ago. Our forecast envisions that a relatively brief period of soft manufacturing output will be sufficient to clean up these problems. But we will need to monitor this area closely in coming months because what appears relatively benign today could turn worrisome in a hurry. For now, we are reasonably comfortable that the data on both spending and production are more consistent with aggregate activity running modestly below the pace of its potential than with a more serious slowdown. Moreover, it would be a mistake to focus only on the downside risks because there are some prominent upside risks to our forecast as well. To my mind, the performance of the labor market continues to provide the clearest challenge to our view that the growth of activity has slipped below its potential. To be sure, last Friday’s labor market report came in very close to the projection in the December Greenbook. But the last two labor market reports taken together were stronger than we were expecting back in October. Payroll employment gains have slowed from the more rapid rate seen over the past few years, but only to a pace consistent with something close to trend growth in output—not the below-trend pace that we estimate has prevailed over the second half of this year. Moreover, the unemployment rate has declined about ¼ percentage point in recent months, an outcome more consistent with above-trend growth than with below-trend growth. Our forecast assumes that signs of greater weakness in labor demand will become more apparent in the months immediately ahead, with increases in private payrolls slowing to about 75,000 per month in the first quarter and the unemployment rate returning to 4¾ percent. The recent modest backup in initial claims gives some support to this expectation. But slowing in labor demand is, for now, just a forecast. We considered another possible interpretation of recent labor market developments, which is that, despite the downward adjustments that we have made to our estimates of the growth of structural productivity and potential output, we remain too optimistic in our outlook. The unemployment rate has been moving lower despite growth in real GDP that we estimate to have been below 2 percent. We have been surprised again by the weakness in labor productivity. We have not bought into this interpretation largely because the tensions between the labor market signals and GDP are relatively recent and are not especially large. So we are inclined to gather a bit more evidence before making any further adjustments to the supply side of our forecast. But the recent readings do point to a bit more downside risk than upside risk to our estimates of structural labor productivity and potential output. Moving beyond near-term developments, we continue to expect that the period of below-trend growth will extend through the middle of next year. As in our previous forecast, the weakness in activity is led by large ongoing declines in residential investment. Moreover, we are expecting the deceleration in home prices to weigh on the growth of consumption next year through the typical wealth channel. With final sales and output slowing, the usual accelerator effects put some brakes on outlays for consumer durables and business investment spending. Those influences are reinforced in this forecast by a modest backing up of long-term interest rates, as financial market participants come to realize that monetary policy will not be eased on the timetable that they currently envision. We see forces at work that, by the middle of next year, should result in a gradual reacceleration of activity back to a pace in line with the growth of the economy’s potential. Importantly, we are expecting some lessening of the contraction in residential investment. Housing starts have now fallen by enough that, if home sales stabilize at something around their recent pace—and I recognize that this is a big if— homebuilders will be able to make substantial headway in clearing the backlog of unsold homes. As they do, we expect construction activity to level off in the second half of 2007 and then to stage a mild upturn in 2008. Another factor working in the direction of some acceleration in activity is a diminishing drag on spending and activity from the earlier run-up in oil prices. By our estimates, the rise in oil prices has held down growth in real GDP by about ¾ percentage point this year but should be a roughly neutral factor for growth in 2007 and 2008. On balance, our forecast is identical to that in the October Greenbook, with the growth of real GDP projected to be 2¼ percent in 2007 and 2½ percent in 2008. There were, however, a few modest offsetting influences. A stronger stock market and a lower foreign exchange value of the dollar would, all else being equal, have resulted in a somewhat stronger projection for real activity. But those effects were counterbalanced by the substantial downward revisions that the BEA made to its estimates of labor compensation in the second and third quarters. As you know, we had been expecting about half of the first-quarter surge in labor compensation to be reversed in subsequent quarters. But in the event, it was completely reversed, leaving the level of real income about $60 billion below our previous forecast. In response, we lowered our consumption projection, just as we had raised it earlier when income had been revised up. On balance, the effects of the lower income offset the influences of a stronger stock market and lower dollar, and our GDP projection was left unchanged. Like our forecast for real activity, our forecast for inflation also has changed little over the past seven weeks. As we had anticipated, this autumn’s drop in consumer energy prices has resulted in outright declines in headline consumer prices. Core consumer prices came in close to expectations as well—though the core CPI was bit below our forecast and the core PCE a bit above. I wouldn’t make much of either surprise. Our miss on the CPI was concentrated in apparel, used cars, and lodging away from home—all components characterized by low signal-to-noise ratios. Core PCE came in only a couple of basis points above our forecast, with the surprise here mostly in the nonmarket component of medical care costs, specifically the BEA’s estimate of Medicare hospital reimbursement rates—all in all, pretty small potatoes. Our longer-term outlook for inflation also remains unchanged. The slightly tighter labor market incorporated in this projection, along with the lower dollar and higher attendant import prices, would have led us to mark up a bit our inflation projection. But the downward revision to labor compensation implies smaller gains in labor costs and a noticeably higher level of the price markup, suggesting a little less prospective upward pressure on prices. As in our past forecasts, we expect a gradual slowing in core consumer prices over the next two years as the pass-through of higher prices for energy and other commodities runs its course and as the current tightness in labor and product markets diminishes and a small gap in resource utilization eventually opens up. Both the CPI and PCE measures of core prices are currently running a bit below the pace of this past spring—by enough to encourage us in our view that core inflation is more likely to fall than to rise over the next two years but not by nearly enough to cinch the case for our position. I have so much more to say, but I’d better stop here, or you will think that we’ve begun our honeymoon together in North Dakota. Steve Kamin will continue our presentation." CHRG-111hhrg53234--153 Mr. Meyer," Thank you very much. And thank you for giving me this opportunity to testify before you this afternoon. The independence of central banks with respect to monetary policy is absolutely essential. Policies that are focused on financial stability, on the other hand, require a more cooperative approach, including, in the United States, the central bank, functional regulators of banks and nonbank subsidiaries, and a clear role for the Treasury. But there needs to be a bright line between the more cooperative approach to financial stability policy and the independence of the Fed with respect to monetary policy. Supervising systemically important financial institutions is, of course, a central part of financial stability policy. I don't believe there is a conflict between the current or newly proposed role for the Fed as systemic risk regulator and the traditional role as independent authority on monetary policy. But then, again, I do not see the Treasury proposal as conferring on the Fed vast new authority as systemic risk regulator. The Fed is already bank holding company or consolidated supervisor for all financial institutions that have a bank. Of the systemically important financial institutions today, most are already bank holding companies. Other institutions that might be designated systemically important could be a couple of insurance companies, a few other large financial firms that are not supervised today, and, in principle but not likely in practice initially, very large and highly leveraged hedge funds. It also should be recognized that there are functional supervisors of the bank and the investment banking and insurance subsidiaries of bank holding companies, and they do much of the heavy lifting in overseeing the risks in their respective parts of the bank holding company. There has always been a debate about whether the Fed's role in bank and bank holding company supervision complements or conflicts with its role in monetary policy. One of the cases for a complementary role is that the Fed's responsibility as hands-on supervisor of some banks and all bank holding companies provides firsthand information about the state of the banking sector, which can be a valuable input into the assessment of the economic outlook, especially in periods of extreme stress like today. The counterargument is that the Fed's concern for the health of the banking system, derived from its role as bank and bank holding company supervisor, can encourage the Fed at times to sacrifice its macro-objectives in order to help the banking system when it is ailing. When I was on the Board, I never witnessed any conflict in practice between these two roles. I don't see why the debate should change as a result of the marginal increase in supervisory reach under the Treasury proposal. A basic premise for my view is that a central bank should always have a hands-on role in bank supervision. First, central banks always have at least an informal responsibility for monitoring systemic risk, and the banking system is a major source of such risk. Second, the central bank is always a source of liquidity to and lending to banks, and must therefore have firsthand knowledge of their creditworthiness, and this is especially true at times of stress. Finally, the central bank will always be called upon to cooperate with Treasury at times of interventions in particular institutions where the Fed will sometimes provide the liquidity, and Treasury should take all the credit risk. Given the Fed's role already as consolidated supervisor of most systemically important financial institutions, the choice may be whether to remove the Fed from its role in banking supervision altogether, or expand its role modestly to cover all systemically important financial institutions. This seems like an obvious choice for me. I also don't see the need to isolate these two functions from each other within the Federal Reserve, at least more than they are today. Now, if the Fed were getting substantial new powers as systemic regulator and had to devote considerable new resources to this new responsibility, then it seems reasonable that it should give up some of its current responsibilities. If something is to be given up, the most obvious choice is consumer protection and community affairs. These are not seen around the world as core responsibilities of central banks. In addition, the case for giving up consumer protection and community affairs is strengthened by the Treasury proposal to unify these responsibilities in a single agency. The bottom line is that the Fed is the best choice for consolidated supervision of systemically important financial institutions in addition to its role as independent authority on monetary policy, and these joint roles are much more complementary than they are conflicting. Indeed, there is a very natural fit between these two roles. Thank you. [The prepared statement of Dr. Meyer can be found on page 77 of the appendix.] " FOMC20061212meeting--90 88,MR. STERN.," Thank you, Mr. Chairman. Two or three developments in the District economy are worth noting, and they seem consistent, by the way, with what’s happening at the national level. First, overall, the labor markets, excluding construction, appear to be continuing to improve. Hiring is expanding, and the availability of jobs appears to be growing. Some of that growth is no doubt seasonal, but my impression is that it goes beyond the typical seasonal increase of this time of year. Second, housing sales of both new and existing homes appear to be stabilizing in year-over-year comparisons. That is clearly a favorable development. However, I think the adjustment in residential construction activity likely still has some considerable distance to go. Numerous projects are under way; many of them are in midstream. So the inventory of unsold homes, particularly of condominiums, is likely to remain high for the foreseeable future, and I think the implication is that no sizable new projects will be getting under way any time soon. As far as the national economy is concerned, I agree with the pattern in the Greenbook of gradually improving growth in economic activity after the current and perhaps the next quarter. But I continue to expect such growth to be a bit higher than expressed in the Greenbook for the reasons I’ve cited recently—sustained gains in employment, rising equity values, lower energy prices, moderate interest rates, and overall generally sound financial conditions. Similarly, I wouldn’t quarrel very much with the Greenbook trajectory as far as it pertains to core inflation. I think that, if this outlook is achieved, the outcome would not be at all bad, particularly if inflation diminishes a bit more quickly than it does in the forecast. Unfortunately it’s hard at the moment to see the precursors of such a development, and the lower dollar is not likely to help. However, I’m not alarmed by the unemployment rate at 4½ percent, and I wonder if we’re getting another test of the ex-ante value of the NAIRU in forecasting inflation. [Laughter] As to the risks to economic growth, some of the recent data, although not those pertaining to the labor market, have been on the soft side relative to my expectation. The persistent inversion of the Treasury yield curve has my attention as well, perhaps belatedly. But it’s hard to know with any confidence what to make of the latter factor, given hypotheses about saving gluts, asset shortages, and so forth. Moreover, other approaches beyond analysis of the yield curve to estimate the probability of recessions generally provide figures that are quite low. The underlying resilience of the economy adds to my confidence that business activity is likely to improve rather than deteriorate from here. I would add that I am not hearing any of the negative anecdotes that I heard in late 2000 before the onset of the 2001 recession. Thank you." FOMC20081216meeting--208 206,MR. PLOSSER.," Thank you, Mr. Chairman. The Third District economic news is similar to the national news. It's all bad. Our December business outlook survey, which remains confidential until Thursday, will post another very weak number. In November the number was minus 39.3. The December reading will be released, and it will be minus 32.9--somewhat better but still deeply in negative territory. New orders, shipments, and employment are all very weak. Price indexes on the survey have fallen appreciably below zero for the past two months and are near their lowest levels since we began the survey in 1969. This is after being at nearly their highest levels over the same interval just a few months ago. Moreover, firms are expecting prices to continue to decline. November's reading marked the first time that the future prices-paid index has been negative. The mood is generally quite grim. The Greenbook also paints a very bleak picture. I would like to think that this isn't the most likely outcome, but it is increasingly difficult to argue against that based on recent economic data. I have revised down my own forecast, of course. Although I'm still not quite as pessimistic as the Greenbook, I admit that the Greenbook is no longer an outlier as I am used to thinking about it. The forecasts for output are nearly as bad as or are worse than the economy experienced in 1974-75. Inflation has moderated significantly, and near-term inflationary expectations have also moderated. Our December Livingston survey participants see CPI inflation averaging just � percent in 2009. In the Greenbook, forecasted core inflation will be just over 1 percent next year and will decelerate to � percent in 2010. With the growth prospects so weak and inflation expectations decelerating, the appropriate real funds rate obviously will probably decline, raising the possibility as we discussed yesterday that the zero bound on nominal rates will pose a problem for us. At the same time, since mid-September the effective funds rate has been trading well below the FOMC's target of 1 percent. As we discussed yesterday, we are effectively conducting monetary policy through quantitative easing--by which I mean an expansion of the Fed's balance sheet by both conventional and nonconventional means. I have no objections in principle to this easing process; but as I discussed yesterday, I believe that we need to acknowledge publicly that we are now in a new regime, with a new way of implementing monetary policy, and that it is a deliberate choice of this Committee. Otherwise we risk confusing market participants or implying that we are no longer in control of monetary policy. But in doing so, we need to communicate how this policy will be conducted going forward. The Board of Governors and the FOMC will have to decide how they will handle the governance issues surrounding this new regime. It seems clear to me that monetary policy determinations should remain in the purview of the FOMC regardless of whether we are using standard or nonstandard policy tools. Thus, I think we have to come to grips with three very important policy issues at this juncture. They include (1) how to implement monetary policy via an expansion of our balance sheets for standard fed funds targeting; (2) what decisionmaking process the FOMC and the Board should use in implementing these policies via the balance sheet expansion; and (3) how to communicate all of these to the public in a transparent and, most important, credible fashion. I agree with the Chairman that we need to maintain and embrace the collaborative process between the Board of Governors and the FOMC, which has been our method of moving forward during this crisis. But I remain convinced that in these times of uncertainty we need to be explicit and to communicate that monetary policy remains under the purview of the FOMC. As we discussed yesterday, our primary goal is to set policy that yields the best economic outcomes for the economy, consistent with our dual mandate. I think our history demonstrates that the institutional structure of the FOMC and clearly articulated goals and methods yield the best policy. Thank you, Mr. Chairman. " FOMC20080625meeting--79 77,MR. LACKER.," Thank you, Mr. Chairman. Economic activity in the Fifth District has remained soft in recent weeks. Our retailers report declining activity in June, especially in autos. We are still hearing scattered reports of delayed or canceled new construction projects, either because of a lack of financing or because demand is expected to decline. Our survey measure of manufacturing activity, which by the way covers a manufacturing sector bigger than the Philadelphia and the Empire indexes combined, [laughter] has edged lower in the last two months; but exports continue to be a bright spot with reports of robust outbound activity at area ports. Manufacturing contacts report some success in passing on rising energy and transportation costs to their customers, and their indexes of expected six-month-ahead manufacturing price trends, both for prices paid and prices received, reached new record highs for the 14-year history of those series. I, too, have heard scattered reports in the last couple of weeks of employers contemplating providing extra compensation boosts to their employees to make up for rising energy costs. On the whole, I think the risk of the national economy sinking into a serious recession has receded, and the growth outlook has edged up a bit. I was relieved by the strength in retail sales in May as well as the upward revisions for April and March. The ISM indexes have steadied at right around 50 over the past four months; and although the labor market has been weak, it has not yet shown the accelerating declines that I feared. The Greenbook projection for Q2 real GDP has been revised from minus 1.4 to plus 1.7, and we have made a similar adjustment in our own projection. There remain plenty of reasons for concern on the real side of the economy, of course. Real disposable income has suffered with the fall in employment over the last half-year, and the rising cost of gasoline is taking its toll as well. The continued fall in housing prices has cut into household net worth and could contribute to a rise in consumer saving. Stimulus checks might be playing an important role in supporting consumer spending right now; it is not clear how much. But I am concerned that, when the stimulus effects wear off later this year, we may find that the underlying trend in consumer spending is fairly soft. Commercial construction also remains a potential risk, I believe. There is a bit of a disconnect between the surprisingly strong data on nonresidential construction and the reports of slowing that we keep hearing from regional contacts. This suggests that the numbers reflect projects initiated before the beginning of the year and that commercial construction is likely to soften later this year and to be a drag next year. Despite all of these elements that could depress growth, I think the economic situation has undoubtedly turned out better than we expected at the April meeting because of the better-thanexpected consumer and business-investment numbers. Greenbook now forecasts a period of low but positive real growth, significantly better than the experiences of the last two fairly mild recessions, and I think that is about right. Inflation is a growing problem, though. CPI came in at an annual rate of 8 percent in May and has averaged 4.9 percent over the last three months. The core intermediate goods PPI is increasing at double-digit rates. Oil prices have risen 16 percent by my calculation since the last meeting. Retail gas prices are up 13 percent. Changes in inflation expectations since the last meeting vary with the measure that you choose. But my reading is that they continue to deteriorate. In any event, they are above levels consistent with price stability. The Michigan survey numbers for inflation expectations have risen notably, especially for the one-year horizon. The TIPS-based measure of expected one-year inflation five years forward has increased 30 basis points since the April meeting, and although the five-year, five-year-forward figure has been stable since then, it is still quite close to the highest value it reached at any point last year. It is popular, as many have noted around the table, to cite the stability of compensation gains as evidence that we are not seeing a wage�price spiral. I have done it myself recently. But I share the concerns expressed by President Evans and others around the table about that being a lagging indicator. I am concerned that, if we wait until we see rising inflation expectations showing up as wage pressures, we will have waited too long. I noted in just a casual glance at the data from the 1970s that, although wage acceleration was a prominent component of the acceleration of inflation in the late 1960s, it was largely absent in the accelerations that occurred in '74 and '79. I think monetary policy is quite stimulative right now. Using the Bluebook's standard approach of subtracting four-quarter lagged core inflation, the real funds rate now stands just below zero, about where it bottomed out in the '91 recession and a good deal above its trough in 2004. But I don't think lagged core inflation is the best estimate of overall inflation now. I am drawn to the Bluebook's real rate estimate, new in this edition, that uses the Greenbook's projection for headline inflation. Using that measure and going back and reconstructing it for the past, the real funds rate is now minus 1.3 percent, and that is substantially lower than its troughs in the last two recessions, which were right around zero. This is a lot of stimulus, arguably way too much given the improvement in the growth outlook, the reduction in downside risks, and the continuation of inflation pressures. I think withdrawing the stimulus is going to be challenging, however. About the extended projections, I am not convinced that the benefits exceed the cost. I don't think it is going to provide much help on communicating an inflation objective. I think it will show about as much dispersion as our third-year forecasts show now. In any event, I haven't noticed much of a decline in the volatility of inflation expectations since we began releasing projections on an accelerated calendar late last year. Moreover, I think those steadystate or longer-run projections are just going to tempt people to think that we have an unemployment rate target and a growth target. That some politicians have suggested that we actually adopt such makes it dangerous to engage in any exercise that seems to comply with that suggestion. Besides, I am not sure who cares about our steady-state growth forecasts besides maybe some business-cycle-model calibrators. But we are likely to get our steady-state growth forecasts from those people in any event, so I am not sure that is going to be very helpful. I don't think we should bother with these extended forecasts. Thank you, Mr. Chairman. " FOMC20060328meeting--239 237,MS. PIANALTO.," Thank you, Mr. Chairman. As I said yesterday, the Greenbook baseline captures the broad contours of my expectations—namely, solid growth going forward and projections for inflation moving downward over the forecast period. But that baseline is broadly the same forecast that we received in January, and in January it was supported by a 4.75 percent funds rate. Obviously, this Greenbook has that same outcome being supported by a 5 percent funds rate. Based on the incoming reports that I received from my District contacts, my guess is that the January forecast was about right. So I do fully support another 25 basis point increase in the fed funds rate today. But then, that leaves open, obviously, as others have said, whether it’s going to prove necessary to move to 5 percent or higher and how we communicate that. As I mentioned yesterday, my impression is that the Greenbook is showing pressures in the labor market, and that was one of the central reasons for moving the fed funds path upward to get the same inflation outlook. Because I’m not seeing those same pressures, I’m inclined to believe that a 25 basis point move today roughly balances the upside and downside forecast risk for inflation. Therefore, I could support leaving this meeting with the presumption that the rate hike today is more than likely the last one for a while. Now, having said that, I am sensitive to the distinctions between a forecast risk and a policy risk. And although I see the risk to the forecast, particularly the inflation forecast, as relatively balanced at a 4¾ percent funds rate, I’m not averse to taking out some additional insurance in case there is an upside risk or a surprise on the upside in inflation, because core inflation is currently running at a rate higher than I want to see. So that leads me to think not so much about this meeting or even the May meeting but, as others have said, about the June meeting. As we discussed earlier, my concern is that having no change in the assessment-of-risk language today is going to reinforce the expectations that there will be another 25 basis point increase in May, and I’m a little concerned that it will also lead to an expectation of an additional 25 basis point increase in June. When my staff looks at the distribution of market expectations based on options on fed funds futures, in the week or so following our last meeting there was a movement up, but not because the data came in unexpectedly high. The data came in where they were expected, but the fed funds options did move up. I’m concerned that we’re going to see a similar pattern after this meeting if we don’t make some changes to the language. But given Governor Kohn’s comments and some of the others, the minutes can help us with that. Our statements can certainly also help us convey that. Given my concern, though, I have to say that I was interested in the language that was suggested in the Bluebook by Vincent—that we modify our statement in section 4 just slightly to say that some additional firming may be needed. However, given people’s comments today, I can live with keeping section 4 language the same and accept some of the changes that Vincent has laid out in alternative B, but I suggest that we then use our minutes and our statements if we’re starting to see too much movement in market expectations about where we’re going to go. Thank you." FOMC20080109confcall--12 10,CHAIRMAN BERNANKE.," Other questions for Bill? All right. If there are no other questions for Bill, let's turn to Dave Stockton for an update on the forecast. " FOMC20081029meeting--224 222,MR. PLOSSER.," Well, I don't like the NAIRU, but in my baseline forecast, my natural rate of unemployment is higher than what the Greenbook has. " FOMC20070918meeting--63 61,MR. PLOSSER., My impression from studies and empirical work is that consumer sentiment usually is a much bigger coincident indicator than it is a forecasting tool. FOMC20070131meeting--379 377,MS. YELLEN.," We would have to discuss how to produce that, but it might be based on, for example, our FRB/US forecast errors that we would apply to the central tendency range." FOMC20050920meeting--42 40,MS. JOHNSON., Not by us. MR. STOCKTON: Not by me. I think we did that at your request. [Laughter] And we were not so convinced by the evidence that we’ve maintained that particular series for forecasting. FOMC20060510meeting--108 106,MR. STONE.," Thank you, Mr. Chairman. Economic activity in the Third District continues to advance at a solid pace. Growth in our region has been steadier than in the nation over the past two quarters. Payroll employment grew in each of the three states through March, and the three-state unemployment rate is now 4½ percent. Our business contacts in the region report increased difficulty in filling open positions. In addition, our employment diffusion index in the business outlook survey rose sharply in April. Regional manufacturing activity continues to expand at a moderate pace. In response to a special survey question in April, the majority of participants said that underlying demand for their products was increasing. On the retail side, performance looks solid. Some of that is seasonal. On the auto side, sales have picked up slightly, but we see some small dealerships actually going out of business. Our retailers have expressed less concern than I’ve heard around the table about the impact of gasoline prices on their sales going forward. While initial reports of nonresidential construction contracts in our region have declined in recent months, demand for office and industrial space in the District continues to strengthen. The office market absorption rate is rising in the Philadelphia metropolitan area, and vacancy rates are declining in both the city and the suburbs. Results of the special survey conducted by the Reserve Bank suggest that commercial construction activity is somewhat softer in our District than in the nation as a whole. Nonetheless, our contacts do see a stronger picture this year than they did last year. In the residential sector, home sales have slowed since the winter. Inventories and time on the market have increased. Demand has fallen particularly for higher-priced homes, more so than for lower-priced homes, and house-price appreciation is slowing in our region. Prices for industrial goods are rising, and construction firms are reporting some shortages of structural materials. Some area builders are starting to stockpile copper, aluminum, and steel for upcoming projects. Employers in a number of industries in our region report that they have paid higher salaries for workers this year compared with hires in similar positions last year. At this time of the year, we usually are traveling around the District and conferring with bankers and other businesses as we’re doing our annual field meetings. Over the past week, we were in the typically most depressed areas of our District—the far western part of our District—and for the first time in many years I was hearing optimism about the future and reports of an actual substantial decline in the unemployment rates in those areas. Turning to the national conditions, our economic outlook is broadly consistent with the Greenbook baseline. However, we see somewhat more economic strength and somewhat higher inflation going forward. We also note that many forecasters have also revised up their forecasts of the second quarter based on the strength of incoming data. Business spending and manufacturing continue to show strength. Notwithstanding the April unemployment report, which came in lower than expected, employment remains strong. Monthly gains have accelerated to an average of 173,000 jobs this year, compared with 165,000 last year. Employment growth will support consumer spending even as house- price appreciation slows. The rising gasoline prices will have a damping effect but probably not a dramatic one. There are no signs of a sharp retrenchment in housing. So far, the slowing has been orderly. With the economy expected to remain at full employment and with labor markets tight, we expect hourly compensation growth to accelerate over the forecast period, but not dramatically so. I recognize that higher oil prices and higher long-term interest rates pose a downside risk to growth and that the downturn in housing and the monetary policy tightening already in the pipeline could prove to be a bigger drag than anticipated. But in my view, given the underlying strength of the economy, the risks to growth are roughly balanced or perhaps even tilted modestly to the upside. I have somewhat more concern about inflation over the intermeeting period. It’s true that we haven’t seen an acceleration in core inflation measured year over year. But at shorter horizons, as has been previously mentioned, we’ve seen a marked uptick in core inflation. In addition, inflation forecasts have been revised up, reflecting the recent higher-than-expected inflation data and the view that higher oil prices might add to inflationary pressures. Longer-run inflation expectations, as measured by the TIPS and the Michigan survey, as reported earlier, are apparently up somewhat, which is troubling to me. Higher productivity growth will help to keep inflation in check. With inflation running at the top of the range that I consider consistent with price stability and with the economy operating at high levels of resource utilization, there’s a risk that stronger inflation pressures could emerge. Thank you, Mr. Chairman." FOMC20080130meeting--196 194,MR. KOHN.," Thank you. Thank you, Vice Chairman Geithner, for a little less gloom here. I didn't expect the bright side from that source. [Laughter] Like everyone else around the table, I have revised down my forecast, which looks very much like the Greenbook: a couple of quarters of very slow growth before a pickup in the second half of the year spurred by monetary and fiscal stimulus. The collapse of the housing market has been at the center of the slowdown, and most recent information was weaker than expected. There is no sign in the data anyhow that a bottoming out is in sight. Sales of new homes have dropped substantially, and that must reflect reduced availability of credit, especially for nonprime and prime nonconforming loans, and perhaps buyers' expectations of further price declines. As a consequence, a steep drop in housing construction has made only a small dent in inventories, and those will continue to weigh on activity and prices. Indeed, house-price declines in the Case-Shiller index picked up late last year. I think we just got November. It looks increasingly as though other sectors are being affected as well, slowing from the earlier pace of expansion and slowing a little more than expected. You can see this in broad measures of activity, as President Stern pointed out: industrial production, purchasing manager surveys, and the employment report. I think it is also evident in some measures of demand. Retail sales data suggest a deceleration in consumer spending late in the fourth quarter. Orders and shipments for capital equipment excluding aircraft picked up in December, but that followed a couple of months of flat or declining data. A slowdown in consumption and nonhousing investment probably reflects multiplier-accelerator effects of the drop in housing, a decline in housing wealth, and additional caution by both businesses and households given the highly uncertain and possibly weakening economic outlook. Certainly the anecdotes we've heard around the table reinforce the sense of business caution. But like other people, I see the softening outlook and the spread beyond the housing sector as importantly a function of what's going on in the financial sector and of the potential interaction of that over time with spending. We have seen improvements in short-term funding markets, in spreads, and in the leveling out of the ABCP (asset-backed commercial paper) outstandings, but investors and lenders seem increasingly concerned about the broader economic weakness and spreading repayment problems, and they are demanding much greater compensation for taking risk in nearly every sector. To me one of the defining characteristics of the period since, say, midNovember is the spreading out from the housing sector of lending caution to other sectors in the economy. Nonfinancial corporations have experienced declines in equity prices. Credit spreads on both investment-grade and junk bonds have increased. A substantial portion of banks reported tightening terms and standards for C&I loans. Commercial real estate sector lenders are very concerned about credit. Spreads on CMBS have risen substantially, and most banks--like 80 percent--tightened up on commercial real estate credit, and that has to affect spending in that sector over time. Banks tell us that they are being more cautious about extending consumer credit, as President Yellen noted. A number of large banks noted a pullback in this area and deterioration in actual and expected loan performance when they announced their earnings over the past few weeks. There have also been increasing doubts about how robust foreign economies will remain, and this was evident in equity markets around the globe and in rising risk spreads on emergingmarket debt. The staff has marked down its forecast of foreign GDP growth again this round. The total decrease in projected foreign growth in 2008 since last August has been around � percentage point, and this is at a time when we are counting on exports to support economic activity. The extraordinary volatility in markets is, I think, indicative of underlying uncertainty, and that underlying uncertainty itself will discourage risk-taking. The uncertainty and the caution are partly feeding off the continued decline in housing, the still-unknown extent of the losses that will need to be absorbed, and the extent to which those losses are eroding the capital of key institutions like the monolines. The monoline issue raises questions about who will bear the losses and provides another channel for problems spreading through the credit markets, through losses being felt or credit being taken back on bank balance sheets, making them more cautious, and even more directly, into the muni market through the monolines. Despite these developments, my forecast for 2008 was revised down only a few tenths from October. But that is because of the considerable easing of monetary policy undertaken and assumed in my forecast. I assumed 50 at this meeting, and unlike that piker, President Yellen, I assumed another 50 over the second quarter. " FOMC20060920meeting--135 133,MR. STERN.," Thank you, Mr. Chairman. Let me make just two or three fairly general comments. First of all, I, too, want to compliment the staff for the paper on inflation dynamics. I think it was very well done. It is important, and we need to take it seriously, and I view it in some sense as a follow-up to some of the work that has been going on at some of the Reserve Banks in recent years. One of the things that I think is important about it is that, at a minimum, it ought to raise a yellow flag about our ability empirically to go from measures like output gaps, or the NAIRU, or other measures of capacity to the determination of inflation. I don’t want to exaggerate that point. I know there are different ways of interpreting it, and I know the work isn’t definitive. But I do, nevertheless, think that we need to think about it seriously and consider it when we discuss the inflation outlook and its relation to economic performance. Second, with regard to the economic outlook, I indicated at the last meeting that I was somewhat more optimistic than the Greenbook, and that gap has opened up even further. I am more optimistic, although I’m not talking about the current quarter. One way of summarizing my position is that I think the positive effects of higher incomes, lower energy prices, higher equity values, and stable-to-declining interest rates are greater than you apparently do. I say that even though I can readily imagine that the decline in housing activity turns out to be both more protracted and deeper than you forecast it to be. By the way, as a footnote, if I did the numbers right, back in 1965 and 1966, we did get a decline in aggregate housing starts of better than 20 percent without a recession, although 1966 was considered a mini-recession, or a pause, or something—I’ve forgotten what the exact term was." FOMC20071211meeting--102 100,MR. PLOSSER.," Thank you, Mr. Chairman. There has been little change in the economic conditions in our District since the October meeting. Except for housing activity, manufacturing and other businesses are expanding at a modest pace, somewhat below trend. Our business contacts are a little less optimistic about growth in the near term than they were earlier in the fall primarily because of uncertainty surrounding the outlook rather than any immediate change in their business activity. I’ll begin by reporting on what our contacts say about credit conditions. Business contacts as well as our board of directors have told me that credit activity has changed very little. Creditworthy borrowers, as far as they were concerned, have had no problem accessing credit. Banks have reported some tightening of lending standards, but mostly that has occurred for real estate developers and in residential mortgages. Some loan demand has dropped because of businesses’ uncertainty about the future, as I suggested earlier. That is, businesses seem to be a bit more cautious. But banks do not appear to be conserving capital. In fact, they’re actively seeking good credits. To quote one of my directors, “The crunch on Wall Street has not hit Main Street.” A couple of bankers I spoke to, one representing a very large regional bank and another a very large community bank, expressed the view that they were actively seeking to regain market share from the larger banks because they did not engage in the same off-balance-sheet financing of riskier debt that the large banks did and so they were not facing either capital or funding constraints. Some bankers acknowledge that consumer credit quality seems to have deteriorated slightly, but they reminded me that this was from very good levels. So the defaults and delinquencies remain well within historical norms. Turning to the economy, payroll employment continues to expand at a somewhat slow pace in our three states, yet the unemployment rate is still 0.4 percentage point below that of the nation. Retail sales picked up in November. Moreover, retailers generally said they met their expectations for the Thanksgiving weekend. However, these sales seem to have been boosted by fairly heavy discounting, according to them; and despite the reasonable showing to date, retailers are wary and uncertain for the holiday season. Housing construction and sales continue to decline, but the pace of that decline is in line with the expectations at the time of our last meeting. Nonresidential real estate markets remain firm in our District. Office vacancy rates continue to decline, and commercial rents are rising. New contracts for commercial real estate have declined, however; but with the decline in vacancy rates and with rising rents, the outlook of many developers is not as negative as the current level of spending would suggest. According to our Business Outlook Survey, manufacturing activity in the District has been increasing at a modest pace for the past few months. The index of general activity moved up slightly, to 8.2 in November from 6.8 in October. This is actually about the same average level that the outlook survey has maintained over the past two years. Shipments and new orders moved up slightly. However, optimism regarding the outlook over the next six months declined. It’s a common theme of many of our business contacts that their businesses have not changed much, but they seem to be reacting to the steady stream of negative news, and it is affecting their outlook. Indeed, the CEOs of several very large industrial firms in our District report business to be very strong both domestically and overseas, and the CEOs have seen little effect of the turmoil on Wall Street on their ability to obtain credit. Now, last time I said that there had been little change in the District’s inflation picture. However, we have started to see evidence of increased price pressures. The Business Outlook Survey’s prices-paid index has risen considerably since the beginning of the year and has doubled since August. The index for prices received has also more than doubled since August, rising sharply in both October and November. Also retailers have noted spreading price increases for imported goods, and a wide range of industries are reporting increases in energy and transportation costs. Firms continue to report higher health care costs, and at the same time, wages continue to be moderate, they say. In summary, economic conditions have changed little since our last meeting. The business activity in the region is advancing at a moderate pace. Credit constraints experienced by the large money center banks have not appreciably affected the banks in our District or their lending practices. In general, firms in the District remain cautiously optimistic about their businesses six months from now but not so much as they were last month. Price pressures have increased on the input side related to energy and commodity costs; more generally, many firms are now prepared to raise their own prices and are looking to do so in the near future, and the financial conditions of our banks remain good. Turning to the nation, financial market conditions, especially those associated with the big money center banks, have clearly deteriorated in recent weeks. Until the end of October, spreads were gradually declining. It seems that the potential for a serious meltdown was monotonically declining. However, since early November, as we all pointed to, a number of financial institutions, subprime mortgages, jumbo mortgages, asset-backed commercial paper, below-investment-grade bonds, and LIBOR have experienced increased spreads. Volatility has risen as well. Clearly, risk premiums have risen for certain classes of assets, and investors have fresh concerns about the way credit market conditions are evolving. Overall, the recent financial developments suggest that it will take longer before conditions are “back to normal” in all segments of the market. As I’ve said before, I continue to believe that price discovery still plagues many of these markets. It now looks as though it will take a little longer before these markets can sort things out and return to normal. Financial institutions continue to write off some of the investments and take losses. I view these write-downs as a necessary and healthy part of the process toward stabilization. Infusions of capital in some financial institutions, I think, are encouraging and helpful to the process. This does not mean that the ultimate agreed-upon market prices for some of these assets will bear any resemblance to what they did before August. Indeed, they probably won’t. But that’s not necessarily a bad sign, nor is it a cause for concern. In general, it may be a very healthy development. The news on economic activity has softened somewhat since our last meeting. Among the negatives, of course, the housing market and residential investment continue to decline. Foreclosures have continued to grow at unprecedented rates. Firms have become a little more cautious in their investment plans. Consumer spending has softened slightly, and real disposable personal income declined in October. Oil prices have moved higher. On the brighter side so far, there is some evidence of spillovers from the financial and housing markets to the broader economy, but I believe it is limited. Net exports and business fixed investment have been surprises on the upside. Finally, and most important, the labor market still looks pretty solid. Foreclosures and consumer weaknesses appear to be heavily concentrated in those states where the housing boom and thus the housing price declines have been most pronounced—especially California, Nevada, and Florida—and in those states, such as Ohio and Michigan, that are feeling the effects of the decline in automobile manufacturing. As President Poole indicated, credit card delinquencies were up but highly concentrated in California, Nevada, and Florida. Thus, based on such observations and the news that I hear from my District, I sense that the stresses in the economy vary significantly by region, and we must be mindful that the weaknesses on Wall Street are in those states that have exaggerated housing volatility and may not be representative of the rest of the economy. To be sure, we must be wary of continued deterioration and spillovers, but at this point my assessment is that they remain concentrated in a few regions and are not as widespread as some of the aggregate data might suggest. It’s important to note that, for a good part of the forecast for the fourth-quarter GDP, it’s payback for strong inventories and net export numbers in the third quarter. I note that, absent payback and despite the worsening news, economic growth would be on the order of 2 percent higher. To put this differently, the news since the last meeting has not altered the overall GDP forecast for the second half of 2007. It’s about the same. The news has clearly altered the Greenbook’s forecast for 2008, especially for the first half of the year but also extending into the second half of 2008. The forecast calls for explicit spillovers from financial markets and the housing sector to the broader economy, to consumption, to fixed investment, and so forth. I should note, however, that most private sector forecasters are significantly less pessimistic than the Greenbook. The Blue Chip survey, our just-released Livingston Survey, our Survey of Professional Forecasters, and several of the major forecasting firms that have issued forecasts in the last couple of weeks see weakness extending into the first and maybe the second quarter of 2008 but a much more rapid bounceback in the second half of 2008 than is suggested in the Greenbook. These private sector forecasts are more in line with my own view. While the news on growth is somewhat on the downside, the news on inflation is on the upside. Readings on core inflation have been stable over the last few months, but headline inflation rates have risen sharply, with increases in energy and commodity prices. The broader scope of these commodity price increases and their breadth suggest that perhaps there are more-generalized inflationary pressures out there rather than these isolated relative price shocks. I will note that the core PCE inflation rate for March to June was 1½ percent; and in every three-month window subsequently, the inflation rate has risen monotonically, now reaching 2.26 percent for the latest three-month period from August to October. This comes after fairly steady declines in core rates during the first half of the year. In my comments on the Third District, I noted the greater prospects for price increases indicated by our manufacturing firms. I also am going to cite another statistic from the same survey that President Evans referred to—Duke University’s CFO Magazine survey. The survey to which he referred was a survey conducted in late November and early December of more than 600 CFOs. In the survey, the average price increase that these CFOs were estimating for their own products in the coming year was 2.8 percent, and that was up from just 2 percent in the previous quarter. Thus, it appears that firms are beginning to be more interested in increasing prices and are more able to do so than they were just a few months ago, even though the same CFOs were more pessimistic about the economy than they were in the last quarter. Another piece of news on inflation expectations comes from the Livingston Survey, which was just released yesterday. There the forecast of the average annual change for the CPI for 2007 to 2008 moved up from 2.3 percent to 3 percent. This, of course, partially reflects the behavior of oil prices during the past several months. The December-to-December forecast, on the other hand, also rose, but only slightly. Thus, overall, the economy is weak but only slightly more so than I anticipated. Volatility in the financial markets continues, and the repricing of risk has not progressed as smoothly as I would like to see. Nevertheless, the spillovers from the financial turmoil seem geographically concentrated, and broader spillovers appear limited to date. I view inflation expectations as fragile and see evidence that price pressures are growing and that more and more firms feel that price increases are coming and are supportable. I think we will have to be very careful not to presume that just because price expectations and prices have remained contained that they will continue to be so, independent of our actions. Thank you." FOMC20070131meeting--84 82,MR. STOCKTON.," Well, your recollection is correct, I think. That was probably just a hazy answer, not a hazy memory on your part. In some sense our basic view is that getting to 2 percent is the gravitational constant that we currently see. We haven’t really seen any evidence to suggest any significant shift in that view in recent months. Something below that number, on a sustained basis, is harder for us to see. In some sense, implicit in this forecast is that, at the end of 2008 and into an extended Greenbook forecast, we get 2 percent without creating an output gap that would actually drag things down further. Then the question is how quick the dynamics might be to take you to 2 percent. The view in our forecast is that the movement would be slow over the next two years. But one could imagine a faster adjustment, especially if it were aided by a stronger dollar and by weaker oil prices. So there are reasons for thinking that the adjustment would be faster, but it’s also possible that some of the recent incoming data have given us a bit of a head fake. Maybe we’re not quite as far along in the process of getting back to 2 percent, and maybe we’re too optimistic in that regard." CHRG-111hhrg54867--211 Secretary Geithner," Very hard to make it enforceable. I think probably not achievable. But what we want to make sure the world understands, that as we save more as a country, which we are already doing and we are going to have to do going forward, they are going to have to find future growth more from domestic consumption in those countries, and if they learn anything from this crisis, it is that basic imperative. So that--the strategy we are suggesting is that we try to get countries to commit to reforms that will help produce that and that the IMF plays its natural role as an independent assessor of whether countries are doing things at all that contribute to a more balanced pattern of growth globally. But you can't expect in a world of sovereign states, and I would never recommend that this country, cede basic responsibility over basic economic policy to a committee of other nations or to the IMF. " FOMC20070509meeting--19 17,MR. STOCKTON.," Certainly. As we have reported at recent meetings, we have been surprised by the extent to which actual productivity has slowed over the past six to eight months. We had been resisting a downward revision in our estimate of structural productivity on the expectation that we would imminently see a significant weakening in labor demand that would, in essence, suggest that more of the slowing was cyclical than appeared to be the case. But the tension just seemed to be growing greater over time. As I think Bill Wascher reported in his chart show back in January, our Kalman filter models have been suggesting a more substantial downward revision to structural productivity than we made even in this forecast. Some tension there remains, so we thought we needed to get a little better balance. At the same time, we have been surprised on the upside by the strength in labor force participation—in particular, the participation of workers 55 years old and older. So it felt as though we needed to make some minor adjustments here to get a little better balance of risk for both our labor force forecast and our productivity forecast. Now, in August, when we get the annual revisions, we’re going to have a better idea of how much of the tension between the income side and the product side over the past year gets resolved in favor of the income side. In that case, maybe we have overreacted by making an adjustment, but it just felt at this point as though the shortfall of productivity relative to our structural productivity was so much greater than we could explain by normal cyclical behavior that we had to give at least a nod in the direction that maybe this was telling us something about slightly weaker structural productivity. I really wanted to wait until we received those figures in August, but it just seemed as though enough evidence against our forecast had accumulated that we needed at least, as I said, to nod in that direction." FOMC20050630meeting--290 288,MR. STOCKTON.," In part I’d answer that question by saying that I don’t view our funds rate path as a prescription. We are not trying to convey to you what you should do. In our thinking about this, we were confronted with a couple of crosscurrents in the forecast this time around that led us just to leave the funds rate path unchanged. One was that we got higher inflation and higher inflation forecasts, which might have been pushing us up. On the other hand, much of that was a supply-shock kind of effect where we were getting higher oil prices and a stronger dollar, and those factors would have been weakening GDP had we raised the funds rate. So, that confronts you as policymakers with the choice. It’s not that we think you ought to pick the funds rate path we wrote down as the baseline forecast. It’s a case in which you’re confronted with a shock, and that has made the tradeoff less favorable for you, and you’re going to have to think about how much of that you would want to take in lower output and how much in higher inflation. So, you’re right, we could have raised the funds rate path. We showed an alternative simulation in which you tightened a bit more aggressively and that brings the inflation rate down to 1¾ percentage point at the cost of something on the order of 3 percent GDP growth going forward. That’s about all I’d have to say on that." CHRG-110shrg50409--27 Chairman Dodd," Senator Bennett. Senator Bennett. Thank you very much, Mr. Chairman. Welcome, Chairman Bernanke. I have the same kinds of questions everybody has with respect to the deal made over the weekend for Fannie and Freddie, but I will save those for the next panel. Let's talk about your forecast. The GDP for the first quarter was originally forecast at six-tenths of 1 percent and then nine-tenths of 1 percent and then at 1-percent growth. It has always been raised as the data come in. We have had a bear signal on the Dow theory. I don't know whether you follow that or not, but there has been a lot of that in the newspapers, which I know you do follow that. Whether you believe the Dow theory or not, you follow it. I don't know whether you believe it or not. That is a separate issue. But, nonetheless, we have got a bear signal that says we are now in a bear market, which historically lasts for anywhere from 18 to 24, 30 months, something of that kind. The blue chip forecast for the second half has always been for growth--slow to be sure, relatively low to be sure, but for growth. And in your previous appearances before the Committee in this kind of a context, you have pretty much been in that same territory. Are you still there? " FOMC20070509meeting--40 38,MR. PLOSSER.," Then what drives the demand for new homes? If it is an inventory-sales ratio, you were also making some implicit statement about the forecast of demand." FOMC20071031meeting--15 13,MR. STOCKTON.," Well, I would say this is a modal forecast, and as I indicated, I think there is probably more downside mass than upside mass in that probability distribution at this point." FOMC20070321meeting--68 66,MR. FISHER.," Just for clarification, David, from peak to trough in terms of housing starts, what percent change in construction do you forecast?" FOMC20070131meeting--392 390,CHAIRMAN BERNANKE., There’s research at the St. Louis Bank that says that the FOMC forecasts are actually pretty good. Was there another two-hander? President Poole? FOMC20070131meeting--390 388,VICE CHAIRMAN GEITHNER.," But you’re not suggesting that we try to aggregate or ask the staff to aggregate our own uncertainties that we convey with our own individual forecasts, right?" FOMC20070131meeting--99 97,MR. SLIFMAN.," I don’t think so. Personally, I could think of equally plausible reasons that we could get stronger aggregate demand growth or somewhat weaker aggregate demand growth over the next year. We highlighted one possibility in the Greenbook with regard to the weaker investment scenario. Another could be the housing forecast: Housing could turn out to be weaker than we’re forecasting. So, on the aggregate demand side, I’d give them equal weighting. With regard to the aggregate supply side, I suspect there, too, the weighting probably is equal. It’s a little harder for me to judge. I don’t know whether Bill wants to add something." FOMC20080109confcall--16 14,MR. STOCKTON.," I believe in nonlinear dynamics. [Laughter] I think I have even experienced them, and probably you have as well on occasion, in terms of the difficulty that we have in forecasting recessions. Our forecast isn't just some sort of ""push a button on a linear model and here is the result."" But I do think the current situation illustrates to me why it is, in fact, so hard for us and why we don't forecast recessions very often. As I indicated, I think there is a configuration of a number of indicators that make it easy for me to imagine you looking back on next June and saying, ""Indeed, what you saw back there in December--in terms of the jump in the unemployment rate, the drop in the manufacturing ISM, and the uptick in initial claims-- were all precursors of a recession."" The point of my remarks is that I am pretty darn worried about that possibility. But it is hard at this point to make that call--we are coming off the data in the fourth quarter, which have exceeded our expectations considerably. As I noted, not all the things that you might expect to be highly sensitive to a business cycle downturn, such as motor vehicle sales, have moved in that direction. I know this is unfortunate, and we really cannot be as helpful to you as I would like. We are saying, in effect, ""Yes, we'll call the recession when we see the weak spending data."" But the weak spending data will already be lagged one or two months, and that is the reason that we will be looking back, if we're lucky to be able to do it in March, saying, ""The spending data indicate that a recession may have started in December."" The current forecast is our best judgment. But I think it wouldn't take much more in the way of negative news for us at this point to regime-shift, as you said, into recession mode. We are not quite there yet, but we are certainly worried about that possibility at this point. " FOMC20061025meeting--37 35,MR. STOCKTON.," Clearly, if you have managed to achieve a significant degree of credibility and that credibility has anchored inflation expectations at a rate of 1½ percent going forward and if, therefore, agents expect whatever inflation shock you’ve had to be temporary and for inflation to revert to its average over the past ten years relatively quickly, then inflation could quickly fall back to 1½ percent as suggested by the scenario. We would be looking for evidence that the level of inflation expectations had remained exactly where it was previously and had remained unchanged, at a range of roughly 1½ to 1¾ percent. Now, we don’t think that’s the case, so that scenario does not underlie our baseline forecast. In fact, we think inflation expectations are probably higher than that, more like the 2 percent level that I think implicitly underlies this forecast. But work by our colleague John Williams at the San Francisco Fed, estimating over a very short time span, does produce an estimate that suggests that it might be reasonable to expect—as a good forecast—that inflation reverts reasonably quickly to its recent average. We’re not persuaded by that, but we don’t think it’s entirely unreasonable." FOMC20050630meeting--374 372,VICE CHAIRMAN GEITHNER.," Thank you. We’re somewhat more confident in the strength and sustainability of the expansion than we were in May. Our view is very similar to the staff forecast. We expect real GDP growth to average roughly 3½ percent over the forecast period. We expect core PCE to follow a somewhat higher path and to end the forecast period slightly higher than we expected in May, at just under 2 percent. This forecast assumes that we’ll continue to tighten monetary policy, perhaps by a bit more than foreseen in the staff forecast and than is currently priced into the market. To us, the risks to this forecast seem roughly balanced. We see no new sources of potential risk. This is not to say June 29-30, 2005 138 of 234 daunting. It’s worth noting, though, that these risks—from a cliff in housing prices to a sharp increase in household saving, to a larger and more sustained oil shock, to less favorable future productivity outcomes, to a sharp increase in risk premia or to declines in asset prices—in general are risks that we can’t really mitigate substantially ex ante through monetary policy. However, by making sure we get the real fed funds rate up to a more comfortable level we can help. The alternative strategy, to oversimplify it, would be to follow a softer path for monetary policy to provide a preemptive cushion against the negative effects on employment of a fall in housing prices, a rise in risk premia, some rise in saving and a fall in consumption, and so forth. This would, I believe, be a less prudent strategy. Although there have been persistent concerns about the vulnerability of this expansion and about some of its less robust characteristics, the two most remarkable aspects of this recovery are encouraging. The first is its resilience. So far, each episode of incipient softness has proved to be shallow in depth and short in duration. Despite very prolonged and substantial headwinds in the context of an oil shock, a large ongoing drag from net exports, a significant tightening of financial conditions, a modest withdrawal of fiscal stimulus, etc., quarterly GDP growth—as Janet said— has shown impressive stability around a 3½ percent annual rate over the last year and a half. And this is a dramatic reduction in realized macroeconomic volatility. It makes the much-heralded “great moderation” look turbulent. The second positive feature of this period has been the behavior of underlying inflation and inflation expectations. Of course, underlying inflation seems to have moved up a bit, but large changes in oil and commodity prices and import prices have produced periods of substantial acceleration in headline inflation without, at least to this point, causing more than short-lived June 29-30, 2005 139 of 234 The behavior of productivity growth and expectations about future productivity growth explain some of this. Also important, of course, is the credibility engendered by the record of the FOMC. Changes in the structure of the financial system must matter, too. There are almost surely other factors—luck for one—that are at work. Among the choices in Vincent Reinhart’s note on interest rates, I’m inclined to support the more benign assessment of the recent behavior of forward interest rates and term premia, even though these factors can’t fully explain those moves, and even though the future may prove to be more volatile and adverse than the markets now seem to expect and than those explanations would imply. So what about monetary policy going forward? There are two salient dimensions of the forecast. One, of course, is growth slightly above trend from a starting point where the remaining amount of resource slack, if any, is substantially diminished. The other is an underlying inflation rate—just to focus on the core PCE—that now seems to be running at a modest margin above 1.5 percent and that we expect will end the forecast period above 1.5 percent. And inflation expectations, at the horizon over which monetary policy operates and with reasonable adjustments to translate them into a view on the PCE deflator, are still some margin above 1.5 percent. We don’t consider this inflation forecast a cause for serious concern. We anticipate upward pressures on inflation from some firming of compensation growth and from higher unit labor costs. We expect those pressures will face the countervailing forces of relatively moderate inflation expectations, strong competitive pressures, still substantial profit margins, the potential for some increase in the labor force participation rate, and pretty strong expected future productivity growth. And yet it should matter to us that, even in a world where the nominal fed funds rate peaks June 29-30, 2005 140 of 234 meaningfully above 1.5 percent. The range of estimates in the forecasts and model simulations before us, and the expectations we can derive from the market, place the terminal rate of the nominal fed funds rate now between 3½ and 4½ or between 3¾ and perhaps 4¼ percent. These estimates have moved down a bit over the last few months, but the shape of the path has steepened a bit. I don’t think we really know how much confidence we can have in these estimates, even if the forecast unfolds as we expect today. But my view remains that we are better off following a path that would put us at the higher end of these estimates than in taking the risk of doing too little and stopping prematurely or trying to manage the communication challenges of a temporary pause when we still believe we have further to go. Thank you." FOMC20080430meeting--178 176,MR. ROSENGREN.," Thank you, Mr. Chairman. There seems to be a groundswell of opinion in financial markets, and perhaps around this table, that given the easing to date we are at or close to a point where we should pause and assess the impact of both fiscal and monetary stimulus already provided. Should we pause at a fed funds rate below 2 percent, at 2 percent, or over 2 percent? The Greenbook forecast assumes that we pause at 1� percent. With this degree of stimulus, core and total PCE inflation is at or below 2 percent in 2009, but the unemployment rate remains well above the NAIRU, even at the end of 2010. The Boston forecast generates similar outcomes. The Greenbook and the Boston forecasts suggest that 25 basis points at this meeting may not be enough. Both forecasts imply that a significant degree of slack remains in the economy, even with a 25 basis point reduction at both this and the following meeting. In addition, there are significant downside risks to the outlook. Falling asset prices in other countries have frequently been accompanied by prolonged periods of weakness. Finally, given the rise we have seen in the LIBOR rate, for many borrowers a 25 basis point decrease leaves policy no more accommodative than at our last meeting. The consensus seems to be that we should be moving in smaller increments. But if we choose option B, it is not at all clear to me that we should pause after this meeting. In that regard, I was happy to see the revised language in the Bluebook table 1, which does not imply that our easing cycle has definitely ended. While I hope that the economy recovers sufficiently that further easing is not necessary, we need to remain flexible, particularly given that our models indicate that even with further easing we are likely to experience several years of elevated unemployment rates. Thank you. " FOMC20060808meeting--7 5,MR. WILCOX.," Thank you, Mr. Chairman. Jack Brickhouse, the voice of the Chicago Cubs for more than thirty years, was more widely known for his knowledge of baseball than for his command of probability. When a Cub would step into the batter’s box after an especially long string of hitless trips to the plate, Brickhouse would invariably declare, “He’s due.” Even we kids knew in our minds that Jack didn’t have it quite right on the probability front, but in our hearts it was enough to keep us going. Some of you may remember that an employment report was released on the Friday after the June meeting, and that time, we pretty much nailed it. So I have to admit to having had a “Brickhouse moment” last Friday and wondering whether we were “due” this time for a real trainwreck. But for a second time in a row, fate smiled, as it so rarely seems to do on macro forecasters. So at the end of today’s meeting, I’ll be happy to pass the baton back to Dave Stockton but with a certain sense of guilt: He’s really due. [Laughter] In fact, as we reported to the Board yesterday, Friday’s labor market report came in very much as expected. Private nonfarm payrolls increased an estimated 113,000 in July, virtually the same as the 100,000 we had been expecting, and the gains in each of the previous two months were revised up by a modest 20,000. The unemployment rate rounded up to 4.8 percent, but unless we receive additional evidence of a more-rapid slackening of conditions in the labor market, we’re inclined to stick with our Greenbook trajectory for the unemployment rate as well. Overall, we made no material adjustments to our macro forecast in light of this news on the labor market. Indeed, I would argue that there was less news in the August Greenbook than met the eye. The quick summary of the August projection is that the pressures on resource utilization look roughly the same to us as they did at the time of the June Greenbook, whereas the outlook for inflation looks just a shade worse. Turning first to the issue of resource utilization, the clearest indication of our thinking in this regard is that the unemployment rate in the August Greenbook never deviates more than 0.1 percentage point from our forecast in the June Greenbook. To put a very fine line on the matter, we nudged the path down ever so slightly over most of the forecast period, and that call still looks about right to us, even in the wake of Friday’s report. Given an unrevised estimate of the NAIRU, the slightly lower level of the unemployment rate implies that the pressures on resource utilization are just a little greater in this Greenbook than they were in the last one. At the same time, we have become a bit more pessimistic about the outlook for the growth of aggregate demand relative to potential over the next six quarters. This slightly greater pessimism derives from several considerations. Most notably, starts and especially permits for the construction of single-family homes came in below our expectations in June, and we responded by taking our projection for residential construction down over the entire projection period. In the June Greenbook, our projection ran above the simulated trajectory from our preferred model for starts, in recognition of the persistent upside errors that model had been making. Now, for what it’s worth, our judgmental forecast happens to be in line with the simulation from that model that jumps off from the last quarter of data. Parenthetically, I might note that the simulations from that model did not revise greatly over the past six weeks. We still see the contraction in residential construction as moderate by historical standards but likely to be a little steeper than we anticipated in June. This time, we forecast that single-family starts will bottom out at an annual rate of 1.43 million units, bringing the overall decline from last summer’s peak to 18 percent, still well shy of the declines that were registered in the early 1980s and early 1990s but starting to be in the same ballpark. We also took on board the growth implications of the further run-up in oil prices since the June meeting, the somewhat lower level of household wealth implied by the downward-revised trajectory for house prices, and the likelihood that greater inventory investment in the second quarter robbed a smidgen of growth from the future. All that said, the adjustments to our forecast of resource utilization are pretty marginal. More eye-catching were our revisions to top-line GDP growth, which averaged 0.5 percentage point over the second half of this year and 0.4 percentage point next year. But here, of course, the changes were driven by the adjustments we made to the supply side of our projection. In its annual revision of the national income and product accounts, the BEA trimmed the average pace of growth of real GDP from 2003 through 2005 about 0.3 percentage point. Because our fundamental views of the pressures on resource utilization and the rate of inflation were unchanged by the NIPA revision, the simplest thing for us to do would have been to take potential GDP down by a like-sized amount, thereby keeping the GDP gap the same as before. As we often do, however, we made a further adjustment to potential in order to bring the output gap into line with the unemployment rate gap at the end of last year thereby eliminating a tension between those two “gap” variables that had become more distracting than informative. As for the forecast, in line with our usual practice, we overlaid the other factors that I discussed earlier with a 0.3 percentage point adjustment for the reduction in the growth of potential, on the theory that households and businesses anchor their spending plans around their longer-term prospects for income. A central issue that we wrestled with in this forecast round was whether the slowdown in growth that we anticipate will materialize to the degree that we expect. The dimensions of that slowdown are significant. Looking ahead six quarters and behind by the same amount helps smooth through some of the quarter-to-quarter wiggles. We estimate that, over the past six quarters, real GDP growth exceeded potential growth, on average, about ¾ percentage point at an annual rate; we expect real GDP growth over the next six quarters to fall short of potential by roughly the same amount. One key factor driving this swing in our forecast is the combination of a waning boost to consumption from household net worth and the higher level of interest rates. The result is reflected in our forecast for the personal saving rate. Again using the same six-quarter window, fore and aft, over the past six quarters, the saving rate declined more than 2 percentage points; we expect that between now and the end of 2007 the smaller gains in wealth and higher interest rates will bring the saving rate back up to 2 percent. Another key factor, especially in the near term, is the slowdown in residential investment. After chipping only about ¼ percentage point from the growth of real GDP during the first half of this year, residential investment is expected to slice about ¾ percentage point from the growth of real GDP over the second half of this year. Next year, the drag from this sector should have diminished but not halted altogether. Finally, we think that the sum of public and private spending related to last year’s hurricanes will top out sometime this year and will begin to drift down, accentuating the downdraft from the other factors weighing on demand. We have assumed that, within the aggregate of total hurricane spending, government spending and the replacement of destroyed equipment have been relatively front-loaded, whereas construction activity, we presume, is still ramping up. Turning to inflation, the news is relatively slight but not of the welcome variety. As you know from the Greenbook, we marked up our projection for core PCE inflation over the second half of this year about ¼ percentage point and nudged the forecast for next year up a tenth. The largest single factor accounting for these upward revisions was the further deterioration during the intermeeting period in the outlook for energy prices; the pass-through of these prices adds about a tenth to our projection of core inflation during the second half of this year and about half a tenth next year. Owners’ equivalent rent surprised us once again to the upside in the most recent CPI release, and we extended forward some of that unfavorable news. Other sources of upward revision, each small but together big enough to generate just a little upward nudge to our projection, included slightly higher near-term core import prices and slightly weaker structural productivity growth. As before, we continue to see core inflation stepping down next year compared with this year, almost entirely because of the flattening out we have projected for energy and other commodity prices: We have the increases in those prices adding about 0.4 percentage point to our forecast of core PCE inflation this year, and we have them adding just 0.1 percentage point next year. Provided that this year’s shocks do not get built into inflation expectations going forward, this removal of upward impetus should be enough to give core inflation a downward tilt. In closing, I might briefly mention that “speed effects” do not play an important role in shaping our outlook for inflation. The slowdown in growth operates first by bringing output down from above potential to right in line with potential by sometime during the first half of next year and then by moving output below potential over the remainder of 2007. For 2007 as a whole, output is so close to potential as to be roughly a neutral factor for inflation. If growth were to proceed at a subpar pace into 2008, the resulting gap in resource utilization could begin to place some downward pressure on inflation. Karen will now continue our presentation." CHRG-110shrg46629--13 STATEMENT OF SENATOR CHARLES E. SCHUMER Senator Schumer. Thank you, Mr. Chairman. I want to thank you for holding this hearing and I want to thank Chairman Bernanke. As Chairman of the Joint Economic Committee, I am always interested in hearing your thoughts on the current state of economy and appreciate your availability on so many issues when we reach out to you. As I have said in the past, we live in interesting economic times. And you face a number of important challenges in setting a course for monetary policy that will achieve the multiple goals of high employment, balanced economic growth, and low inflation. Right now, there are certain reasons to be concerned about where we find ourselves. In the short-term, even with the likely improvements in the second quarter, overall economic growth in the first half of the year has been disappointing to say the least. Most forecasters have revised downward their expectations for economic growth through the rest of the year. The Administration continues to run high budget deficit that threaten our future stability to compete with the rest of the world. And our trade gap, particularly with China, remains immense and growing at a rapid rate. Energy prices are hovering at record highs, feeding our trade gap and fueling anxiety among middle-class families. The collapse of parts of the housing market which you call a correction has become a serious drag on our economic growth and a threat to economic security of too many American families. And while I welcome the Fed's new pilot program to monitor independent subprime brokers, I do not think consumers will truly be safe from irresponsible and deceptive lending practices until we enact tougher Federal laws to protect the subprime mess from happening again. As indication of the weakness in the housing market continue to mount, there is an urgent need for better protections for existing and aspiring homeowners, although I do want to thank--the Appropriations Committee did a $100 million in for the workouts. So nonprofits can do workouts that Senators Casey, Brown, and I had asked them to do. Most importantly, a view is recognized. We have an economy whose rewards seems to be more and more going to fewer and fewer privileged Americans. We are facing the greatest concentration of income since 1928 right before the crash and the beginning of the Depression when 24 percent of all income went to the richest 1 percent. It is now close to 22 percent and will pass the 24 percent, if present trends continue, all too soon. At a time when the wealthiest in this country have been doing extremely well, the American middle class, the engine of our economy, has not been as fortunate. Most Americans have not seen the benefits of working harder in their paychecks. Between 2000 and 2006 the typical worker's earnings grew less than 1 percent after accounting for inflation while productivity increased a whopping 18 percent. And now that economic growth seems to be slowing, its fair to ask whether most middle-class Americans will slip even further behind. The dramatic increase in productivity and its failure to raise wage rates is a great conundrum for our economy that needs all of our attention. I do not pretend that there are easy solutions to the troubling challenges facing our economy but we need to remember that our collective focus must be on achieving strong sustainable long-term economic growth that can be shared by all families in this country, not just those in the top 1 or 5 percent. Unless economic fortunes in this country grew together rather than apart, we cannot be confident about our children's economic futures. I look forward to your testimony, and thank you, Mr. Chairman, for the time. " FOMC20060808meeting--17 15,MR. MOSKOW.," President Poole asked a significant part of my question, or he presented a significant part of my question. [Laughter] But let me ask you about the markup part of this. You know, we have always thought that there was a cushion for compensation to go higher, for input costs to go higher, and for profit margins to shrink, and therefore we wouldn’t get any pass-through into price increases. Those markups have remained incredibly high—I mean, profit margins are very high. I was just wondering whether you think we should put less weight on this factor going forward when we’re looking at our forecasts, given what we’ve seen in unit labor costs, which you mentioned, and other changes in the forecast." FOMC20080805meeting--40 38,MR. PLOSSER.," Thank you, Mr. Chairman. I have two questions. First, on the Greenbook forecast, one thing that struck me is that there was a fairly large revision in your forecast for nonresidential structures going forward. In fact, after a pretty good showing in the first half of this year, you marked down the second half of this year for that and marked down substantially 2009. In the last Greenbook, you had structures actually growing positively in 2009; now it's minus 4 percent, something like that. Is that driven by something in the model, or is that some adjustment factor that was added in? If so, what was the rationale for that, or why might it be coming out? Why do we have that change? Then I'll follow up with another question. " FOMC20080130meeting--165 163,VICE CHAIRMAN GEITHNER.," President Yellen, I think you answered this, but could you say a bit more about your monetary policy assumption in your forecast. How did you get to an additional 75? " CHRG-110hhrg46591--124 Mr. Johnson," If a horse has never run, you still don't know, but an informed investor can decide for himself. Rating agencies have been miserable failures as forecasters. " FOMC20051101meeting--160 158,MR. REINHART.," Among other things, the staff inflation forecast is judgmental and need not be accepted by the Committee. I think computationally you’re talking about something, if you wanted to go to the FRB/US model, that would be difficult to do and—" FOMC20061212meeting--50 48,MR. PLOSSER.," I was looking at the change from the August forecast of core inflation, which was before we had the big decline, and it really hasn’t changed much. That’s why I couldn’t see why it hadn’t had that much of an effect." FOMC20060920meeting--171 169,MR. GUYNN.," Thank you, Mr. Chairman. I don’t know how we would rationalize or explain a departure today from the pause that we decided on at our last meeting. Also, I think that what we have learned since our last meeting does not substantially alter our medium-term forecast. Therefore, I strongly favor another hold decision today, along with a statement that continues to make it very clear that, if our forecast changes, especially with regard to the expectation of moderating inflation, our policy position would also be reassessed. I also want to echo the earlier observation of President Stern on the evidence in the memos that were circulated before the meeting. Despite the lack of correlation between resource utilization and inflation and a decline in the influence of energy prices on core inflation, we continue to put considerable weight on these relationships in our statements. I think there are issues here that deserve a good discussion at some point. Finally, it seems clear that we are really struggling to understand inflation dynamics and see a need for a more empirically robust framework to guide our decisionmaking. I assume this area will receive even more research emphasis and will be a fundamental part of the upcoming debate you will have on how to target, forecast, and talk about inflation and the inflation outlook. Thank you, Mr. Chairman." FOMC20070131meeting--94 92,MS. MINEHAN.," I’m interested in the risks you see around the GDP growth rate in your forecast. I note a couple of things. First, some of the growth rate depends upon consumers getting the message that they really ought to be saving for the future instead of spending as they have been. I wonder why they’d do that this year if they didn’t do it last year. Second, I notice that, if you compare the Greenbook GDP forecast with the central tendency of the members of the Committee, growth is a good deal slower—0.3 or 0.4 slower, which in this realm is a lot. I’m interested in how you see the upside risk to this, particularly given that, even with your slower growth rate, you get to zero output gap relatively quickly." fcic_final_report_full--329 At the end of July, Congress passed the Housing and Economic Recovery Act (HERA) of , giving Paulson his bazooka—the ability to extend secured lines of credit to the GSEs, to purchase their mortgage securities, and to inject capital. The -page bill also strengthened regulation of the GSEs by creating FHFA, an inde- pendent federal agency, as their primary regulator, with expanded authority over Fannie’s and Freddie’s portfolios, capital levels, and compensation. In addition, the bill raised the federal debt ceiling by  billion to . trillion, providing funds to operate the GSEs if they were placed into conservatorship. After the Federal Reserve Board consented in mid-July to furnish emergency loans, Fed staff and representatives of the Office of the Comptroller of the Currency (OCC), along with Morgan Stanley, which acted as an adviser to Treasury, initiated a review of the GSEs. Timothy Clark, who oversaw the weeklong review for the Fed, told the FCIC that it was the first time they ever had access to information from the GSEs. He said that previously, “The GSEs [saw] the Fed as public enemy number one. . . . There was a battle between us and them.” Clark added, “We would deal with OFHEO, which was also very guarded. So we did not have access to info until they wanted funding from us.”  Although Fed and OCC personnel were at the GSEs and conferring with executives, Mudd told the FCIC that he did not know of the agencies’ involvement until their enterprises were both in conservatorship.  The Fed and the OCC discovered that the problems were worse than their suspi- cions and reports from FHFA had led them to believe. According to Clark, the Fed found that the GSEs were significantly “underreserved,” with huge potential losses, and their operations were “unsafe and unsound.”  The OCC rejected the forecasting methodologies on which Fannie and Freddie relied. Using its own metrics, it found insufficient reserves for future losses and identified significant problems in credit and risk management. Kevin Bailey, the OCC deputy comptroller for regulatory policy, told the FCIC that Fannie’s loan loss forecasting was problematic, and that its loan losses therefore were understated. He added that Fannie had overvalued its deferred tax assets—because without future profits, deferred tax assets had no value.  Loss projections calculated by Morgan Stanley substantiated the Fed’s and OCC’s findings. Morgan Stanley concluded that Fannie’s loss projection methodology was flawed, and resulted in the company substantially understating losses. Nearly all of the loss projections calculated by Morgan Stanley showed that Fannie would fall be- low its regulatory capital requirement. Fannie’s projections did not. All told, the litany of understatements and shortfalls led the OCC’s Bailey to a firm conclusion. If the GSEs were not insolvent at the time, they were “almost there,” he told the FCIC.  Regulators also learned that Fannie was not charging off loans un- til they were delinquent for two years, a head-in-the-sand approach. Banks are re- quired to charge off loans once they are  days delinquent. For these and numerous other errors and flawed methodologies, Fannie and Freddie earned rebukes. “Given the role of the GSEs and their market dominance,” the OCC report said, “they should be industry leaders with respect to effective and proactive risk management, produc- tive analysis, and comprehensive reporting. Instead they appear to significantly lag the industry in all respects.”  “CRITICAL UNSAFE AND UNSOUND PRACTICES” FOMC20080430meeting--77 75,MR. STOCKTON.," A lot bigger than just the rise in expectations, and the fed funds rate, of course, would have to rise considerably. On the inventory side of the forecast--again, you put your finger on the principal reason that inventories are as weak as they are in the near term, which is that we think there will be a pretty sizable spending response to the tax rebates but we don't see that as showing up fully in activity in large measure because we think firms are going to understand that this will be a one-time increase in demand. So they will be somewhat cautious about responding with higher production to that demand and will, especially in the context of a relatively weak economy, be more content with having that run down inventories than actually with ramping up production immediately. Now, that's guesswork on our part. Again, I feel pretty comfortable with that basic story, but it is going to require some fairly negative inventory figures shortly. There is a technical factor here as well. We have occasionally cited a residual seasonality in imports, and in the second quarter that residual seasonality pushes down imports a lot. But we see no residual seasonality in GDP, so we take it out of inventories. That has been a standard feature of our forecast for the past few years. Nathan and his crew have communicated quite frequently with the BEA complaining about the fact that they have a seasonal adjustment process that takes a relatively flat series and creates lots of noise. [Laughter] It does not seem as though it is probably the best thing, but it exaggerates the downward movement in inventories. If I had to cite something that would make me nervous about the weakness in our near-term outlook, I do worry that the inventory liquidation in our forecast is large. The decline in the inventory�sales ratio in our forecast looks a lot like the decline in the inventory� sales ratio that we saw in 2001 and 2002. So it's not out of line with past cyclical behavior, but it's an aggressive drop. " FOMC20080625meeting--104 102,MR. LACKER.," Thanks, Brian, for including these two new lines of the real federal funds rate. As I remarked yesterday, one use of the figures is to look back and judge the degree of accommodation relative to other historical episodes. My understanding is that the Greenbook forecast of headline inflation four quarters ahead is higher now than it was in 2004, when the black line in your exhibit 3 last hit its lowest point. My understanding is that, if you drew that black line using the equivalent of line 12, the Greenbook's forecast for overall inflation, the trough in 2004 would lie around zero, and we would now be at minus 1.3. " FOMC20071031meeting--68 66,MR. STERN.," Thank you, Mr. Chairman. There really have not been any significant changes in economic conditions or trends in the District. Moderate expansion is continuing. The special survey we did on financial conditions and whether the changes there had affected capital spending plans suggested that plans, at least for firms in our District, were largely unaffected. Contacts with insight into the shipping industry do report that exports are very strong, stronger than at least they had anticipated. That, of course, is consistent with what we have been seeing in some of the aggregate data. As far as the national economy is concerned, I agree with the Greenbook’s assessment of the incoming information that we received since the last Committee meeting. I won’t rehash it here, except to say that the surprises have been positive, a bit on the upside, and I think we still—at least at the aggregate level—haven’t seen generalized spillovers from the contraction in housing activity or prices on overall economic activity. I also agree with the Greenbook’s assessment of the outlook for the economy for the next two or three quarters. I think growth is likely to be subdued as a consequence of the changes in financial conditions that we’ve seen. As far as prices are concerned, core inflation seems to me to be relatively well contained at least on a year-over-year basis, and I expect that performance to be maintained as long as we pursue appropriate policy. Looking at the overall economic outlook beyond the next two or three quarters, I think there is a reasonable chance, given recent developments and recent actions, that by the middle of next year, say, we’ll be looking at real economic growth of something close to what the economy has averaged over the past six years—that is, the period 2002 through 2007. This is a bit more favorable, a bit higher, than the Greenbook outlook, and as best I can judge, the Greenbook is more conservative than I am about the nonconsumption, nonresidential investment components of aggregate demand. Put another way, those components add a bit less to aggregate demand in the Greenbook than I would expect. But my real point is that I don’t think it is a great stretch to see pretty respectable growth by the middle of next year. My reading of the projections package that was briefly discussed earlier suggests to me that at least some have the same view. Of course, that improvement could occur even sooner given the uncertainty associated with forecasting short-term perturbations in the economy. Thank you." FOMC20060328meeting--132 130,MR. STONE.," Thank you, Mr. Chairman, and welcome back. And welcome to the new Governors. First, I’d like to make a couple of comments on the region before I talk about the national economy. The Third District didn’t see a fourth quarter as weak as the national economy, nor is our first quarter as strong. But we’re seeing solid growth, which our indicators tell us will continue at current rates for the foreseeable future. Payroll employment is a particular issue in our District. With the benchmark revisions that were made, our employment growth has been stronger than we originally estimated. Our three-state unemployment rate fell to 4.4 percent in January, and businesses report an increasingly difficult time finding qualified workers. Indeed, more than half the respondents to a special question on our manufacturing survey said that they were having trouble filling openings because of the lack of qualified applicants. That’s an increase from 40 percent when we asked that question two years ago. Firms report the greatest difficulty in finding production workers and computer-savvy employees, but I would go on to point out that one of our directors, who heads a temporary employment agency, has been reporting for the past two years a continuing difficulty in finding workers with even limited skills to deploy. Manufacturing in our area continues to expand at a moderate pace. After a temporary dip in January, the index in our survey has rebounded to the level consistent with last summer, and that level is consistent with moderate expansion in activity. Retail sales in our District are rising only modestly, but retailers tell us that weaknesses in February were weather-related and that they expect a pickup in April. Demand for nonresidential office space in the District is growing, and that’s unusual for our market. The office market absorption rate is rising in the Philadelphia metropolitan area, and the office vacancy rate is declining in both the city and the suburbs. We had some office building in the last couple of years, which is the first office building we’ve had in downtown Philadelphia in a decade. We are seeing a few signs of modest slowdown in housing markets, with permits, home sales, and mortgage lending softening in recent months. Finally, we have received some further welcome news of moderation in price pressures in the District. Our manufacturers’ survey measures of prices received and prices paid have fallen sharply over the past two months. Expectations of future price increases remain subdued, and several respondents told us that, in their view, input price pressures have settled down and that their inflation concerns have subsided. Turning to the national economy, our economic outlook is broadly consistent with the Greenbook baseline. All signs point to a strong rebound of growth this quarter, after the temporary weakness in the fourth quarter. Employment, business spending, and manufacturing remain strong, and consumer spending continues to increase at a solid pace. There are emerging signs that the housing market is beginning to cool off, but no signs of a sharp retrenchment at this point. The economic fundamentals remain solid, and after the rebound this quarter, we expect growth to settle down to a range of 3 percent to 3½ percent, near potential growth. The economy is expected to remain near full employment, with labor markets tight. We expect hourly compensation growth to accelerate somewhat over the forecast period, but not dramatically. Now, in my view, the risks to growth are roughly balanced. A sharper decline in the housing market than that built into our forecast poses some downside risk, but it’s also possible that housing will not turn down as much as or as soon as forecasted. The extent to which we see an improvement or further deterioration in exports is another risk that could go either way. In fact, there appears to be a considerable divergence of views on the path of net exports among private- sector forecasters. In my view, the inflation risks are tilted somewhat to the upside. It’s true that the data on core inflation and inflation expectations and our own recent decline in survey measures of prices paid and received are encouraging. The acceleration of core inflation at the end of 2005 has been reversed in the first months of 2006. So far, firms have had a remarkable ability to absorb cost shocks via new-found productivity gains, and increased global competition has limited their pricing power. Both have helped keep inflation in check. On the other hand, oil prices remain at high levels and continue to be volatile. The ability of firms to maintain low pass-through in the presence of continued higher costs is a question. With inflation running near the top of the range that I consider consistent with price stability and with the economy operating at high levels of resource utilization, there is a risk that strong inflation pressures could emerge. Several times in the past we have seen core inflation quickly rise by a sizable amount when the economy was operating at high levels of resource utilization following periods of accommodative monetary policy, even when oil prices did not rise sharply. So in my view, the inflation risks remain at least moderately on the upside, even though the recent data have been benign. That said, on the whole I think the economy and the economic outlook are very positive. Thank you." FOMC20061025meeting--49 47,MS. MINEHAN.," Thank you, Mr. Chairman. The New England District economy continues to grow at a moderate pace, pretty much as it was growing the last time we met, with job counts slowly increasing and business and consumer confidence relatively good about both current and future conditions. As I’ve noted before, income growth has been robust in the District, with regional income growing better than 7 percent from second quarter ’05 to second quarter ’06. Indeed, incomes in Massachusetts and Connecticut both rose about 9 percent. Reflecting this rise, the fiscal condition of the states in the region, while varied, remains positive. Regional corporate health is solid, and readings of regional stock indexes follow the positive pace of the nation’s financial markets. Contacts from a wide range of manufacturing industries reported positive trends; fewer cost pressures from commodity, energy, and interest rates; and a continuation of competitive pressures to restrain costs and keep prices stable. We regard this pressure as a return to business as usual. On the negative side, the slowdown in the housing sector becomes more apparent with each passing month. According to the overall OFHEO house-price indexes, year-over-year appreciation in the second quarter of ’06 for New England was about half of that for the nation. The change from the first to the second quarter in ’06 was virtually zero. The region now has the lowest rate of annual housing appreciation of any area of the country except the Midwest. This situation is not entirely unwelcome, as housing price levels in the region remain quite high relative to the nation, and there has been much hand-wringing locally about the effect high housing costs have on attracting skilled labor to the region. Of course, the cyclical effect of a sharp residential investment slowdown is of concern. Existing home sales volumes are down 12 percent from their 2005 peaks. New home construction is weakening significantly, and construction employment has declined in both Connecticut and Massachusetts since year-end 2005. Indeed, negative commentary from area business contacts revolved mostly around markets for products aimed at the residential housing industry. While there may be some light at the end of this tunnel, with recent lower mortgage interest rates and some sense of bottoming out, the usual seasonal slowdown in the real estate industry as winter approaches may make this improvement difficult to appreciate for some time. The effect of slowing residential investment remains one of the key uncertainties on the national scene as well. Combined with the negative effect of trade, housing trends have caused us to mark down our estimate of third-quarter GDP growth to about the level of the Greenbook. However, positive incoming data on employment, consumer spending, and corporate profits, spurred as they have been by favorable trends in energy prices, financial markets, and worldwide growth, support a modest rebound in overall activity in the fourth quarter and a forecast for 2007 and 2008 of just slightly less than potential. Indeed, I was pleased to see the upward revision to the Greenbook forecast for the fourth quarter of this year, as I had worried whether the earlier trajectory had increased the risk of a spiral downward into a recession. I don’t think that’s likely, and I realize that overall the second-half GDP projection remains about the same. But the upward revision to the fourth quarter in the Greenbook, which brings it closer to our Boston forecast, makes me somewhat more comfortable about the underlying trajectory of economic activity. We, like the Greenbook authors, have revised down slightly our estimate of potential, so our sense of any gap in resource usage remains about the same as it was at the last meeting. Thus, unemployment rises very slowly, to just about 5 percent in 2008, and inflation falls slowly as well, along the lines of the forecast at the last meeting. All in all, that is not a lot of change. I must admit, however, to some small amount of hope that we may be seeing the bottoming out of the housing market decline because of the mixture of the data that Dave referred to earlier. Moreover, other aspects of the current situation seem quite positive as well—in particular, the very accommodative nature of financial markets and the continuing profitability of the nation’s corporations. Thus, the risks to what continues to be in many ways a rather benign forecast seem to me to be a bit less on the downside than they seemed at our last meeting. Energy-driven inflation may be lower as well, but I remain concerned about the underlying pressures on resource utilization if the economy does not slow as much as we now expect. Corporate-driven productivity growth, though we haven’t seen it escalate recently, could come to the rescue here, but I think it’s hard to bet on that. Thus, I do see some continuing uncertainty as to whether inflation will be as well behaved as in either the Boston or the Greenbook forecast." FOMC20070321meeting--261 259,MR. PLOSSER.," Thank you, Mr. Chairman. I’d also like to lend my voice to the vote of thanks to the staff on what I thought was an excellent set of memos. I think the staff did an outstanding job in summarizing a lot of the nuances and the details that are involved. Perhaps it comes as no surprise that I’m in favor of defining the Committee’s price objective numerically and announcing that goal to the public. I believe that specifying our long- run price stability objective numerically would focus our policy discussions and help anchor expectations. By reducing the public’s uncertainty about our goal, long-run expectations would become less responsive to changes in short-run inflation. This should help enhance monetary policy’s flexibility to respond to economic shocks as we may deem appropriate. Thus, rather than being unduly constraining, I believe it would actually add to our flexibility. In this way, it’s consistent with the other goals of monetary policy and increases monetary policy effectiveness. It would also increase social welfare to the extent that it helps us avoid time-inconsistent policy, since we know welfare under commitment generally exceeds welfare under discretion when agents are forward looking. Thus, I believe a numerical goal would be a long-run anchor to our monetary policy and help coordinate our own discussions of what appropriate policy might be. Now, as Vince laid out the questions, we have to make a number of decisions in making that numerical goal operational. I feel more strongly about some aspects of the design than about others, and many of the choices are interrelated. For example, a long horizon should mean a tighter control range. A long horizon makes the choice between headline and core less important. A long horizon makes the choice of core in fact less compelling. I think that any proposals will have their pros and cons. As I said, I’m not necessarily wedded to all of the particulars, but I will make a proposal. But let me emphatically stress that what is more important than the specifics is that we agree on a numerical objective and a horizon for its achievement. Regarding which price index, I prefer the headline CPI even though it’s likely to be harder to control and forecast in the short run than the core. Many foreign central banks with experience have tended to move toward the headline CPI number, indicating that it can in fact work. The headline CPI is a measure that’s more understood by the public, so the communication arguments are important here. Unlike the PCE, as has been mentioned a couple of times, or the GDP deflator, the CPI is not revised, which helps us in assessing our accountability in reaching our goal. I also prefer headline to core for our goal because I don’t want to convey the idea that we are insensitive to the wider array of prices that influence behavior—particularly because, as Governor Mishkin indicated, the stochastic processes or properties of individual elements of the CPI may change over time. If we started defining a subset of prices, we could find ourselves in trouble. I think we would also have the opportunity to use the core in our communications when explaining why we might or might not react with policy to a temporary blip in headline inflation. I view focusing on headline and using the core for other purposes as a means of enhancing our communication efforts. Again, this practice is similar to the practices of other central banks that announce their inflation goals. Of course, I think it’s going to be terribly important for us to consider how we will respond to and communicate about the inevitable misses from our target. Regarding a point goal or range, I strongly favor announcing a point goal. In reality, there is a range around this point that reflects the precision with which we policymakers think we can control inflation, and this control range will differ depending on the inflation measure used and the time horizon selected. However, I’m reluctant to announce a range as part of our inflation goal because I think it would be very difficult to ensure that the public would not interpret it as a range over which we are indifferent. So for the headline CPI, I would specify and announce a target of 1 percent. That’s consistent with our goal of price stability and the estimated measurement bias of the CPI of being something slightly less than 1 percent. I picked 1 percent because I take seriously our mandate for price stability. Since I do not believe that there is any long-run tradeoff between inflation and employment, we have no reason not to seek and meet that goal over a reasonable period. I recognize that some may feel that a 1 percent target is too low as the risk of deflation or zero bound restrictions on nominal interest rates might call for a greater cushion. I understand those arguments, and they are certainly plausible. But for various reasons, some articulated by people around this table, I’m less concerned about our ability or the economy’s ability to deal with those issues, both of deflation and zero bounds. But I accept that some people may have more concern about it than I do. Regarding time horizons, I feel strongly that we should specify a time horizon by which we think we can achieve our target so that we can be held accountable for meeting or missing a goal. Since I favor using the headline CPI, which is a little more difficult to control, more volatile, than a core measure, I think a two-year horizon would be appropriate and, indeed, achievable given the typical shocks that hit the economy and the volatility of the CPI. For example, for the past ten years, the standard deviation of the monthly twenty-four-month CPI headline inflation rate has been about 0.5 percent. I could also make the case that initially we may want to consider a slightly longer horizon, especially if we choose a number like 1 percent and given that we are currently well above 2 percent. Specifying a longer horizon at first may provide markets with more opportunity to adjust to the new regime and mitigate some of the transition costs. As we converge to our target, we might be able to shorten the horizon. I much prefer that idea to adjusting the goal. I think the goal ought to be the goal, and we use the horizon to give us some flexibility, depending not only on initial conditions but also perhaps in future discussions on the nature of the shocks that may cause us to do that. I don’t like the idea of not picking an optimal target simply because we’re not there yet. I think that’s not the right strategy. There remains the issue of how we treat deviations from our goal—that is, whether we let bygones be bygones or whether, for example, when inflation has been above our target for a year, we must get it below our target for a year. Our chosen inflation goal will imply a price- level path with that goal. We need to decide whether or not we will permit permanent deviations from that price-level path. Deviations from the price-level path occur when inflation deviates from our goal. If inflation increases above our goal for a time, then we would need to bring inflation below our goal to return to the price-level path that was consistent with our initially announced inflation goal. Similarly, if inflation moved below our goal, we would need to have a period of above-target inflation to return to the price path. Alternatively, the Committee might decide to accept permanent deviations from the price path and choose to implement policy only to return to the inflation level. I would prefer the former as a price-level path because it prevents base drift, and I suspect that we will, on average, more likely be above the target than below, and the ensuing gradual erosion of purchasing power will be higher than we might have anticipated. In either case, I think it’s important, regardless of which way we decide, that we make that choice consciously and weigh the costs and benefits of it and decide which regime we want to be in. I do think it’s critical that the FOMC members reach a consensus, or at least a decision, on the goals and the definition of price stability and essentially not dispute those in public. I don’t think members need to agree on the model of the economy or the channel through which monetary policy affects the economy. Indeed, given the state of economic science, the differences in the models and the channels can actually aid in policy formation. However, the point of announcing a numerical definition of price stability is to anchor expectations and improve our accountability. Without agreement on that definition, the benefits of such an announcement would be critically diminished. The Committee may want to periodically review the definition of particulars such as the horizon as it gains experience operating under this structure, but I think it’s very important that we reach a consensus on our announced goal. While I have offered my own choices on the particulars, I believe that they really are of secondary importance to our public commitment to an objective. As far as the trial run is concerned, I strongly favor having a trial run for producing a forecast narrative in May, and I agree with the discussion last time in that I like the idea of doing it four times a year. I also like the idea of incorporating a forecast narrative into the minutes, which gives participants the opportunity to comment on the draft narrative. This is not the only way to proceed, but I think that it is a good first step and that refinements can follow. As I mentioned earlier, our discussion this morning highlighted the real need for us to have a way of communicating our policy views more effectively and outside the narrow confines of the policy statements as they are currently constructed. Regarding the narrative itself, I have two comments. First, I suggest adding the assumed policy path as a variable in the forecast. Participants are asked to assume appropriate monetary policy, and conditioning on policy paths that can differ across participants embeds differences in participants’ preferences over outcomes as well as differences across their models. If we are thinking about the forecast as a communication device that enhances the transparency of our policymaking process, then we want to convey something about the reaction function that is likely to arise out of our Committee’s decisionmaking process. Aggregated information, such as the range and central tendency of the fed funds rate in the fourth quarter of each of the three years of the forecast, as we do with the unemployment rate, might be useful without holding the Committee to any particular path. I think the idea of conveying information regarding the uncertainty of the forecast is also important so that the public does not place too much emphasis on point forecasts or narrow ranges. Moreover, uncertainty is clearly larger than the range of the point forecasts of the Committee, and yet I’m not sure, as has been mentioned already, that using the forecast standard errors out of the FRB/US model is the best solution since they are not consistent with the forecast that was generated by the Committee. We might, for example, even consider asking Committee members when they submit their forecasts to submit their own range of uncertainty at the four-quarter horizons and then use those estimates to create something like a fan chart. In any case, I’m looking forward to a trial run in May. Thank you, Mr. Chairman." FOMC20060328meeting--62 60,MR. STOCKTON.," No. In fact, we have a slight 0.1 bump-up in the near term in the participation rate, but basically in our forecast the participation rate moves sideways." FOMC20070131meeting--384 382,VICE CHAIRMAN GEITHNER.," Then you attach some other method for framing uncertainty based on past forecast errors—for example, of FRB/US, Greenbook, Blue Chip, or somebody else." FOMC20070807meeting--78 76,MR. PLOSSER., That is fine. This point was driven home to me by somebody who I thought was fairly sophisticated. He saw the central tendency narrow and thought that therefore we were more certain about what our forecasts were. FOMC20051213meeting--59 57,MR. LACKER.," If it’s too much, we could do it offline. And more broadly, I’m interested in understanding the framework you have for forecasting this. It’s not clear how that works. If there is a memo or paper that you could refer me to that laid out all the machinery, I’d really appreciate it." FOMC20080625meeting--38 36,MR. FISHER., You don't know how happy I am to see global things come first. But are you saying that a great deal of uncertainty is attached to that forecast? FOMC20050920meeting--21 19,MS. JOHNSON.," Thank you, Mr. Chairman. Spot prices for crude oil were especially volatile over the intermeeting period, as uncertainty about the consequences of possible hurricane damage, along with other risks, drove up prices before Katrina hit the Gulf shore and as evolving expectations of the near- and medium-term implications of the storm damage induced fluctuations in the weeks following Katrina. In the last few days, concerns about Tropical Storm Rita have been added to the mix. As has been our practice, we again relied on the futures markets to sort through the uncertainties about crude oil supply and demand over the forecast period, and our projection of WTI [West Texas intermediate] prices through the end of 2007 is drawn from the futures curve as of September 12. September 20, 2005 10 of 117 U.S. crude oil production in the Gulf remains at about 50 percent of the level before Hurricane Katrina, with some of this reduction offset by release from the Strategic Petroleum Reserve. We expect that repairs to the damaged facilities will occur over time and have incorporated into the forecast a gradual recovery that is completed early next year. Consequently, we have bumped up our projection for crude oil imports in the first quarter to account for the transitory shortfall. The net effect of these developments is that we have raised our projected price for spot WTI oil by $1.40 per barrel in the fourth quarter of this year and by $1.80 per barrel next year. However, in the near term we have raised our projection for the U.S. oil import price by more, $2.60 per barrel in the fourth quarter and just below $2 per barrel in the following quarter, to reflect the change in mix toward imports of refined product and the rise in product prices as well as crude prices. The net result is a forecast for the oil import bill that is notably higher in the near term, but is less so by the end of next year. Other elements of the external forecast that were affected by Hurricane Katrina include the shipments of non-oil goods into and out of the United States through the region=s port facilities. The immediate percentage impact on exports is judged to be a bit larger than that on non-oil imports, as imports have greater flexibility to be diverted to other ports. The port facilities are reopening quickly, and these effects, particularly on a net basis, should be small. In addition, the current account balance will be positively changed by receipts by U.S. insurance firms of payments owing to reinsurance abroad and, to a lesser extent, by aid contributions from other countries to the U.S. economy. These items will appear as transfer receipts in the nontrade portion of the current account. On balance, this range of impacts from Katrina is expected to be transitory and of limited magnitude. The outlook for foreign growth and inflation is, of course, also influenced by the change in our forecast for global energy prices and by the changes projected for the U.S. economy. In the near term, these two factors work in the same direction to lessen foreign growth. Over a longer horizon, with U.S. growth projected to rebound next year, they are partly offsetting. Upward pressure on inflation from energy prices is a growing concern of central banks and officials abroad. The event of Hurricane Katrina reinforced the trend toward elevated oil prices that has been unfolding over the past few years. In some foreign countries, particularly emerging-market economies, officials have controlled domestic energy prices to blunt the effects of higher global prices. As elevated oil prices have continued, foreign officials have started to remove or lessen these subsidies, with consequent effects on inflation pressures. David will continue our presentation. September 20, 2005 11 of 117 building models that bear no resemblance to economic reality and praised—or at least I think it was praised—for then having the good sense to essentially ignore those models through the wise use of add factors. That mixed message reminded me of a story told by Nobel laureate Ken Arrow. During World War II, Arrow was assigned to a team of statisticians to produce long- range weather forecasts. After a time, Arrow and his team determined that their forecasts were not much better than pulling predictions out of a hat. They wrote their superiors, asking to be relieved of the duty. They received the following reply, and I quote “The Commanding General is well aware that the forecasts are no good. However, he needs them for planning purposes.” [Laughter] I’ll have to admit that we face more than the usual challenges in the period ahead. Over the next few months, I suspect that we will encounter considerable difficulty extracting the macroeconomic signal from economic data that could be profoundly affected by the consequences of this disaster. But as we set ourselves to that task, it will be important not to lose sight of the fact that the larger influences of monetary and fiscal policy, financial conditions, and global energy developments, rather than the hurricane, are likely to dominate the macroeconomic outcome a year hence. In that regard, while it might seem like ancient history and a world away, most of the macro data that we received since the August Greenbook provide a window on how these forces were shaping economic developments prior to Katrina. In brief, we saw the balance of the incoming information as broadly consistent with our view that the economy had been growing at a brisk pace early in the second half. In particular, the household sector seemed especially buoyant. Sales of motor vehicles were receiving a considerable boost from the employee discount programs. And last week’s retail sales report for August suggested consumer spending excluding motor vehicles had been well maintained. Meanwhile, housing activity remained strong, with both starts and sales holding near historic highs. I should mention that this morning’s release showed housing starts in August remaining above 2 million units at an annual rate—close to our expectations. Even the external sector appeared poised to make a contribution to current-quarter growth, rather than being the drag we had earlier anticipated. September 20, 2005 12 of 117 The incoming information on new orders and shipments for nondefense capital goods also has been on the soft side of our expectations. Spending on computers looks to be on track for a 16 percent increase in the current quarter, a relatively modest gain for this component and well below our previous projection. And outlays for capital goods outside of the tech area have been about flat since the turn of the year. As you may recall, equipment investment was surprisingly strong in the second half of last year, and we may now be experiencing some payback for the earlier strength. It is also possible, however, that higher oil prices could be damping business confidence, raising uncertainty about the outlook and making firms more reluctant to invest. And, of course, we can’t rule out the possibility that the recent weakness in equipment spending reflects a dearth of profitable investment opportunities, which would raise questions about the underlying thrust of aggregate demand going forward. For now, we think it is too early to reach that conclusion, but the recent softness here certainly raises that risk. Putting these pluses and minuses together, we thought the economy was on track for growth in the vicinity of 4 percent in the second half of this year. We were encouraged in that interpretation by the ongoing improvement in labor markets. Gains in private payrolls had averaged about 175,000 in recent months, and with the readings on initial claims remaining in the low 300,000s, a continuation of those increases seemed likely. Looking a little further down the road, there had been the usual crosscurrents in the key factors influencing the contours of our forecast. Oil prices continued to rise, siphoning off even more purchasing power from households. But, we were surprised yet again by the strength in housing prices, with the OFHEO [Office of Federal Housing Enterprise Oversight] repeat-transactions index up about 13 percent in the year ending the second quarter. The associated upward revision to housing wealth more than offset a slightly weaker stock market to boost overall household net worth over the projection period. All in all, it seems likely that, absent the hurricane, we would have been presenting to you a forecast that was very similar to that in the August Greenbook. September 20, 2005 13 of 117 As we noted in the Greenbook, our assessment is that, with a few wrinkles, the influence of Katrina on economic activity will trace out a pattern similar to that we have seen after previous disasters. Output will be depressed in the near term by the disruptions to production in the region and elsewhere. As those disruptions ease, activity begins to recover. And then once rebuilding efforts really get under way, output receives a considerable boost. In reality, aspects of all three of these phases operate simultaneously—but with different intensities as time passes. In that regard, one can’t fail to be impressed with how rapidly some aspects of the recovery process already are occurring—in many cases, faster than was initially expected. Some evacuees are finding employment elsewhere; many firms are either temporarily or permanently relocating offices and employees; and workarounds are being found for some of the transportation bottlenecks that have developed. Still, there is no denying that the disruptions remain substantial. About 15 percent of total U.S. oil production and 7 percent of U.S. natural gas output remain shut in at facilities located in the Gulf. As Karen noted, four refineries are still off line and full recovery may not occur for several more months. Activity in the chemical, shipbuilding, and food processing industries—to name just a few—remains seriously impaired. More broadly, business has been disrupted throughout the region. And while many businesses have been effective in developing workarounds, these adjustments are often less efficient and more expensive than before. In our forecast, we have assumed that these disruptions pull down the level of activity in the third and fourth quarters, lopping more than ½ percentage point off the annualized growth of real GDP in the second half of this year. Accompanying this hit to growth, payroll employment is expected to drop 250,000 in September—a shortfall of about 400,000 relative to trend. Employment is then expected to stage a gradual recovery in subsequent months. Although rebuilding activities are already under way, those activities don’t really show through with any macroeconomic force until early next year. In that regard, the draining and environmental cleanup of New Orleans will slow the rebuilding phase compared with past hurricane recoveries. The dynamics of the recovery process will be influenced importantly by the response of the federal government. We have assumed an $85 billion fiscal package, about $70 billion of which is spent over the next two years. This spending is projected to provide a powerful counterbalance to the depressing effects of Katrina and is a chief reason why activity is projected to approach the pre-hurricane baseline by the middle of next year. September 20, 2005 14 of 117 package is appropriately scaled to our estimates of the extent of the damage that has occurred and the dimensions of the economic disruptions. Even with that scaling, I should note that we have the federal government footing the bill for a vastly larger share of the losses than is typical—nearly dollar for dollar in our forecast relative to the 25 percent reimbursement rate that is more the norm. One obvious risk that you confront is that the hurricane, viewed from a macroeconomic perspective, could prove less disruptive to activity and that a massive dose of fiscal stimulus is about to be layered on top of an economy that was already nearing its productive limits. In those circumstances, there is the potential for some overshooting in output with accompanying upward pressure on inflation. But Katrina has amplified some of the downside risks to the outlook as well. Prior to the storm, we were already concerned about the cumulative effects of the rise in energy prices over the past two years. As we noted in our briefing yesterday, there is at least some evidence that sharp jumps in the price of oil have at times in the past been associated with outsized effects on consumption. With the retail price of gasoline having risen above $3.00 per gallon in much of the country, there is certainly cause to be concerned. As a macro guy, I hope that those of you involved in supervision haven’t been too hard on home equity lending, because pretty soon people are going to need a loan to fill up their SUVs. [Laughter] Moreover, the price of gasoline is not the only drain on consumer budgets. Households will face another hurdle this winter when the bills for heating oil and natural gas come due. So this source of downside risk seems likely to be with us for some time. For now, there simply isn’t much hard evidence to suggest any nonlinear response is gaining traction. As I noted earlier, consumer spending has continued to surprise us to the upside. Although last Friday’s report on sentiment showed a substantial deterioration, that drop closely matched our expectations. The forecast is predicated on a gradual recovery in sentiment by the end of the year. If that were not to occur, we would become more concerned about a greater retrenchment in consumer spending. Of course, the cumulative effects of higher energy prices also pose some nonlinear risks to the inflation outlook. Three channels, not entirely independent of each other, would seem to be of greatest concern: a broad-based breakout to the upside in inflation expectations; an intensified push on the part of workers to restore real wages for the ground lost to higher energy prices; and an effort by businesses to more aggressively repair damage that may have occurred to profit margins from rising energy costs. September 20, 2005 15 of 117 expectations moved up to 4.6 percent, the highest level since 1990, while expectations for the next 5 to 10 years edged up to 3.1 percent, just above the narrow range in which they have held over the past several years. However, we suspect that the enormous increase in gasoline prices that took place over the first half of the month was a contributor to this development, and we would counsel waiting for a few more readings before concluding that there has been a consequential deterioration in inflation expectations. That view receives some support from TIPs [Treasury inflation-protected securities]-based measures of inflation compensation, which have also increased, but by much less than the survey reading. We also don’t see much evidence that we are on the verge of a substantial acceleration in labor compensation motivated by efforts of workers to restore real wages. Abstracting from the surge late last year that we believe was related, in part, to stock option exercises and bonuses, the growth of hourly labor compensation has been reasonably stable over the past few years. And while the labor market has tightened up, we don’t hear much from our business contacts to suggest that the competitive environment has changed in a way that would have altered their ability or inclination to grant substantially larger pay increases in the period ahead. Finally, there is a concern that the steep rise in energy costs has placed the margins of some businesses under pressure and that efforts to restore margins could result in more upward price pressure than is currently anticipated in the forecast. To be sure, there is considerable heterogeneity across industries. However, as best we can judge, in the aggregate, the margins of nonfinancial non-energy producing corporations have reached high levels over the past couple of years despite pressures from energy costs. Hence, businesses either have been reasonably successful in passing through higher energy costs or have implemented other offsetting efficiencies. Looking forward, we think that we have made adequate allowance for further pass-through of higher energy prices, but we acknowledge that there are considerable uncertainties about the magnitude of that effect. September 20, 2005 16 of 117 While we do not believe that we have yet experienced nonlinear effects on either output or inflation, any further upward movement in energy prices would certainly intensify the risks of such outcomes. With another storm moving toward the Gulf, we will be watching The Weather Channel closely in the next few days. Before closing, I would like to draw your attention to some substantial changes in both the content and format of the Greenbook’s green sheets that we implemented this round. As far as we can determine, this is the most significant change in the forecast presentation in a few decades. We recognize that we may have imposed some transition costs on those of you who were used to the previous format. But our objective was to make the presentation more user-friendly and to make the forecast and how it has changed between rounds more transparent to you and your staffs. Obviously, we are open to suggestions for further improvement and, if past is prologue, we should be able to work them into the Greenbook at some point in the next few decades. [Laughter] Karen and I will be happy to take your questions." FOMC20080430meeting--87 85,MR. EVANS.," Thank you, Mr. Chairman. I was pleasantly surprised that we have not had any major downside surprises since our March 18 meeting. So while I still recognize the economy's downside risks, I've become less comfortable about signing onto the Greenbook's judgment that a nonlinear step-down in activity currently is in train. On balance, our projection still looks for weakness in the near term and then has growth picking up as we move through 2008 and into 2009. We see a noticeable output gap opening this year but not one as large as in the Greenbook. Under this forecast, it is possible that some portion of 2008 might eventually be labeled a recession, but it is not yet conclusive that it will be. Indeed, given the highly unexpected development that events have proceeded as expected, I think the downside risks to growth have abated some. Some of the stress in financial markets has been mitigated by our new lending policies as well as actions by banks in recognizing losses and raising capital. Neither the incoming data nor the reports from my business contacts seem to be consistent with the bleak downside scenarios that I feared might transpire after we saw the December employment report early this year. In this regard, I will simply note a couple of observations from my contacts. A national shopping mall developer reported that his tenants experienced a small improvement in April retail sales compared with March. He was not expecting that. Similarly, Manpower indicated a small improvement in billable hours for temporary workers over the past month and a half, also unexpected. Now, I am not saying that I will be surprised if the outlook deteriorates further. I am saying that the likelihood of that event seems to be smaller today than I expected at our last two meetings. Accordingly, I think that current real interest rates are appropriately accommodative relative to the baseline forecast for economic growth and the risk to that outlook. As seen in chart 6 of the Bluebook, the real funds rate is essentially zero. Of course, this uses a core PCE measure of inflation and thus may overstate the true real rate since headline inflation has been consistently running above this core measure. There is the additional accommodation that is being provided by the range of new lending facilities we had put in place. The extra accommodation is appropriate to offset the large degree of restraint still being exerted from financial markets, and our expansion of the swap lines and the TAF adds to this accommodation. Furthermore, in the event of a nonlinear step-down in economic activity, as in the Greenbook forecast, our policy responses can be adjusted appropriately because we're well positioned now for that. On the price side, on balance, the recent news has been good. My forecast has core PCE inflation falling to just under 2 percent in 2010 largely because of the increasing resource slack in the economy. However, I think there are substantial upside risks to this outlook. All of my business contacts have noted how high and rising energy and commodity prices are creating cost pressures that many are passing on to their customers. As Dave Stockton mentioned, with his inflation catechism, without reviewing the past transcripts I will speculate that we have been projecting a leveling-out of energy prices since the price of oil was $70 a barrel. Weak domestic demand may limit the degree to which producers can pass through these higher costs, but it is unlikely to prevent noticeable increases in some downstream prices. The depreciation of the dollar also imposes risks even beyond the effects operating through the commodity price channel. Now, I do agree that labor costs have not been cited as a problem for inflationary pressures, and so that does add somewhat to trimming out the risks there. Inflation expectations were also an issue. No matter how often we say that core inflation is a more reliable measure of underlying inflationary tendencies, I find it difficult to believe that the public's inflationary expectations will not be affected by large and persistent increases in food and energy prices. The past five years have been unkind on this score. On average over this time, higher food and energy prices have pushed total inflation above core about � percentage point, and it is also sizable over the past ten years. Another challenge for inflationary expectations comes from our policy focus on the downside risks to growth during a time of rising headline inflation. Rightly or not, this could make the public question our attitudes toward inflation. We are accepting considerable inflationary risks when we hope that these concerns will disappear quickly with future adjustments to policy that have not yet been signaled. How we balance these conflicting risks should be an important component of our discussion tomorrow. Thank you, Mr. Chairman. " FOMC20070807meeting--43 41,MS. JOHNSON.," The financial market turmoil over the intermeeting period has not been confined to U.S. markets. In today’s financially globalized world, events in one asset market frequently have consequences in other markets and other countries; both the level and the volatility of asset prices abroad have moved with U.S. asset market developments. Equity prices are generally down, although not in China. Yields on long-term sovereign fixed-income securities are also generally down. CDS spreads, corporate bond spreads, EMBI+ spreads, and similar measures are generally up. With so much action happening in global financial markets, you might have expected some major revisions to our outlook for foreign real growth and inflation. Yet with the exception of revisions to some second-quarter numbers because of surprises from incoming data, the baseline forecast this time is little changed from that in June. Two reasons for the lack of significant macroeconomic consequences in the rest of the global economy from these financial events seem particularly noteworthy. One is that there is no sector abroad in any of the major regions that corresponds to the U.S. housing sector and its direct ties to credit problems related to subprime mortgages. The second reason is that we do not observe any telltale signs, such as overexpansion by one or more industries or fragile household balance sheets, that would suggest that some repricing of risky assets and perhaps some restraint in credit creation would trigger significant changes in real economic behavior of firms or households. The global economy expanded strongly in the first half of this year with the underlying strength broadly distributed across regions and sectors. As a result, it is in robust condition and is likely able to withstand the adjustment proceeding in financial markets without substantial risk to continued real expansion or creation of inflationary pressures. Of course, we cannot be certain that continued or more- intense disorderly conditions in financial markets will not trigger a negative macroeconomic reaction, nor do we know for sure that problems are not already present but are not yet visible to us. So we see the events of the past several weeks as giving rise to an abundance of downside risk to our forecast of real activity rather than to changes in the baseline. Despite a basically unchanged outlook for the rest of the global economy, two elements of the international forecast merit some further discussion: global oil market developments over the intermeeting period and the staff’s judgment that U.S. real imports of goods and services will expand at a rate about 1 percentage point lower than we projected in June. On July 31, the spot price for WTI rose above $78 per barrel and attracted attention for having reached a new peak value. Although that price subsequently moved back down somewhat, the spot WTI price was about $7 per barrel higher on the day we finalized the Greenbook forecast than it was on the comparable day in June. In part, the upward shift in the spot WTI price reflected an unwinding of most of the unusual discount for WTI relative to Brent and other grades of oil that persisted from mid-March until recently as a result of large inventories of WTI at certain locations. By comparison, the spot price for Brent crude oil rose nearly $4 per barrel over the same interval. The upward pressure on spot prices appeared to arise from the supply side, with production restraint by OPEC a factor. However, although prices moved up noticeably at the front of the curve, futures prices for oil dated later this year and early next year moved up much less; and futures prices for crude oil in late 2008 and beyond actually moved down. As a consequence, the oil futures curve returned to what is called “backwardation,” meaning that the spot price is above futures prices, which tend to flatten out at more- distant dates. Putting all this together, our forecast for the U.S. oil import price is more than $4 per barrel higher for the very near term than it was in June, but it is little changed over 2008. So the impact of higher oil prices on our trade deficit is limited. Whereas some upward push to consumer prices abroad might result from the recent increases in crude oil prices, our expectation, based on futures markets, that they will prove transitory means that few sustained pressures on inflation should result. Our forecast for the growth of total U.S. imports of goods and services has been revised down about 1 percentage point for the second half of this year and nearly that much for next. The resulting annual growth rates of 2¾ percent in the near term and 3 percent next year are about 3 percentage points below the growth we are projecting for real exports of goods and services. Although in the near term slightly weaker projected imports for oil and natural gas are part of the story, further out weaker growth in imported core goods and services largely account for the revision. For these two categories, the downward revision reflects the changes in this forecast to the projected level of the dollar and to the path for U.S. real GDP. We have made some small adjustments to our outlook for the constituent currencies in our broad dollar index that by chance are offsetting, leaving the staff forecast for the rate of depreciation of our real broad dollar index going forward about the same as in June. However, the depreciation of the dollar that has already occurred since your June meeting resulted in a downward shift in the current-quarter starting value for our forecast path of about 1¼ percent. That real depreciation works to restrain imports of core goods and of services somewhat, especially in the near term. Parenthetically, it also has a stimulative effect on our exports of core goods and services. The lower path for U.S. GDP growth going forward is the primary explanation of our downward revision to projected import growth. With U.S. GDP now expected to grow at an annual rate of 2 percent, rather than 2½ percent, imports of both core goods and services decelerate more than in proportion, as our best estimate of the income elasticities for each of these categories is above 1. Of course, the baseline path for U.S. real GDP takes into account the lower imports and the simultaneous nature of the determination of GDP and its components. But the information contained in the annual revision to past U.S. GDP growth and the prospect of lower potential GDP going forward was “news” to our import model and led us to make the downward revisions I have just described. With growth of real exports of goods and services revised up only slightly, their positive contribution to real GDP growth is just a bit more positive. In contrast, the negative contribution from real imports is now significantly smaller in absolute value. As a result, the overall arithmetic contribution from real net exports to real GDP growth over the forecast period is positive at an annual rate of about ¼ percentage point. Such an outcome would mean that real net exports have contributed or will contribute positively to real GDP growth in each of 2006, 2007, and 2008. From the perspective of real GDP, a positive contribution from real net exports is one very reasonable criterion for external adjustment, should it be sustained. Brian will now continue our presentation." CHRG-111hhrg55809--48 Mr. Hensarling," We will turn it into a two-word answer. Clearly, you are familiar with the incredible financial commitment of the taxpayer to the Government-Sponsored Enterprises, Fannie Mae and Freddie Mac. I believe that the Fed has purchased roughly $130 billion of their debt; another roughly $700 billion of their MBS; and I think FHFA and the Treasury is up to about $100 billion. So we are looking at almost $1 trillion of taxpayer commitment here. The legislation that the Administration and the Democratic Majority has brought before us is almost silent on the issue of any reforms for the GSEs. And the legislation before us will apparently regulate pawn shops and payday lenders. To the best of my knowledge, they had no role in our economic turmoil. Many economists believe that Fannie and Freddie were central to our economic turmoil. I don't believe pawn shops and payday lenders have taken any taxpayer funds, and now we are looking at an almost $1 trillion commitment. In your testimony, you said that your reform, any reform agenda, should include at least five key elements. If our reform agenda is silent on reforming Fannie and Freddie, did we meet your test? " CHRG-109hhrg23738--77 The Chairman," The gentleman yields back. The gentlelady from Oregon, Ms. Hooley? Ms. Hooley. Thank you, Mr. Chairman. Thank you, Mr. Greenspan, for appearing today. According to a letter you wrote to the Joint Economic Committee of Congress, you said, ``High energy costs are forecast to shave three-quarters of a percentage point off this year's growth to the U.S. gross domestic product.'' You also noted that ``The U.S. economy seems to be coping pretty well with the runup of crude oil prices, aside from these headwinds.'' Well, I know many middle-income families making the decision of whether or not to take a vacation this summer might disagree with you. Rising gas costs of well over $2.50 a gallon certainly impacts a majority of family budgets. And in my state, of Oregon, we are suffering still a 6.5 percent unemployment rate, and many people would argue that impact is already being felt. My question is: If the economy is coping well and these are only headwinds, at what point do the rising gas prices pose a serious threat to our markets and economy; and at what price level will our economy no longer be able to cope? " CHRG-111hhrg56776--126 Mr. Hensarling," Thank you, Mr. Chairman. Chairman Bernanke, welcome. Chairman Volcker, welcome. Chairman Bernanke, I have been an outspoken proponent for having a Federal Reserve that restricts itself to conduct monetary policy tied to specific inflation targets. In your testimony, you posit that it is a critical element of conducting monetary policy to have the prudential regulator role. I certainly have an open mind to that argument. Is not our own historical evidence and international examples--is not the empirical evidence kind of murky, if you look at the U.K., if you look at Japan, and if you look at Germany, clearly they did de-couple the two. They had similar economic challenges that we had. We did not de-couple. Can you please elaborate on the evidence that is out there that might be convincing to members of this committee? " FOMC20070321meeting--77 75,MR. PLOSSER.," Thank you, Mr. Chairman. The economic picture in our region has changed little since our last meeting. It seems as though I’ve used that phrase almost every meeting for the past three meetings. Economic activity is expanding at a moderate pace in our District. Business contacts expect that pace to continue in the coming months. According to our March survey, manufacturing activity in our region remained flat, and we’ve seen little change in this activity in the last six months. The general activity index actually fell from 0.6 in February to 0.2 in March, which are both essentially the same and very close to zero. But there were some positives to be read from the survey. First, both the new orders and shipment indexes improved this month. Second, the diffusion index of capital expenditures, which reflects firms’ planned spending six months from now, moved up to 25 percent—a level that is considerably above the average level of 18 seen over the past two expansions. Third, other indexes of future activity remain relatively strong. Finally, in response to a special survey question and ignoring merely seasonal changes in activity, twice as many of our firms said that they expect their own production to accelerate rather than to decelerate in the second quarter compared with the first quarter—46 percent, compared with 23 percent. I take these as signs that our manufacturers see the soft patch as temporary rather than more prolonged, and this is consistent with the anecdotal evidence gathered in talking to the business contacts in our region. Thus, business sentiment among our manufacturing firms appears to have changed little since our last meeting. There has been little change not only in overall activity but also in the pattern across sectors. Housing continues to weaken. Area homebuilders that we surveyed in February indicate that sales continue to decline, and high inventories continue to hold back construction activity. Nonresidential real estate markets in the region remain firm, but construction has not gained any appreciable strength. One of my contacts in a major bank sees continued strong loan demand, however. Businesses that come to him for loans have strong balance sheets, their profits remain good, and from his perspective that is supportive of continued business investment going forward. This may be suggesting that business investment, which—as many of us have been concerned about—has been weak in the past several months, may be on the verge of rebounding. Labor markets in the region remain tight. Employment in my three states has grown at a pace of 1.3 percent over the past three months ending in January, an acceleration from the 0.8 percent pace over the past twelve months. The unemployment rate has held steady, and employers continue to complain of difficulty finding both skilled and unskilled labor. On the inflation front, prices for industrial goods continue to move up, but retail price increases have not been widespread. However, there are signs of increased pressures on wages and salaries. Wages in low-skilled jobs in New Jersey and Pennsylvania have certainly increased because of increases in state minimum wages, yet the acceleration in wages appears to be more widespread. Employers in a number of industries have said they had to raise salaries much more this year than they did last year in order to hire and retain workers in certain professional and managerial occupations as well as high-skilled workers in a variety of jobs. In summary, business activity in the region continues to advance at a moderate pace— I’m looking for other words to substitute for “moderate,” which gets old after a while. Our business contacts expect this moderate pace to be maintained in coming months. Turning to the national economy, at the time of our last meeting, the data on real activity had come in stronger than expected, and inflation, while still elevated, had moved down a bit. Since then, the data suggest perhaps a somewhat weaker near-term growth outlook and a backsliding in my view in the progress on inflation. If these recent data are indicative of the future, then we are in a much less comfortable position than we thought we were a few weeks ago. I think there is still good reason to believe that the weakness we are seeing on the real side of the economy remains confined to the effects of the housing correction and to a lesser extent of the auto correction, which should moderate over the year, and that the fundamentals underlying the economy remain somewhat strong. I think that labor markets will be considerably firmer than in the Greenbook forecast and that the consumer sector will also hold up in part because of that. It’s particularly difficult to infer trends from the data from this past January and February. A sizable swing in temperatures from one of the warmest Januarys on record to one of the coldest Februarys has led to large swings in both seasonal factors and the economic data more broadly. So I think that we need to be a little more cautious than usual in trying to interpret these volatile month-to-month numbers. That said, I must admit that the uncertainty surrounding my own forecast that growth will soon return to trend has increased since our last meeting. The recent decline in new orders over the past several months suggests that the weakness we’ve seen in business investment in the fourth quarter may linger a little longer than expected, despite healthy business balance sheets and positive investment and business sentiment. Although in my view the reassessment of risk in the subprime mortgage market suggests that this market is working as it should, the overall weakening in credit conditions in the mortgage market increases uncertainty as to whether the housing correction will be contained or whether it will spill over into other sectors of the economy. Thus, although I’m not really ready to abandon my forecast, I do think my uncertainty of that forecast has increased somewhat. At the same time, I’m less convinced that inflation is moderating and that we’re making sufficient progress toward price stability. Perhaps I really should say that I am more concerned that we are not. The twelve-month change in the core CPI was 2.7 percent, and the three-month change has reaccelerated. I find the upward trend in core inflation over the past year, from 2 to 2¾ percent, troubling. I take some comfort in the fact that inflation expectations have moved down somewhat. Even ten-year expected inflation in our first-quarter Survey of Professional Forecasters moved down to 2.35 percent from 2.5 percent. That’s a seismic event, [laughter] given the stability of that number over the past eight years. However, these expectations continue to lag, not lead, inflation. So I remain concerned with the inflation numbers that we are in fact seeing. Thus, I find myself back to where I was this fall. A slowdown in real economic activity, if sustained, would suggest a lower equilibrium real rate, but inflation remains elevated. At this point, I would allow for some implicit policy firming implied by a constant fed funds rate unless we see stronger evidence of a declining economy. Thank you." FOMC20080430meeting--55 53,MR. STOCKTON.," Before explaining how the global developments that Nathan just described intersect with our domestic inflation forecast, I should briefly review some of the incoming information on prices. For the most part, the recent consumer price data have been running below our expectations. At the time of the March Greenbook, we were estimating that core PCE prices had increased at an annual rate of 2� percent in both the fourth quarter of last year and the first quarter of this year. We now are projecting increases of 2� percent and 2 percent in the fourth and first quarters, respectively. Although we are estimating that core PCE prices rose 0.2 percent in March--just a couple of basis points below our previous forecast--there were noticeable downward revisions to the data stretching back to late last year, principally for medical services and nonmarket prices. Just as we had discounted some of the earlier elevated increases in core PCE prices, we are now inclined to discount the recent more favorable readings. The small increases in medical service prices are not likely to persist. Moreover, some of the recent slowdown is attributable to nonmarket prices, which we view as both noisy and mean-reverting. Still, we don't think all of the good news on core PCE prices of late should be written off; and all else being equal, we would have taken down our forecast for the year as a whole in response to the incoming data. But, of course, all else was not equal. As Nathan has noted, there has been another sizable increase in crude oil prices; the prices of non-oil imports have increased more rapidly than we had expected; and more broadly, both imported and domestically produced materials prices have risen sharply thus far this year. In reaction, we have marked up our forecast for core PCE inflation for the remainder of the year, and that upward revision basically offsets the effects of the recent good news. For now, inflation this year looks likely to repeat the pattern of the past four years. Since 2004, headline PCE prices have risen at about 3 percent per year, and core prices have been up at a rate of about 2� percent. Due to a further steep rise in energy prices, large gains in import prices, and another above-trend increase in food prices, we are projecting headline PCE prices to rise 3� percent this year and core prices to increase 2� percent--similar to the averages over the preceding four years. Moreover, our forecast for 2009 bears a striking resemblance to the out-year forecasts that we have continued to make over the past four years. By now, in answer to the question of why inflation is expected to slow in the forecast, most of you could easily recite the staff's catechism of disinflation. Based on readings from the futures markets, we expect consumer energy prices to flatten out next year and food prices to slow to a rate close to core inflation. With the dollar not expected to fall as much as it has over the past year and other commodity prices expected to move sideways, import prices are projected to slow. Those more favorable developments in combination with a noticeable increase in projected slack cause headline inflation in 2009 to slow to 1� percent and core PCE inflation to edge back to 2 percent. Both of those figures are 0.1 percentage point higher than our March forecasts, reflecting the indirect effects of higher prices for energy and other imports. As we have noted many times, a key element in our projection is the assumption that oil and non-oil commodity prices will flatten out as suggested by the futures markets. To put it mildly, that has not been a winning forecast strategy in recent years, but I'm not sure that we have a superior one to offer you. Obviously, there are some big upside and downside risks to our forecast of domestic inflation. Nathan has already covered some of those related to prices for oil and other imports, so let me say a few words about the outlook for retail food prices. Our outlook for food prices remains relatively sanguine, but there would appear to be more pronounced risks to the upside than the downside. Although most of the value of what's in your morning cereal bowl is advertising, packaging, and transportation, some corn and wheat are in there also, [laughter] and those prices have been rising rapidly. Futures markets are predicting a leveling-out in crop prices, and that expectation is built into our forecast. But worldwide stocks of grains remain tight, and any serious shortfall in production could result in sharply higher prices. In that regard, while the growing season here is just getting under way, corn production is off to a slow start because unusually wet conditions have hampered plantings. Elsewhere, increasing supplies of livestock products and poultry have been a moderating influence on retail food prices in recent months. Again, while futures markets suggest relatively subdued prices going forward, there are a few worrying signs. Although cattle on feedlots have remained near record levels, new placements have fallen off of late, reportedly because of the higher cost of feed. In addition, the portion of feedlot placements composed of females was high last fall and through the winter, which points to a reduction in the size of the breeding herd this year and thus suggests some potential supply risks ahead. In recognition of the upside risks posed by both food and energy prices, we included in the Greenbook an alternative simulation in which oil prices climb to $150 per barrel next year and food prices continue to run at the elevated pace of the past three years. In this scenario, we also assume that another year of elevated headline inflation results in a further erosion of inflation expectations of about � percentage point. Under these conditions, headline PCE price inflation posts another year north of 3 percent, and core inflation moves a bit higher to 2� percent this year and next. It strikes me that this type of persistent upward creep to inflation, which would be difficult to positively identify in real time, is a more likely risk than a sudden upward surge in price inflation. There are, however, some downside risks to the inflation outlook as well. As you know, we upped our price forecast a bit in the last round because we saw the incoming readings on inflation expectations as suggesting that there had been some modest upward movement over the preceding few months. Some of that increase may have resulted from your aggressive easing of policy early this year. But going forward, the situation may be turned around. If our forecast over the next few quarters is in the right ballpark, and on our assumption that the easing of policy is coming to an end, you will be standing pat on policy even as payroll employment falls throughout the remainder of the year, the unemployment rate trends higher, and headline inflation begins to back down. It doesn't seem a stretch to me that in that environment, inflation expectations could come down somewhat, a development not embodied in the baseline forecast. More broadly, one place that inflation expectations might be expected to manifest themselves in a way that would be most damaging to inflation would be in labor compensation. Despite the elevated headline inflation of the past four years, there is little evidence of any noticeable step-up in wage inflation. If that was the case when the unemployment rate was 4� percent, it seems less likely that larger nominal wage gains will be secured when the unemployment rate rises to 5� percent. Indeed, increases in hourly labor compensation have been running well below our models for some time, pointing to some additional downside risks to our inflation outlook. For now, we see substantial risks to the inflation outlook, but those risks still seem twosided to us. Brian will complete our presentation. " FOMC20050920meeting--49 47,MR. FERGUSON.," Two points—a comment and a question. I’m actually somewhat surprised at the answers you got on your last question, Mr. Chairman, because staff members September 20, 2005 23 of 117 just this question, and I talked about the results at the last meeting. We found, in terms of root mean squared prediction error, that the staff forecast seemed to be the best forecast of one-year­ ahead inflation. But in the last four or five years, trying to control as best our staff could for some of the liquidity effects and risk premium effects that Vincent talked about, our finding was that TIPS compensation turned out to be a somewhat better predictor even than the staff model. The other forecasts turned out to be much worse than either of the two I just talked about. So I think we don’t know a lot, but we know a little bit. Maybe we could get that material circulated again. My question, though, is not on that point. Dave, you threw me off a bit on the question of where we now stand on compensation because in the Greenbook you said that the downward revision in the P&C [Productivity and Cost] measure of compensation per hour was smaller than expected and, “we now view more of the surge in 2004 fourth-quarter compensation as having been permanent and less as a reflection of transitory factors such as stock options.” I thought what I heard you say in your oral presentation was that the pendulum had swung back a little." CHRG-109hhrg31539--125 Mr. Bernanke," Well, Congressman, as you point out, there is uncertainty. We have a baseline forecast which assumes that energy prices don't do another big increase, that expectations remain contained, as they appear to be currently. We have talked about the cost side of labor costs, which seem not at this point to be a problem from a cost perspective. So from all that perspective, again, we have the baseline forecast that the inflation will gradually decline over the next couple of years. At the same time, we talk about risks, and we think there are some risks. The risk that I talk about in my testimony is that, given the tightening of markets, product markets in particular, that some firms may be better able to pass through those energy and commodity prices that you mention, and that that might become possibly embedded in the expectations of the public. So we do see some upside risks, and we have to take that into account as we make policy. " FOMC20060920meeting--140 138,VICE CHAIRMAN GEITHNER.," Thank you. Let me just start with the broad contours of our outlook. Growth has obviously slowed. The second half is likely to be relatively weak, but the only place we see pronounced weakness is in housing, and we expect a return to moderate growth going forward. Core inflation seems to be easing a bit, and it may have peaked in the second quarter, if you look just at the three-month annualized numbers. But inflation remains uncomfortably high, and our forecast assumes only a very gradual moderation over the next two years. In terms of numbers, we expect the real economy to grow at around its 3 percent potential rate in ’07 and ’08. We expect core PCE inflation on a Q4/Q4 basis to come in just below 2½ percent in ’06 and to moderate to about 2 percent in ’07 and 1.8 percent in ’08. Our outlook is largely unchanged from August. It’s conditioned on a path for policy that is flat at current levels for two to three quarters. This puts us slightly above the level that is currently priced into the risk-adjusted Eurodollar futures curve. In terms of uncertainty and risk, we see somewhat greater downside risks to demand growth than we saw in August, but the inflation risks still seem likely to be to the upside. Weighing the balance among these competing risks, we believe, as we did in August, that inflation risks should remain the predominant concern of the Committee, not so much, to borrow the Chairman’s formulation, because the probability of a higher inflation outcome is substantially greater than that of a much weaker growth outcome but because the costs of an erosion in inflation performance would be more damaging. On the growth outlook, we’re seeing a somewhat greater adjustment in residential investment than we anticipated, but this has not yet induced or been accompanied by a significant weakness outside housing. Of course, the outlook for the economy as a whole should not be particularly sensitive to plausible estimates of the direct effects of the remaining adjustment, whatever it is, left in residential investment. What seems more important, of course, is the potential effect of what’s happening in housing on consumer and business spending. We just don’t see troubling signs yet of collateral damage, and we are not expecting much. The fundamentals supporting relatively strong productivity growth seem to be intact. The acceleration of the nominal compensation growth that appears to be under way, combined with the moderation of headline inflation that we expect as energy prices moderate, should produce fairly strong growth of household income, even with the moderation in employment growth to trend. Corporate balance sheet profitability remains strong. Domestic demand growth outside the United States is expected to remain quite robust even though there has been some moderation in current measures of activity in some markets. Of course, the level of interest rates is not particularly high in nominal or real terms. Equity prices and credit spreads suggest a reasonable degree of confidence in the prospects for future expansion. Financial market participants report very strong continued demand for credit and for risk generally and very ample liquidity. This strength may reflect other factors that are operating on demand for financial assets, but still survey-based measures of confidence have not deteriorated dramatically. This, of course, may prove too optimistic on the growth outlook, and the risks seem weighted to the downside. On the inflation front, recent data have not altered our forecast or, really, our assessment of the risks to that forecast. Although there are signs of moderation in underlying inflation, the core PCE and a range of alternative measures continue to grow at levels that are uncomfortably high. We expect further moderation to occur only gradually over the forecast period. The latest data have been somewhat reassuring, and inflation expectations at various horizons have behaved relatively well since our last meeting. The acceleration in compensation growth and unit labor costs does not justify a higher inflation forecast in our view, provided that expectations remain well anchored, business markups fall, the ongoing moderation in growth reduces pressure on resource utilization, the futures curve proves a reasonably accurate prediction for the path of energy prices, the dollar declines only modestly, and so forth. These are reasonably good arguments, but we still think the risks are to the upside. Over the past two years, we have consistently revised up our forecasts for inflation. I’m not sure we really yet understand the forces behind the unanticipated acceleration in underlying inflation. Medium-term inflation expectations, while not rising at stated levels, may be higher than is consistent with an inflation objective in the range the Committee has talked about in the past. Containing these upside risks should be the dominant focus of policy until we see a more-pronounced moderation in current and expected underlying inflation. As my comments imply, we don’t have a lot of differences with the Greenbook on the contours of the outlook. The Greenbook shows slower growth relative to lower potential but also more inflation than we do. It also shows more slack with more inflation and a little less confidence in the strength of demand growth than we do for the reasons I hope I explained. I see certain questions as key. On the growth front the question is, Will weakness cumulate? If we see a more-pronounced actual decline in housing prices, will that have greater damage on confidence and spending? But the more interesting questions are really on the inflation forecast, and let me just talk very briefly about two. First, does the Greenbook forecast produce enough moderation in inflation soon enough to keep inflation expectations anchored? The baseline forecast has inflation falling to 1.5 percent, at least based on the last time we saw a long-term forecast, only over a very protracted period—a period that is significantly longer than the one many central bankers would consider an acceptable deviation from an inflation target. We have already seen a bit of troubling speculation from people who write about us. This Committee may have more inflation tolerance or a higher implicit target than its predecessor. Should we try to achieve a more rapid moderation of inflation? How should we evaluate the costs and benefits of trying to achieve a quicker and more substantial moderation of inflation, particularly given the tenuous state of the evidence on inertia and persistence? Is this gentle and gradual expected moderation in inflation optimal, given the softness of the outlook for demand? These are questions that are worthy of a more explicit discussion by the Committee, particularly if we’re going to talk about moving toward a quantitative definition of price stability with more disclosure around the forecast. The second and related question is about inflation in our forecast: With the stance of monetary policy that is now priced into the markets—this is a softer path than the one in August—how confident can we be that we are likely to achieve the forecast of sustained growth and gradually moderating core inflation? I think we can be less confident than the confidence you might read into current market expectations and the uncertainty that surrounds them. Of course, the behavior of long-term inflation expectations in financial markets suggests that this risk is not particularly high at present and that we can take some more time to get a better handle on the evolution of the economy before deciding what is next in terms of monetary policy actions. But I think that we may have more to do, and we should try to avoid fostering too much confidence in the markets that we’re done. We need to preserve the flexibility to do more if that proves necessary to keep inflation expectations anchored. Thank you." CHRG-109shrg30354--24 STATEMENT OF SENATOR MEL MARTINEZ Senator Martinez. Thank you, Mr. Chairman. I will not be nearly that disciplined in my approach. Mr. Chairman, thank you for being here and thank you for coming to share with us. I will be very brief actually. I was noting with particular interest the area of labor in your report. I noted, in spite of what some would profess to be gloom and doom that there are a lot of good news in the economic report and the forecast terms of the labor statistics. For instance, it seems like this past quarter we were able to reach a low unemployment level that had not been seen in 5 years, and 4.7 in the second quarter of the year, below 5 percent. That is consistent, and even not quite as good as what we are experiencing in Florida where I think our unemployment rate is probably around 2.7 percent. Which gives rise to an issue that I do not know if you will address but hopefully in the questioning I will have an opportunity to discuss with you, which is whether in fact we may not have, in some aspects of our economy, a labor shortage. Recently, in the agricultural sector in Florida it was reported that there will be probably 3 million to 6 million boxes of citrus that will not be harvested this year because there simply was not the labor there to pick the fruit. I have heard of similar reports coming from California. I know in the housing industry, which seems to have slowed down a bit in Florida, but still housing construction is strong, that there is great competition for labor to be able to get the work done. So as some of us have been struggling to try to put some sense into our immigration laws one of the issues that we have repeatedly discussed is some type of a guest worker program and whether there is the need for such. In fact some Americans, I think mistakenly believe that if only wages rose a bit that there would be plenty of people to do many of the tasks that today we rely on foreign workers to do. The fact is that I think a healthy combination of a guest worker program as well as encouraging job training and so forth are part of what needs to be for our future economic needs. But I do hope that I get an opportunity to discuss with you some of these labor issues that I think are also an important component part of our economic picture. Thank you very much for being here. " FOMC20081216meeting--191 189,MR. FISHER.," Nathan, you would probably have been arrested for treason if you had said that in Latvia--literally. The economist who gives a negative forecast is arrested for treason. Stay here. [Laughter] " FOMC20070131meeting--130 128,MS. MINEHAN.," As I look at the forecast in the Greenbook, the higher saving rate—money out of income that’s expected to be there going into savings—is one element that makes consumption lower than it would otherwise be." CHRG-111hhrg55809--265 Mr. Bernanke," I would be fooling myself and you if I said I knew with any certainty. But most forecasters, including the Fed, are currently looking at growth in 2010, but not growth so rapid as to substantially lower the unemployment rates. " FOMC20070131meeting--375 373,MS. YELLEN.," Yes, the dark band in the center would be the central tendency of our reports, and the thinner, longer lines would be bands generated by numbers we use for forecast uncertainty." FOMC20050920meeting--41 39,CHAIRMAN GREENSPAN., Several years ago I recall that we ran a correlation with the gold price against levels of inflation. We actually came out with some forecasting capability. Has that been rerun in recent years? CHRG-111hhrg49968--24 Mr. Bernanke," Mr. Plosser does, as well. He is simply saying we shouldn't put too much weight because it is very difficult to measure them. But what I am saying is that, currently, there is not much doubt that there is an output gap, and that, therefore, there would be a downward effect on inflation. That being said, there are other factors as well, including the currency, including commodity prices and so on, and we watch those very carefully. I think I would note that, if you look around for evidence of inflation, inflation expectations, you are not going to find very much. If you look, for example, at surveys of consumers, if you look at the forecast of professional forecasters, if you look at the spreads between indexed and nonindexed bonds, all of those things are quite consistent with inflation remaining stable and well within the bounds that the Federal Reserve believes is consistent with price stability. " FOMC20080805meeting--115 113,MS. YELLEN.," Thank you, Mr. Chairman. Developments during the intermeeting period have heightened my concern about downside risks to economic growth and slightly allayed my concern about upside risks to inflation. Let me begin with growth. The moderate growth rate registered in the second quarter was disappointing, especially because it benefited from the temporary effects of the fiscal stimulus package. Moreover, the pattern of consumer spending during the quarter, with weakness in June, is worrisome. With all the publicity surrounding the rebate checks, households may have put them to work earlier than usual, especially since they were facing significantly higher prices for food and gasoline. This interpretation does not bode well for activity in the current quarter. Assuming no change in the funds rate this year, we have lowered our forecast for real GDP growth for the second half of the year about percentage point, to just � percent, and project a correspondingly higher unemployment rate. Our forecast for weak second-half growth reflects not only the unwinding of fiscal stimulus but also adverse financial sector developments. The credit crunch appears to have intensified since we last met. Evidence of tighter financial conditions abound. Risk spreads and the interest rates charged on a variety of private loans, including mortgages, are up noticeably, and lending standards have tightened further. Credit losses have risen not only on mortgages but also on auto loans, credit cards, and home equity lines of credit. As a consequence, the list of troubled depository institutions is growing longer. IndyMac and First National will not be the last banks in our region to fail. Indeed, the decline in broad stock market indexes is partly a reflection of the market's concerns about the health of the financial sector. Many financial institutions are deleveraging their balance sheets and reducing loan originations. For example, a large bank in my District has begun now in earnest to cancel or cap outstanding home equity loans and lines of credit, despite an ongoing concern about alienating consumers. Tighter credit is affecting demand. Anecdotal reports suggest that the plunge in July car sales partly reflects a tightening of credit standards for auto loans and leases. A large bank reports a substantial drop in demand for mortgage credit in response to the recent rise in mortgage interest rates, and the anecdotal reports that we hear support the Greenbook's negative view of the effect of credit conditions on investment in nonresidential structures. The housing sector is of considerable concern. House prices have continued to fall at a rapid rate, and futures prices suggest a further decline of around 10 percent over the next 12 months. This forecast seems reasonable given the overhang of homes for sale, the recent rise in mortgage rates, and the tightening of credit. Unfortunately, the risk of an adverse feedback loop from tighter credit to higher unemployment, to rising foreclosures, to escalating financial sector losses, to yet tighter credit remains alive and well, in my opinion. Indeed, stress tests conducted by some of the large financial institutions in our District reveal an exceptionally high sensitivity of credit losses to both home-price movements and unemployment. The ""severe financial stress"" simulation in the Greenbook illustrates my concern. It is not my modal forecast, but it certainly seems well within a reasonable range of outcomes. The probability of such a scenario has risen, in my view, since we met in June. One partially mitigating factor that should help to support consumer spending is the drop in the price of oil since our last meeting. But to the extent that the decline in oil prices partly reflects reduced expectations for global growth, the net impetus from stronger domestic spending will be offset by weaker export growth. Continued declines or even stabilization in oil prices will, however, be good for inflation. We have revised down slightly our forecast for core inflation as a consequence. Moreover, the fact that we were not once again surprised on the upside by oil prices has had a small favorable effect on my perception of inflation risks going forward. That said, inflation risks obviously remain. Even with the recent decline, energy prices are well above year-ago levels and are not only pushing up headline inflation but also spilling, to some extent, into core. Higher headline inflation could undermine our credibility and raise inflation expectations. If the public concludes that our implicit inflation objective has drifted up, workers may demand higher compensation, setting off a wage�price dynamic that would be costly to unwind. Fortunately, the reports I hear are consistent with the view that no such dynamic has taken hold. My contacts uniformly report that they see no signs of wage pressures. They note that high unemployment is suppressing wage gains. Growth in our two broad measures of labor compensation are low and stable; and taking productivity growth into account, unit labor costs have risen only modestly. I tend to think of the chain of causation in a wage�price spiral running from wages to prices, but it is certainly possible that the causation also, or instead, runs in the opposite direction. Either way, though, faster wage growth is an inherent part of the process by which underlying inflation drifts up, and at present we see not the slightest inkling of emerging wage pressures. Growth in unit labor costs also remains at exceptionally low levels. I would also note that I have looked for evidence of some increase in the NAIRU due to sectoral reallocation by examining the Beveridge curve, thinking that if there were sectoral reallocation we might see an outward shift in the Beveridge curve. I have detected no evidence of such an outward shift. These facts provide me with some comfort. Moreover, various measures of longer-term inflation expectations suggest that they remain relatively well contained. When we met in June, the Michigan survey of inflation expectations five to ten years ahead had recently jumped a couple tenths of a percentage point. I argued then that the respondents to that survey typically overrespond to contemporaneous headline inflation. Since that meeting, oil prices have come down a bit, and so have the Michigan survey measures. Assuming that the funds rate is raised from 2 percent to 3 percent in 2009, my forecast shows both headline and core PCE inflation falling to about 2 percent in that year. So, in summary, during the intermeeting period, my forecast for economic growth has weakened, and that for inflation has edged down slightly. I consider the risks to our two policy objectives pretty evenly balanced at the present time. " FOMC20060920meeting--16 14,MR. KOS.," That’s correct—it could. Again, despite forecasts by some traders and brokers in the market, so far that has not happened. In part, it’s because the GSEs have been using term fed funds more than overnight funds for cost reasons." CHRG-109hhrg28024--106 Mr. Bernanke," Our expectation is that if and when the housing market slows, that savings rates will tend to rise. We have built into the forecast, so to speak, some increase in personal savings. As home values grow more slowly, then consumers can rely less on the increase in equity as a source of wealth building and, therefore, must save more out of their current income. Again, that's to be expected. As I've indicated, our current expectation is that process will be gradual and is consistent with continued strong growth in the economy. However, as I also indicated, the housing market and the consumer response to any changes in the housing market is one of the risks to the forecasts and one we will be monitoring closely as we try to assess the state of the economy in the coming year. " FOMC20060920meeting--159 157,MR. POOLE.," Am I the only taker to be number one? [Laughter] Thank you, Mr. Chairman. I want to start with two observations. First, the distribution of the market’s outlook for the federal funds rate six months ahead—and the briefing paper that appeared in my hotel room last night has that shown on exhibit 1—is pretty symmetrical, although it actually has a bit more probability weight on declines in the rate than increases. But roughly speaking, it accords with my own view—a one-third chance that we will stay where we are, a one-third chance that it will be appropriate to ease, and a one-third chance that we will want to increase the rate. I come out with a very symmetrical view myself. I think of the views around the table—some people are probably there, some people are probably skewed on one side and some on the other side, but I come out very much in the middle. My second observation continues a point that Tim Geithner made a few minutes ago. I had several conversations at Jackson Hole with Wall Street economists and journalists, and they said, quite frankly, that they really do not believe that our effective inflation target is 1 to 2 percent. They believe we have morphed into 1½ to 2½ percent, and no one thought that we were really going to do anything over time to bring it down to 1 to 2. I think that is very unfortunate because so many of us have talked about 1 to 2. Also, it seems to me that in the future it would be easy for people to say, “Well, it is going to be inconvenient. Let’s just sort of settle at 2 to 3.” They have already said that they would be at 1½ to 2½ effectively by the behavior of the Committee. Now, if we get data in the coming months that are unfortunate on the inflation side and lead us to increase our inflation forecast in the absence of any further policy action, I would certainly be on the side saying that we ought to act. We should firm policy so that we do not allow the forecast inflation to rise from where it is now. One reason that I do not want the explicit reference to housing to be in the statement is that I would take that position even if housing were continuing to struggle, because I think it is extremely important that we not allow inflation to ratchet up. If housing is a casualty of that policy, we had better accept that situation. I would not like to see a mixed market signal because I would not want the market to believe that continuing weakness in housing would deflect us from acting as necessary to keep inflation from rising further. I think the explicit reference to housing in the statement conditions the market to think about our policy going forward in the wrong way. At the same time, there is a clear possibility that we could see data in coming months that would be weaker than we now anticipate in the Greenbook forecast. What I know about forecasting error says that you have to think that coming in weaker on the real economy is a real, live possibility. I hope that we do not get unfortunate news on inflation and a downside on the real economy together, but I do not rule out that possibility. I think it is unlikely, if we receive substantially weak data on the real economy, that we would be raising rates into a recession. But quite frankly, I would like for us to condition the market to accept this symmetrical view of the risks that we face going forward and for us not to have language in our statement that tilts us toward tightening. My own sense is that an asymmetric tilt toward tightening would not serve us well should we get downside surprises in the real economy. Indeed, we should be quite happy to see longer-term rates weaken in the event of weak data on the real economy. To have the market respond that way helps to serve as a built-in stabilizer for economic activity. It would tend to support housing and other interest-sensitive sectors, and we should encourage rather than discourage that response in the market. Let’s see. What else do I want to say here? I would observe that the Greenbook forecast of a prolonged period of an inverted yield curve has no historical precedent. Usually the yield curve is inverted in the process of going from here to there, and you do not just sort of settle there. So I think that this situation is likely to be resolved either in the direction of higher long-term rates, as news on the real economy or inflation comes through in that direction or in the direction of lower short-term rates, for reasons I was just outlining; and I don’t know which direction it will be. My view of the current stance of policy is that it is moderately restrictive. Money growth, whether measured by MZM (Money Zero Maturity) or by M2, has been modest, and in fact, real balances have been flat to declining for a year or more, which would be a rather traditional sign that our policy is restrictive. Thank you." FOMC20081216meeting--210 208,MR. LOCKHART.," Thank you, Mr. Chairman. I think President Fisher at the last meeting actually proposed that, since we all knew where the economy was, we just suspend discussion and get on to what to do about it. Forgive me for a six-week reaction function here, President Fisher, but I tend to agree with that. I will be very brief. The points I will make have either been made or will be made, I am sure. [Laughter] We are facing dysfunctional financial markets, a rapidly weakening real economy, and a very negative psychology, a darkening mood. In addition, I am picking up in my contacts uncertainty or even questioning of what can be done and what good anything close to conventional monetary policy will do. My board of directors, advisory councils, and other contacts reflect deepening pessimism, and many of those contacts confirm the view that consumer activity and the economy in general pulled back dramatically in September and October. I have adjusted my forecast similarly to the Greenbook and commercial forecasters. I think it is very difficult at this point to forecast with any confidence that conditions will gel in a way necessary for a recovery. The Greenbook sees a somewhat sharper snapback by midyear, reflecting the influence of a fiscal stimulus, than I am prepared at this time to project. Our forecast assumes a protracted period of weakness through all of 2009, somewhat more along the lines of the ""more financial stress"" scenario in the Greenbook. Regarding financial markets, I would just comment that the pressures on the hedge fund sector have clearly not abated and may be intensifying. Over the weekend we picked up rumors of a Fed intervention that has not been discussed here, so I presume that it was just a rumor. Nonetheless, rumors were circulating that a major hedge fund group was about to collapse and that our people were ""in,"" so to speak, over the weekend. As Bill mentioned yesterday, the Madoff scandal certainly has not helped the picture regarding hedge funds. Regarding risks, it is not my baseline scenario, but the risk of deflation obviously cannot be ignored, and the apparent speed of disinflation is quite a concern. The Atlanta staff prepared several forecast scenarios, and there were some plausible downside scenarios that really were quite ugly. So to preview later comments, I think the balance of risks at this point is decidedly to the downside and justifies a trauma-management approach--or, in more normal terms, a risk-management approach--of acting aggressively at this meeting. Thank you, Mr. Chairman. " FOMC20080109confcall--15 13,MR. LACKER.," Yes, Dave. So there is a lot written about nonlinearity and macroeconomic dynamics. There are these regime-switching econometric models characterizing real data. There is the 0.3 thing--I think it is 0.3-- that people talk about regarding the unemployment rate: It doesn't go up by more than 0.3 without going up by a ton. You guys are surely aware of those econometric properties or those methods of characterizing the data, and while your econometric models may be strictly linear in some sense, what you give us is your best judgment, right? Am I to take your forecast as reflecting the probabilities of nonlinear dynamics or not? If it doesn't, are nonlinear dynamics something you believe in, that you think we should internally adjust your forecast with, or not? " FOMC20051101meeting--89 87,MR. STOCKTON.," It does, indeed. In essence, what is going on with the stock market is that we’ve had a net stimulus in the economy this year coming from the run-up in the stock market that November 1, 2005 23 of 114 goes from a net stimulus to more of a neutral effect because we’ve made basically a neutral assumption about the stock market going forward. That contrasts with the housing market, where we think we’re getting a lot of net stimulus right now. But in our forecast of a slowdown to 4 percent, that moves toward neutrality, and then the 2 percent rise in house prices that we’re forecasting for 2007 actually would impose a little bit of restraint on overall spending at that point." FOMC20070509meeting--121 119,VICE CHAIRMAN GEITHNER.," Don raised the obvious question, which is whether we want to introduce the characterization of uncertainty on one piece of our outlook but not the other. But, Gary, did you suggest that uncertainty about the inflation forecast is greater today than it was in March?" FOMC20070628meeting--235 233,MR. REINHART.," The staff draft of the June narrative will be similar in structure to the May narrative. That, however, is only the first draft. Given that we intended it to be similar in structure to the May narrative, then we would include a couple of histograms. We also added in this package a revised picture of the central tendency—you know, the red bars and the box and whiskers chart. We intended to include that. So we didn’t view any material upgrade in the pictorial description of the forecast. We tried to come up with as fat a package as we could for your internal discussion so that you could see how the individual forecasts of your colleagues vary and also are related—for instance, between the unemployment rate and the growth rate and between the inflation rate and the unemployment rate." FOMC20060920meeting--91 89,MS. MINEHAN.," Thank you very much. Dave, I found your discussion of the averaging to be interesting—that is, the forecast is between the devil and the deep blue sea or, in effect, between recession or much slower growth on the one side and more inflation with perhaps higher growth on the other side. It reflects what I have been going through mentally and the discussion we had at some length with our staff in Boston yesterday. Just focusing on the potential-for-recession side, when is it that we have had drops in residential investment such as the ones that you are projecting (which are quite unusual looking across the whole range of forecasts, particularly for this year) in the absence of a recession? I think the material from the briefings suggested that the drop is about the same as ’90-’91, which was a recession, and not quite as bad as ’80-’82, which was a big recession. When have we seen that outside a recession?" FOMC20060920meeting--78 76,MR. STOCKTON.," Your 2 percent scenario is close to what we are forecasting in the Greenbook—inflation expectations running more like 2 percent than the 1½ percent, with less inflation persistence. You are right. We created a scenario in which, if you thought about some of the equation estimates that have been presented, persistence has fallen just about to zero, in which case inflation pretty quickly reverts to what its average has been over the past decade. That was the basis for the “less inflation persistence” scenario. We obviously don’t think that is the most reasonable underlying assumption because we’re not forecasting that outcome; but we do think that it’s not entirely implausible and that you ought to at least have it on your radar screen as a possible outcome. It highlights some of the tension between the “less persistence” view of the world and the one in which we are expecting greater persistence." FOMC20060629meeting--52 50,MR. STOCKTON.," I want to reinforce a little of what Larry said. In this forecast, growth is just a bit below potential, there is a modest rise in the unemployment rate over the next six or seven quarters in the context of interest rates that have increased considerably and a fiscal policy that was swinging from considerable stimulus to some restraint. Industrial production is continuing to increase at a reasonably solid pace. So I don’t view this forecast as telling a cyclical weakening story to any great extent. It’s just a softening to below trend. That may still be inconsistent with the anecdotes you’re hearing. Certainly in the industrial sector, in nonresidential construction, and even in business fixed investment, the anecdotes out there do sound quite positive at this point." CHRG-111shrg62643--68 Mr. Bernanke," For the next few years. That is our estimate, but it is just forecast. Senator Bayh. OK. I just saw the monthly figures last month, so hopefully that does not augur a return to something more---- " FOMC20070131meeting--370 368,MS. MINEHAN.," Thank you. That was really interesting, Janet. Your recommendation would be not to condition on a common policy path but have “appropriate policy.” So in the end when we publish the forecasts, would it be a range of federal funds rates?" FOMC20070131meeting--148 146,VICE CHAIRMAN GEITHNER.," Though I don’t want to pin you down, that sounds sort of modest. You are saying that with another 25 basis points you’d get what core PCE inflation over the forecast period?" FOMC20080130meeting--161 159,MS. YELLEN.," Thank you, Mr. Chairman. I broadly agree with the Greenbook forecast for economic growth this year and with the assessment that the downside risks to that forecast are considerable. The severe and prolonged housing downturn and financial shock have put the economy at, if not beyond, the brink of recession. My forecast incorporates fiscal stimulus of the same magnitude as the Greenbook and monetary stimulus that is somewhat larger. I have assumed a 50 basis point cut at this meeting and an additional 25 basis point cut during the first half. My forecast shows growth of 1� percent in 2008, like the Greenbook, but it has a more pronounced acceleration in 2009 as the monetary and fiscal stimulus kickstarts the economy. The unemployment rate edges up this year to 5� percent before dropping gradually next year toward the natural rate of 4�. I am especially concerned about the outlook for consumer spending. The combined hits to equity and housing wealth will extract a considerable toll, and consumer spending will be further depressed by slower growth in disposable income due to weaker employment growth. Delinquencies and charge-offs on most forms of consumer debt have already risen, and slower job growth seems likely to exacerbate this trend, prompting financial institutions to further tighten credit standards and terms. In my forecast, such developments reverberate back negatively onto economic activity. Like the Greenbook, I downgraded my economic outlook substantially since our last inperson meeting. The December employment report was probably the single most shocking piece of real side news prompting this revision. But knowing that it is unwise to put too much weight on any single piece of data, I have been examining the question of whether that report was more signal or noise. The drop in initial UI claims to relatively low levels in recent weeks makes such an assessment important. Because the behavior of both series may have been affected by seasonal factors near year-end, it seems worthwhile to examine a broad range of data bearing on the labor market. My conclusion is that the labor market has indeed been weakening since mid-2007, and the extent of weakening, while relatively modest thus far, is quite typical of patterns seen when the economy is tipping into recession. Independent evidence of a weakening in the labor market comes from the household survey. Even when adjusted for definitional and measurement differences from the payroll survey, the household survey shows a fairly smooth trend of declining employment growth during 2007. The drop in payroll employment in December helped bring the establishment data into closer alignment with the household employment data. In the payroll survey, the slowdown is concentrated in construction and finance. In the household series, higher unemployment is actually widespread across sectors. The household survey also contains other signs of a weakening job market: a 25 percent increase in the unemployment rate for job losers, which accounts for the lion's share of the overall increase in aggregate unemployment; an increase in the number of newly unemployed job losers, which can be thought of as a broader measure than UI claims of inflows into unemployment; and an increase of 5 to 10 percent in the estimated expected completed duration of an unemployment spell, suggesting a reduced pace of outflows from unemployment. The labor force participation rate of men and women of age 16 to 24 years has also fallen notably in recent months. Labor force participation rates for this group have been edging down since the last recession, but the decline accelerated in 2007, and historically this group is among the first to respond to weakening labor market conditions. Data from the JOLTS survey, which we discussed in the Q&A round, confirm the weakness revealed elsewhere. The job openings, or vacancy, rate is down, consistent with the reduced pace of outflows from unemployment, as reflected in continuing UI claims and unemployment durations, and layoffs and discharges are up sharply. Other data cited in the Greenbook, Part 2, such as net hiring plans for Manpower, and NFIB and survey measures of job availability and unemployment expectations further corroborate a slowdown. With the aggregate unemployment rate now up only 0.6 percentage point off its low, I would describe the deterioration in the labor market thus far as modest, but it is noteworthy that an increase in unemployment of this magnitude, in the space of 12 months, has occurred only twice since 1948 outside of recessions. While my modal scenario contains a near-term slowdown rather than a contraction, it is actually pretty rosy compared with what I fear might happen. My contacts have turned decidedly negative in the past six to eight weeks, and further financial turmoil may still ensue. On consumer spending, two large retailers report very subdued expectations going forward following the weak holiday season, which involved a lot of discounting. On hiring and capital spending, my contacts have emphasized restraint in their plans due to fears that the economy will continue to slow. A serious issue is whether the tightening of credit standards that is under way will deepen into a full-blown credit crunch. The new Senior Loan Officer Opinion Survey shows a noticeable tightening in lending standards, and this is confirmed by my contacts. For example, senior officers of a large bank in my District recently described a variety of new steps they are taking to protect against credit losses. They are tightening underwriting practices across the entire consumer lending and small business loan portfolio. A recent strategy has involved classifying MSAs according to whether their real estate markets are stable, soft, distressed, or severely distressed, using both historical and prospective views of property values. Based on these designations, the company has reduced permissible combined loan-to-value ratios in their home equity portfolio, and going forward they intend to apply them across the entire consumer portfolio. On the positive side, though, they note that lower interest rates have spurred a surge in applications for mortgage refinancing, and a recent analysis shows that the reduction in the prime rate is having a significant impact on ARM reset expectations, shifting a large number from increases to reductions at reset. In fact, an analysis conducted before our most recent rate cut that assumed a 7 percent prime rate in February 2008--and it is now at 6�--estimates that two-thirds of the subprime ARM portfolio would now experience a decrease in their monthly payments at reset. This is a sharp contrast from an analysis in June 2007 with a prime rate of 8 percent. Now let me turn briefly to inflation and inflation expectations. I project that inflation will decline over the forecast period to around 1� percent, and I see the risks around that forecast as balanced. Admittedly, though, the recent data on inflation have been worrisome, and they raise the issue of whether or not we can afford to cut rates as much as needed to fight a recession without seriously risking a persistently higher rate of inflation and inflation expectations. I tend to think this risk is manageable, largely because of the credibility we have built. It appears to me that this credibility has reduced the response of inflation to all the factors thought to influence it, including energy prices, the exchange rate, and business cycle conditions. Thus I consider it less likely that rising energy prices are going to push up core inflation very much or that the passthrough that does occur will easily get built into inflation expectations. So I view inflation as less persistent now than it once was, tending to revert fairly quickly to the public's view of our inflation objective. I do hope that our long-run inflation forecast will help people identify what that objective is. But even if inflation expectations turn out to be less well anchored than I think, I still see the inflation risk going forward as roughly balanced. With less well anchored inflation expectations, there is greater risk that higher energy and import prices will pass through into core inflation and inflation expectations. By the same token, there is also a greater likelihood that inflation will decline should a recession occur. We looked at the behavior of core and total inflation in the first three years following recessions from 1960 to the last one in 2001, and inflation declined in most of these episodes. The exception is 2001, when core inflation remained essentially unchanged--which seems consistent with my view that inflation has become less responsive to the business cycle over the past decade or so as we have acquired more credibility. " FOMC20070807meeting--108 106,MR. MADIGAN.,"3 Thanks, Mr. Chairman. I’ll be referring to the package labeled “Material for FOMC Briefing on Monetary Policy Alternatives.” Financial markets have experienced exceptional strains over the intermeeting period. The Bluebook provided a thorough review of these developments through Thursday, and I had intended to provide only a brief summary of and update on those developments, as in exhibit 1, and some thoughts on their implications for monetary policy. But given the extensive discussions of this topic so far this morning, those points seem all to have been made, and I will turn directly to a discussion of policy alternatives. As noted at the top of exhibit 2, the risk of weakness in aggregate demand stemming from tighter credit conditions and disruptions in credit flows formed part of the rationale for the 25 basis point easing of alternative A that was presented in the Bluebook. Even if your views about the modal outlook are similar to the Greenbook baseline forecast, you may be concerned that the deterioration in credit conditions, the significant increase in market volatility, and potential declines in confidence have tilted the risks to growth distinctly to the downside. You may also see the recent spate of soft spending indicators as having raised the likelihood of sluggish growth in aggregate demand. The considerable gap between the Greenbook-consistent real federal funds rate, the dashed green line in the panel to the right, and the range of model-based estimates of the equilibrium real federal funds rate, shown in red, may add to questions about the possibility of weaker growth than in the staff forecast and reinforce your belief that some easing of policy is appropriate. Moreover, you may be more optimistic than the staff about either productivity growth or the NAIRU or both. Indeed, as I mentioned earlier, several of you noted just such optimism in the narratives accompanying your trial-run projections. The financial stimulus from a policy easing, of course, would help support growth directly. A policy action might be highly potent in current circumstances, possibly helping to buoy consumer and business confidence in a period when sentiment may well be deteriorating. You may 3 Materials used by Mr. Madigan are appended to this transcript (appendix 3). also believe that the inflation outlook would support a near-term policy easing. Core inflation readings have been relatively subdued in recent months, wage growth seems to have remained moderate, and labor market pressures may be starting to ease, although the evidence on that score is so far quite limited. In the staff forecast, core inflation converges toward 2 percent, an outcome that, judging by your projections, some of you would find acceptable—and your forecasts suggest that you think the odds favor a prompter and slightly steeper decline in inflation. In contrast, as noted in the bottom left-hand panel, you may concur with the Greenbook forecast for spending and prices, given its policy assumptions, but judge that the forecasted trajectory for inflation is too slow and leaves inflation at a level that is too high to foster optimal economic performance. If so, you may be inclined to firm policy ¼ percentage point, as in alternative C. The decline in core inflation in the Greenbook is slight and slow. As shown in the bottom right panel, the optimal control simulation in the Bluebook based on a 1½ percent target for core PCE inflation suggests an increase in the federal funds rate of about ¾ percentage point over the next year. Credibility or learning effects that might flow from a policy firming, as in the simulation, could limit the output and employment sacrifice necessary to foster a lower path for inflation. Moreover, you may agree with the staff’s baseline assumption that the effects of current market strains will prove temporary, that markets will soon resume clearing, albeit at higher and perhaps more- rational and more-sustainable spreads, and that the restraint on aggregate demand will be modest. Finally, you might see the risks to the inflation outlook as tilted to the upside, given high levels of resource utilization and increased energy prices. Alternative B, discussed in exhibit 3, may be seen as an appropriate balancing of the considerations motivating alternative A, on the one hand, and alternative C, on the other. Under this alternative, the Committee would leave the stance of policy unchanged today. The statement would acknowledge the recent volatility of financial markets and tighter credit conditions but would also convey an expectation that moderate growth will likely continue. Core inflation would be characterized as subdued in recent months but subject to upside risk. The Committee would expressly refer to increased downside risk to growth but indicate that its predominant policy concern remains the risk that inflation will fail to moderate as expected. A rationale for alternative B is laid out in the upper left-hand panel. In the baseline Greenbook forecast, the economy expands at a moderate pace, resource pressures ease slightly, and core inflation ebbs to 2 percent with the federal funds rate held at its current level through next year. That forecast may be close to your own view about the modal result, and you may see it as an acceptable outcome. As shown to the right, optimal control simulations based on the Greenbook baseline and an assumed core inflation objective of 2 percent would suggest leaving the federal funds rate unchanged for the rest of the year before easing slightly. Returning to the left- hand panel, holding steady at this meeting would also be consistent with the Committee’s past behavior as captured by the estimated outcome-based and forecast- based policy rules presented in the Bluebook. You may also believe that alternative B represents a suitable weighting of the risks. For example, even if you are a bit more optimistic about potential growth and the NAIRU than the staff, you may nonetheless see maintaining the federal funds rate at its current level as an appropriate risk-management approach, given the upside risks to inflation and the higher costs should they be realized. Careful consideration of the most recent developments also may incline you toward alternative B. In particular, even if the incoming data and increased financial market strains of recent weeks incline you to believe that the downside risks to growth have increased, you may be quite unsure about the extent of those risks and not wish to exaggerate them. As suggested by yesterday’s developments, it is not inconceivable that markets will soon begin to right themselves and that the Greenbook baseline assumption of only modest financial restraint will prove correct. In these circumstances, watchful waiting may be the best approach in order to allow more information to accumulate that will enable you to better assess the likely eventual adjustments of market prices and flows and the appropriate policy response. Indeed, you may be especially concerned about the risk of overreacting (or being perceived as overreacting) to temporary market developments—particularly if you see a significant probability that markets could misinterpret changes in the stance of policy, or in your words, as an indication that you place a higher priority on financial market stability or economic growth than on price stability. Moreover, your inflation concerns may not have diminished much, if at all, over the intermeeting period. While the most recent core inflation readings have been relatively low, you may concur with the staff that some of that good performance will likely prove transitory. Also, overall inflation has remained high, and with resource utilization elevated, you may be worried that high rates of overall inflation could allow inflation expectations to move higher. The statement associated with the revised version of alternative B is provided in the bottom panel. Given the volatile market conditions of late, getting a reliable read on market participants’ expectations at this point is difficult, but an announcement roughly along these lines seems to be anticipated by most market participants. Notably, the statement explicitly mentions downside risks to growth. That mention may be seen as opening the door a crack to future easing or at least giving the Committee greater scope to move in that direction. Although only a minority of market participants apparently expect the Committee to point explicitly to downside risks to growth, a sizable market reaction to the inclusion of such a reference in paragraph 4 seems unlikely, as the Committee still would state that inflation risks are its predominant concern. The final exhibit is an updated version of table 1 for your reference. Changes" FOMC20070131meeting--406 404,MR. KOHN.," Thank you, Mr. Chairman. I want to join the others in thanking the staff for their very helpful memos. These issues are complicated, and some of them are even hard, as has been said, and I found all the memos helpful to me in framing my ideas on this subject. I find myself, importantly, in agreement with President Yellen and Governor Mishkin— not in every respect, but in some respects. So I’ll try to be a little more concise than I was going to be. But I do think it’s important to confront the issues that Presidents Fisher, Poole, and Minehan have raised. I agree that there is nothing fundamentally broken about what we’re doing now. The markets do a good job, and the public does a good job, in anticipating what we do and understanding how we’re going about our business, and they even do a pretty good job in anticipating where we want to go eventually. There is no compelling reason to change right now, but that doesn’t mean we’re in the best possible place. I do think we could improve what we’re doing. To the extent that we can improve the way we explain our policy, particularly as a Committee, it will help the markets anticipate. It will help on the accountability issues. I don’t think we need major surgery, but there are some things we can do that might help around the edges on these things. I also agree that markets are insatiable. Whatever we give them, they’ll want more; and mostly what they’ll want, as President Fisher pointed out, is to know exactly what we’re going to do with the federal funds rate three and six months from now, and we can’t tell them that. So they will always want more. One thing that we can accomplish here is to shift attention a bit from the speeches of individuals to the Committee’s documents. I have told Larry Meyer and Brian Sack that my goal is to be at the bottom of their league list on who influences interest rates. [Laughter] They don’t like that, but I’m getting there. [Laughter] I don’t want to influence interest rates when I’m giving speeches. I think it’s much better if the Committee speaks and if the Chairman speaks, particularly when he is speaking on behalf of the Committee, in his speeches and his testimony. So drawing attention away from individual speeches to the Committee’s views is a very positive thing. Understanding our actions involves understanding how much we don’t know as well as what we think we know. Obviously, we can’t anticipate shocks. But as we’ve discussed around this table, we have very limited knowledge of the dynamics of the economy. We need to be very careful not to give a sense of false precision about what we know. We also need to be careful that we don’t get invested in specific numerical projections and become less willing to change our policies and our projections when new information comes in. Partly for these reasons I agree that the story we tell, the narrative, is as important as, if not more important than, the particular numbers that we give out. It’s really the story that people use to inform their own forecasts of the future, to judge how events are unfolding relative to our expectations, to understand which aspects of the economic environment we’re really paying most attention to, and therefore to help predict. I also agree with the others that we need to recognize and respect the diversity of what is effectively a nineteen-person Committee, we need to avoid doing anything that would discourage alternative views, and we need to think about how to represent alternatives views in our communications. So against those principles, here are my answers to the eight questions. Not surprisingly, on the first question, given the size of the Committee, the diversity, and so forth, I think that we have to stick with making individual forecasts. I would publish them in some kind of aggregated way, as we do now. I’m kind of attracted to the histogram—let the public see the whole distribution of the forecast—but that’s a technicality. People worry about inconsistencies among the central tendencies when you’re choosing different people for each central tendency. But in my experience of writing these things up—when the Chairman allowed us to—[laughter] those inconsistencies weren’t a major problem most of the time. You could tell a coherent story around the central tendencies. Sometimes we had to use a little imagination, but it wasn’t really incoherent. [Laughter] I think that Chairman Bernanke demonstrated this in his last two testimonies—to take the central tendencies as we submit them and tell a pretty good story that’s helpful to the public. For many of the same reasons we ought to go with individual assumptions. When we use individual assumptions, such as “appropriate policy,” rather than a common assumption, we’re in effect telling people the combinations of outcomes for inflation and output that we think are possible, if policy is run just right, and that we would prefer. We’re giving a lot of information about where we think the economy can end up and where we’d like it to end up. In effect, we’re giving our read on where we’d like to be on a Taylor curve that links output and inflation variability. A common set of assumptions, as others have noted, might not coincide with appropriate policy for many participants. We wouldn’t be telling people our sense of the best possible outcomes. We could, particularly if we used a market rate path, tell them a little something about where we expected interest rates to go because, if the outcomes didn’t line up with where we thought things should be, the markets might sense that and adjust. But there are other ways of doing the same thing. So I think that individual assumptions, rather than coordinated assumptions, are the way to go. Should we collect and publish the views of the members about appropriate policy in another histogram or central tendency, as President Yellen suggested? We may end up there, but I wouldn’t start with that. I think it multiplies the odds for inconsistencies among the central tendencies. You’ve got interest rates and output now that could also be inconsistent and could create confusion. It risks shifting attention from the forecast to the rate path. I was somewhat drawn to somebody’s suggestion that, if we had strong views, we could indicate that qualitatively in the narrative. But for now I’d stay away from the explicit interest rate forecast. Because I think the story is important, I think the narrative is important, and a minutes- style narrative, which discusses significant differences as well as the common tendencies, is important. Such a process would be helped by our submitting notes with our forecasts that the staff could aggregate and modify after listening to the meeting. I hope that submitting forecasts and notes doesn’t make it harder for people to change their minds at the meeting. I’m a little worried—and Governor Mishkin mentioned this—about shifting things forward to before the meeting. It makes the information we get a little staler at the meeting. Already we’re getting something that was put together on Wednesday for a Tuesday meeting; it’s already a week stale. I’m also concerned that, if everybody has a forecast and circulates it, having an exchange of views in which people change their minds might be a little more difficult because you have written down exactly what you want. So we need to be careful about that tendency, but I still think we could submit narratives and that would help. I’d favor more-frequent updates. I was thinking about quarterly, but then there’s President Yellen’s point about three times a year. The long interval is between July and February. Maybe we ought to start by updating between that seven-month-or-so interval and then see whether we want to do it even more frequently. But I think we could update a little more frequently than we’re doing. I’d keep my focus on just a few variables—output, unemployment, and inflation. Those are the key ones. I’d drop nominal income. We’re not interested in velocity anymore. Other variables, like housing markets and energy prices, could be covered in the narrative. I would like to formally convey some measure of uncertainty. I’d be tempted to use past forecast errors to do that. I don’t think I’d like to try to fine-tune a fan chart to begin with. If the Committee had a sense that uncertainties were particularly large or particularly small or were skewed to one side or another, we could cover that in the narrative. Then, I have two thoughts on procedure. First, we need to allow for some dry runs to see how things work out wherever we end up. Second, as a former staff member, I can tell you that senior staff members are already stretched very thin around FOMC meetings, especially around the semiannual report meetings. So if we ask them to do more, we need to think about what else we’re going to ask them not to do that they’re currently doing. Thank you." FOMC20070509meeting--36 34,MR. PLOSSER.," Thank you, Mr. Chairman. I just want to follow up a bit on the tail end of the conversation with President Poole about residential investment. One of the big changes in your forecast was the additional markdown of pushing the recovery in residential investment out further and sustaining a more negative effect on your forecast. My sense is that had a fairly significant impact going forward. I am curious as to what extent that outcome was really model driven in that your actual estimation of the fundamentals changed, or was it more judgmental? If it resulted from the fundamentals that were predicted by the model, what were the pieces of evidence that were driving that change, or was it just a judgmental thing that is saying it will take longer? Can you elaborate a little on where that came from?" CHRG-111hhrg48867--96 Mr. Hensarling," Thank you, Mr. Chairman. Just to set the record straight, if I heard my colleague, the gentlelady from California correctly, speaking that Countrywide was not regulated, that will come as news to both the OCC and the OTS who at different times during Countrywide's existence regulated those institutions. Mr. Wallison, you have a lot of your written testimony that you were unable to speak about in your oral testimony. I thank you for being here. I thank you for your very thoughtful op-ed in the Wall Street Journal today. Certainly you bring a wealth of credibility to this panel as being one to have the clarity and call that Fannie and Freddie were presenting a huge amount of systemic risk to our economy. In your testimony, you say that the design of a systemic regulator could cause more Fannie and Freddies to take place in the future. Although I don't remember the exact quote, our President, in his State of the Union address, said something along the lines of before we can correct our economy going forward, we have to understand how we got into this situation in the first place. That is a paraphrase. Can you speak exactly how significant was the role of creating a federally sanctioned duopoly in Fannie and Freddie, giving them affordable housing goals that ultimately brought down their lending standards? What role do you believe that played in the economic debacle we see today? " FOMC20060920meeting--127 125,MR. PLOSSER.," Thank you, Chairman Bernanke. Overall, economic activity continues to expand in the Third District. The consensus in the regional business community is for moderate growth in the months ahead, but some sentiment has turned more cautious in the intermeeting period. We have seen a slowdown in regional manufacturing activity over the past month. Our business outlook survey, which remains confidential until noon tomorrow, weakened somewhat in September with general activity falling just barely into the negative area, at -0.4, from an 18.5 number in August. This is the first negative reading we’ve seen since April 2003. The diffusion indexes for shipments, new orders, and unfilled orders also turned slightly negative. I don’t want to read too much into one survey. The April 2003 dip was very short-lived, and we saw a similar pattern in our survey in the mid-1990s, when growth slowed but then picked back up again fairly quickly. Part of the slowdown in manufacturing is at firms that supply the housing industry, reflecting a slowdown in residential real estate, which has become more pronounced in our District since our last meeting. Building permits and home sales were down in July and August. Inventories of homes on the markets, like much of the nation, continue to increase. House-price appreciation has slowed, but we have not yet seen outright declines. Despite an increase in cancelled sales of new homes, builders generally indicate that their backlogs will keep them relatively busy through the rest of the year. However, some real estate contractors have begun to lay off employees in anticipation of slower activity. A pickup in activity in nonresidential real estate markets has been helping to offset the decline in residential construction. Office vacancy rates continue to edge down, and net absorption of office space continues to be positive. However, over the next year, some moderation in nonresidential building construction in our three states is expected. In response to a special question in our manufacturing survey this month, about one-third of the firms report that they plan to lower their expenditures on new structures next year compared with this year. Only one-tenth of our firms expect to raise spending on structures. When we asked a similar question a year ago, about half the firms expected to raise their expenditures on structures in 2006, and, in fact, we did see that this year. For other categories of capital spending, however, firms by a large margin anticipate expenditures in ’07 to be the same as or higher than those in ’06. At some small banks in our District there has been a recent pickup in nonperforming loans, which is concentrated in their commercial real estate portfolios. Conditions in other sectors of our region are little changed since our last meeting. Retail sales of general merchandise edged up, but sales of back-to-school merchandise, especially fall apparel, did not seem to meet manufacturers’ expectations. Payroll employment continues to expand in our three states at a somewhat slower pace than in the nation as a whole, which is typical of the region. The unemployment rate, which had edged down slightly in June, edged back up in July but remains below 5 percent. While many employers continue to report difficulties in filling positions, the Philadelphia staff’s forecast is for employment in our region to grow at a pace of about 1 percent over the next year, slightly lower than this year. Unemployment rates in the region are expected to increase modestly maybe over the next year. Growth continues at a moderate pace, but we see little indication of receding price pressures in the District. The index of prices received in our manufacturing survey edged up in September. There was some minor moderation in prices paid, but that index remains at an extremely high level. Employers in a number of industries in the region report that wage and salary levels have been moving up at a somewhat faster pace than they did a year ago. Turning to the national economy, my view is not much different than it was at our last meeting. My main concern remains the outlook for inflation and the risk it poses for our credibility. In my view, the Fed’s most important contribution to a healthy economy is achieving and maintaining price stability. As expected, incoming data continue to indicate a moderation in growth to potential or somewhat below potential. On the negative side, housing has weakened more sharply than many expected, and auto production seems to be turning down for the rest of the year. On the positive side, as has already been mentioned by a number of others, business investment and corporate profits remain firm. Employment continues to rise at a moderate pace. The revised wage and salary data are now more consistent with the strength in consumer spending that we’ve seen, and continued growth in income and perhaps lower gas prices will help offset the possible negative effect that we may see from a deceleration in housing prices. On balance, I am somewhat more optimistic than the Greenbook about the growth side of the economy. I, too, see growth somewhat below potential over the next four quarters, but that’s driven predominantly by a slowdown in the near term—that is, in 2006. Then I see a return to potential more or less in 2007, although my estimate of potential is probably slightly higher than the Greenbook’s estimate. Now, given the level of precision of our output measurements and forecast of potential GDP growth, I’m really not overly concerned about the forecast at this point. The adjustment in the housing sector to more-sustainable levels is forecast to occur without triggering a recession and without triggering much of an increase in unemployment. I believe we should not attempt to stand in the way of that happening. It’s a mistake to think that the forecasted moderation in growth will bring inflation back to a level consistent with price stability. Indeed, the Greenbook’s baseline forecast of core PCE inflation remains above 2 percent through the end of 2008. Even in the alternative Greenbook simulation of a slump in housing, in which aggregate demand weakens and real GDP growth slows to just 0.6 percent in 2006 and barely above 1 percent in the first half of 2007, core inflation hardly changes and remains above 2 percent in 2008. Thus, it seems to me that language from us in the press that indicates that moderating growth will help to restrain inflation is not really consistent with our forecast. I think it imputes a degree of precision to an estimated Phillips curve that we just don’t have. Over the intermeeting period, we have had some hopeful news on the inflation front. Core CPI inflation has not accelerated further in the past two months, and oil prices seem to be down. Thus, headline inflation, as I pointed out, is likely to be way down in September, and we will seem quite omniscient. The measure of expected inflation over the ten-year period in our Survey of Professional Forecasters has not changed—it remains at 2½ percent. The August rise in the Michigan survey of one-year-ahead inflation expectations seems to have been reversed in the preliminary September numbers, largely because of the decline in oil prices. However, both compensation per hour and unit labor costs have been trending up, not down as the earlier data suggested, although I will note that the usefulness of the compensation numbers in predicting inflation is quite weak. Although core inflation has stabilized, its level is still above our so-called comfort zone. To my mind, the inflation outlook is quite uncertain. We do not yet know if the positive developments in oil prices will stick or not. I hope they will, but certainly we’ve seen energy prices retreat only to move back up again, and the hurricane season isn’t over yet. Thus, we should not become too sanguine about inflation from one or two data points. Moreover, we do not know if the upward revision to labor compensation will pass through to core inflation, as built into the Greenbook baseline, or if measures of medium-term inflation expectations will continue to decrease. What we do know is that core inflation has been above 2 percent for two and a half years and is expected to be there, according to the forecast, for another two years. Put another way, there is little evidence in the forecast that policy actions to date will bring core inflation back below 2 percent before sometime in 2009. I think that should concern us. I see two inflation scenarios as being plausible, and I struggle with which one I believe to be the correct one. In the first scenario, core inflation is elevated primarily because of transitory factors, like the pass-through of higher oil prices, and reflects an adjustment to these changes in relative prices. As oil prices stabilize, assuming that they do, we’d expect to see core inflation presumably fall and fall faster than indicated in the baseline Greenbook forecast. The Greenbook forecast appears to me to incorporate an assumption of relative price stickiness that is inconsistent with some recent studies on microdata. Thus, in this scenario, I see inflation falling, perhaps more in line with the Greenbook’s alternative scenario of less persistent inflation. This story is appealing and plausible to me, but it rests on the transitory nature of the current measures of inflation. Even in this most desirable of scenarios—seeing inflation fall back to 2 percent or slightly less in 2007—we have to recognize that we will have essentially ratified a higher price level driven by oil price increases, and we should ask ourselves whether or not we are comfortable with that. In the other scenario, stimulative monetary policy during the past five years has been a major contributor to the rise in core inflation. In this case, we wouldn’t expect to see a deceleration of core inflation until monetary policy has firmed enough to take out the cumulative effects of that accommodation. The Committee has now moved rates up considerably from historical levels. If potential growth is now lower, as the staff indicates, the equilibrium real rate may be slightly lower, suggesting that monetary policy may be slightly firmer now than previously thought. Even so, it has only recently reached that level. But given the imprecision with which we estimate potential output or equilibrium real rates, I really don’t take much comfort from such measurements. Thus, to my mind, there is a significant risk that policy is not yet firm enough to achieve the desired outcome. Regardless of which of these two scenarios you think more likely, I think we must be concerned that our credibility and the consequences of allowing inflation to remain above our comfort zone for so long are at question. If scenario 1 comes to pass and inflation falls faster than suggested by the Greenbook baseline, then we would all breathe easier. But that scenario seems largely a bet on oil prices and on the presumption that past accommodative policy is not playing any role, and that makes me nervous. I would much prefer to believe that scenario 1 is the operational one. However, again, I find it hard to believe that a four-year to five-year period is transitory, so I have to consider the alternative. If the first scenario is wrong and inflation evolves as in scenario 2, then our credibility is seriously at risk if we fail to take further steps to curtail price increases. We might be lucky. But we might risk finding ourselves in a situation in which inflation expectations become unhinged, making it more costly to bring inflation back down. As has been mentioned, in the Greenbook alternative forecast in which inflation expectations become unanchored, inflation remains near 3 percent with only a slight decline in 2008, and growth slows below 1¾ percent next year and remains well below trend through the forecast period. To me, 3 percent inflation and 1½ percent real growth is not a comfortable place to be and would make restraining inflation in the future even harder for us. I’d like to conclude my remarks by thanking the Board staff for their research on inflation dynamics and the possible reduction in the level of persistence in recent years. I think this is an important area for research, but I encourage the staff to continue its work to try to identify structural models of these dynamics in addition to reduced-form models. I agree with the staff that the monetary policy implications of the reduced-form findings presented in the memo depend on how one chooses to interpret them. The results presented by the staff and others suggest that, since 1990, inflation has become less persistent and appears to be less related to other macro variables as well. We do not know whether these changes are due to a more aggressive stance of monetary policy against inflation and to our credibility or to fundamental changes in the domestic or world economy. If we suppose that lower inflation persistence is due to enhanced policy credibility, then it is incumbent upon this Committee to maintain that credibility. That is, we should not expect inflation persistence to remain low if the Fed acts in a manner that is inconsistent with its commitment to price stability or risks its credibility by neglecting to take actions that return the economy to price stability in a reasonable period of time. We shouldn’t ignore the fact that the longer we allow deviations from price stability to persist, the higher is the risk to our credibility and the higher is the risk that recent high inflation readings will raise longer-term expectations, thereby putting us in a very awkward position a year from now. Thank you." FOMC20070918meeting--120 118,MR. STERN.," Thank you, Mr. Chairman. Let me make a few comments about current economic conditions and then talk a bit about the outlook. By way of overview, I will say that I largely agree with the Greenbook, both about the current quarter and about the near-term outlook, in any event. The current quarter does look as though it is going to turn out to be certainly respectable real growth of 2½ percent or perhaps a bit more. The anecdotes from our District that relate to the third quarter seem to be consistent with that. Employment has been sustained, and if anything, the reports of the scarcity of skilled labor have probably increased. In fact, some of our directors have speculated that perhaps the aggregate employment gains have been restrained by that availability issue. The largest bank in our District and several others say that, based on what they are seeing, consumer spending and consumer unsecured borrowing are proceeding normally. Repayments are proceeding normally, and credit quality on the consumer side is in good shape. The one exception to what I would describe as a generally positive picture is what we are hearing in the nonresidential construction sector. I don’t want to make too much of this, but I have a sense that it is significant. Some of the large developers in the District have reported that, because of the change in financial conditions that has occurred in the past month or two, some projects are clearly being postponed. Whether they will ultimately be cancelled remains to be seen, but there certainly have been some effects there. Turning to the outlook, I think that the outlook for real growth over the next several quarters is less favorable than it was formerly. I admit that it’s a stretch to get there, if we rely on our familiar models to produce that result. Nevertheless, I take a cue from the comments I made a moment ago about nonresidential construction. It looks as though that will be somewhat slower than I earlier anticipated because of changing financial conditions. I would guess that we would see the same thing in outlays for equipment and software, so I’m expecting a less favorable performance there. As far as the housing sector is concerned, it seems to me that, given the inventory of unsold homes, even if financial conditions improve and improve relatively quickly, housing is going to exert a depressing effect on the economy for quite some time to come, just because of the inventory overhang. More broadly, the changes in the cost and availability of credit that we see are likely to hamper the economic expansion for several quarters. So I have marked down my forecast accordingly, based on changes in the factors I cited—namely, a somewhat less favorable outlook for nonresidential construction and ultimately for spending on equipment and software, prolonged weakness in the housing sector, and a somewhat less favorable outlook for consumer spending as a consequence of changes in credit cost and credit availability. On the inflation front, the incoming information is slightly more favorable than I had earlier expected, and so on margin I have adjusted my forecast there as well. I had been expecting a diminution of core inflation as a consequence of the ebbing of transitory factors and of a moderately restrictive monetary policy. It appears to me now that the decrease in underlying inflation is occurring a little sooner than I had anticipated, and I think this is obviously a positive development from a number of perspectives, one of which is that it is potentially significant as it gives us a little more maneuvering room on the policy front if, in fact, it is sustained. Thank you." FOMC20081029meeting--280 278,MR. PLOSSER.," Thank you, Mr. Chairman. Clearly, forecasts have been marked down since our September meeting--mine included. This reflects the weaker data that we have obtained on the real side, especially consumer spending and manufacturing, but also worsening conditions in the financial markets. Accordingly, in an intermeeting move on October 8, we cut the funds rate 50 basis points. Yet the additional effect on the economy of financial turmoil during the last month remains highly uncertain. Spreads in many markets remain higher than at the time of our September meeting, but some have started to decline. If our new facilities have the desired impact, we may well see spreads continue to fall back to September or lower levels. It is very difficult to say at this time. Although I dislike intermeeting rate cuts, I supported the October 8 cut because it was part of a coordinated effort among central banks around the world and it seemed justified given that our growth outlook had deteriorated and inflation expectations had remained stable. We may well have to do more, but I think we are near the end of what we can do with monetary policy. Of course, it's difficult to determine the appropriate level of the funds rate, and I want to draw your attention to the Greenbook, which showed that, whether we cut today or don't cut today, the paths of GDP, employment, and inflation over the next year or two are not much different. In fact, in most models, cuts of that magnitude do not show up very heavily in real variables. I would also note that, according to the Greenbook, we could cut the rate to zero and have no effect on inflation, apparently, for the next four years. However, given the fact that rate cuts don't have much effect, even in the Greenbook simulations, we have cut rates. It may not make much difference, as President Hoenig was saying. My preference at this meeting would be to stand pat and see how the data and financial markets improve. We are already engaged in extraordinary quantitative easing, even at this point, and we are hearing from bankers that the funds rate will do little to stimulate lending on their part or improve their balance sheets. Now, delaying necessary rate cuts is not desirable. But given the considerable uncertainty around our forecast, it is not clear that further cuts are either necessary or desirable or are going to be effective. And doing so for purely psychological reasons, from my standpoint, is a dubious way to conduct policy. A comparison of the baseline Greenbook forecast with the alternative scenario involving more-rapid improvement in financial conditions suggests that the appropriate policy path is very much dependent on knowing whether the increase in financial stress in September will be lasting. If conditions deteriorate further, which they might, we may want to cut in December. If conditions improve, this may not be necessary. Given the decline in confidence in our markets and institutions, I think the Fed can play a positive role by being a steadying hand. That's another reason to wait a bit longer before moving again. I do not believe that we inspire confidence by appearing to react to market fluctuations. Even though that's not what we're doing, I fear that we often give that appearance. Moreover, although we have gotten positive reactions to the creativity of our liquidity programs, I think we have missed opportunities for raising confidence by rolling out our liquidity facilities in a piecemeal fashion. We had announcements made every day between Monday and Wednesday, on October 6, 7, and 8. I think it would have been far better to announce these actions as a wellthought-out package, explaining the intention of the individual pieces and how they related to one another. For example, we now have three different lending programs designed in whole or in part to support money market mutual funds. I have concern that we have been looking reactive rather than proactive, even though I know that some of these programs had been in the works for a while. I have argued that it is important that we think about our policy choices in terms of policy paths--that is, a dynamic path. The principles of dynamic programming suggest that we think about our policies in a backward-looking way. This, I believe, applies not only to monetary policy but to our liquidity programs as well. In this spirit, I believe that we must think hard about our exit strategies both from the liquidity programs and from our very low funds rate. I think we have dug ourselves a very deep hole in terms of the breadth and depth of our lending to the private sector. We seem, at times, to be the lender of first resort as well as the lender of last resort. We must make sure that we have a sturdy ladder that will enable us to climb our way out of this hole. This is especially important given the interaction between the programs and the differences across the programs in their current expiration dates. On the monetary policy side, we have added significantly to liquidity in the economy, as I alluded to earlier. Given the uncertainty surrounding our forecast, we may very well find ourselves in a position of having to reverse those injections sooner than expected. I am even more concerned with this planning process than I have been when I have raised this point before. The baseline funds path in the Greenbook is quite extraordinary from my perspective. It suggests that we can keep the funds rate low, below 1 and even close to zero, throughout most of the forecast period. Indeed, in 2011 the funds rate is still below 2 percent, even though the economy is growing at 4.4 percent. We may disagree somewhat on the magnitude of the contributions of our low interest rate policies in the 2003�05 period to the current problems, but I don't think many of us want to repeat that episode. Yet looking at the baseline forecast and where the funds rate remains--below 1 percent or certainly below 2 percent for the next four years--it strikes me as a risky strategy at best and perhaps even a dangerous one. We have previously expressed views around this table that this Committee historically has been reluctant to raise rates in a timely fashion, and I believe that fear is reinforced by what I see in the baseline forecast in the Greenbook. That projection worries me a great deal. We must not act in a way that sows the seeds of the next crisis. Despite the pressure of the here and now, we cannot and should not ignore the consequences of our actions in the intermediate term. Managing our way from point to point, dealing with immediate problems, can very easily lead us to a place in which we do not wish to be--thus the importance of thinking in terms of a path. I think it would also serve us well to think about the process we will follow to unwind our liquidity programs in advance, so that we avoid unintended consequences across markets, and about the communication strategy that will ease the transition back to a more market based provision of liquidity. In sum, Mr. Chairman, although I would prefer not to move today, I recognize that my forecast is more optimistic than most. Moreover, I also accept the notion that there is a great deal of uncertainty about the outcomes and fragility in the marketplace, and your concerns are well noted. Thus, I will not dissent against a 50 basis point cut. But I would like to remind the Committee of our earlier discussions and the general agreement I thought I heard that, when the time comes, we will have to raise rates and we may have to do so aggressively. In all likelihood, that will occur before lagging indicators, such as the unemployment rate, are firmly on the decline. This is not the projection offered in the Greenbook baseline. Thank you, Mr. Chairman. " FOMC20070321meeting--107 105,MR. STERN.," Thank you, Mr. Chairman. As others have commented, the latest numbers on the performance of the national economy have been mixed, which is to say less positive than I had expected; and I take the Greenbook’s point that growth is subdued this quarter. I don’t view the recent news on inflation as especially favorable, but I don’t find it overly alarming either. The question for me is, Do the latest readings have implications for economic performance beyond the current quarter—that is, say, over the next several quarters or so? At this stage, my answer to that question is “no,” in part because I want to avoid getting whipsawed by marking down the forecast now only to mark it back up in May or June. More fundamentally, I think that continued gains in employment and income, sound fundamentals for business investment, sustained increases in government spending, and generally liquid financial conditions are likely to maintain the expansion. I also think that the trade situation may turn out to be a bit better than that depicted in the Greenbook, assuming that energy prices don’t take off a lot from here. I also take some comfort that, at least until now, I haven’t viewed my forecast as especially ebullient. By the way, I do think that the housing correction still has some way to run, as I’ve commented before, largely because of the overhang of unsold properties. To get some additional evidence on the latest developments, we called a number of our contacts in retailing late last week to see if we could detect anything new in consumer spending. The short answer I would say is “no.” A clear trend was not apparent from our contacts. Some reported significant increases in sales recently and were optimistic about prospects. Some experienced sales decreases and were at the least cautious, and some said sales were unfolding more or less as anticipated. Overall, this is probably modestly good news, since at least there was no obvious break in consumer outlays. As for inflation, I would judge that the situation has not changed appreciably, and so I continue to expect modest deceleration over time. I don’t sense that price pressures are building at this point, but you have to look pretty hard to find convincing signs of moderation as well. Thank you." FOMC20070807meeting--44 42,MR. MADIGAN.,"2 I will be referring to the handout labeled “Material for FOMC Briefing on Trial-Run Projections.” As in shown line 1 of the top panel of exhibit 1, the central tendency of your current forecasts for real GDP growth for the second half of 2007 is 2.0 to 2.7 percent. Combined with the BEA’s estimate of 2.0 percent growth in the first half, your projections imply a central tendency for the year of 2.0 to 2.3 percent, down 0.2 percentage point from the June trial run. The growth rates for 2008 and 2009 were revised down by a similar amount and now center on about 2.5 percent. As can be seen by comparing rows 3 and 4, the central tendencies of the projections for the unemployment rates at the end of 2007, 2008, and 2009 are essentially the same as in June. The downward revisions to real GDP growth together with the unchanged forecasts for unemployment suggest that, like the staff, many of you revised down your estimates of potential GDP growth about ¼ percentage point. Still, as in June, FOMC participants generally are a bit more optimistic than the staff about potential growth. Indeed, many of you made those points in your forecast narratives. As shown in row 5, the central tendency for core PCE inflation for the second half of 2007 is 1.9 to 2.1 percent. Together with the 1.9 percent rate for the first half, this implies a central tendency of 1.9 to 2.0 percent core inflation for the 2007 as a whole, down slightly from the June projections. The central tendencies for the next two years are nearly identical to those in June, with the midpoint edging down over time. The central tendencies for total PCE inflation, line 7, collected for the first time in the current exercise, are similar to those for core inflation for 2008 and 2009. The central tendencies of your projections for core inflation this year and next lie just below the corresponding staff forecasts, and the central tendencies of your projections for unemployment late this year and next are also just below the staff forecasts. These comparisons suggest that many of you have a somewhat lower estimate of NAIRU than the staff’s estimate of 5.0 percent, a point that some of you made explicitly in your narratives. In earlier discussions of the role that your projections might play in enhancing the Committee’s communications, some of you noted that extending the time horizon for your projections would give the public more information about your estimates of potential GDP growth and your judgments about optimal or acceptable trend inflation. To the extent that argument is correct, the 1.1 percentage point range of your projections for GDP growth in 2009, shown in line 1 of the middle panel of exhibit 1, suggests noticeable dispersion in your views of potential growth, though those growth rates may also be affected by projected adjustments toward inflation rates that you see as desirable. The range of your projections for total inflation in 2009, line 7, is not quite as wide, suggesting somewhat greater commonality in your views about the rate of inflation consistent with price stability; and the range for your core inflation forecasts in 2009, line 5, is a bit narrower, remaining at 1.5 to 2 percent. 2 Materials used by Mr. Madigan are appended to this transcript (appendix 2). As shown in the bottom panel, most of you again characterized the appropriate path for the federal funds rate as broadly similar to the Greenbook assumption. As in June, a few of you assumed a modestly lower path for the federal funds rate, evidently reflecting expectations of more-favorable aggregate supply conditions than in the Greenbook forecast, while two assumed an increase in the fed funds rate later this year or early next year (followed by a reduction) to foster more disinflation. Exhibit 2 summarizes the results on uncertainty and skews. You were asked to characterize your judgment of the uncertainty attached to your projections relative to levels of uncertainty over the past twenty years and to indicate your judgment of the risk-weighting around your projections. As shown in the top two panels, about two- thirds of you see uncertainty about growth as broadly similar to that experienced historically and see the risks around your growth projections as broadly balanced. Compared with the situation in June, however, a few more of you see greater uncertainty than historically; and a few more view the risks as tilted to the downside. Similarly, with regard to the outlook for unemployment, not shown, noticeably more of you than in June see the risks as tilted to the upside. With respect to core inflation, the middle two charts show that almost all of you again judge that the uncertainty attached to your projections is similar to past levels, while the number of you who see the risks as tilted to the upside edged down. As shown in the bottom panels, your judgments about the uncertainty and risks for total inflation are nearly the same as those for core inflation. I would like to end on a personal note. As the Chairman noted, Vincent Reinhart will be leaving us. Vincent joined the Board’s staff in 1988. For a while, Debbie Danker and I oversaw Vincent’s work, but before long Don and the Board recognized prodigious talent, and eventually the tables were turned. [Laughter] The Chairman has already indicated how the Board and the FOMC have benefited from Vincent’s unparalleled expertise and work ethic. But I want to note that we on the staff have benefited equally, from Vincent’s generous contributions to our research, current analysis, and policy work and from his insightful and creative approaches to day-to- day management issues. Finally, Vincent’s eclectic wardrobe was useful to the staff in generating random numbers for stochastic model simulations. [Laughter] On any given day, for any given occasion, whether he would choose to show up snazzy or shabby was perfectly unpredictable. Vincent, all members of the Federal Reserve staff have been proud to be associated with you. We will miss you. Thank you, Mr. Chairman." FOMC20060131meeting--87 85,MR. SANTOMERO.," Thank you, Mr. Chairman. Consistent with the national economy, overall activity in the Third District slowed somewhat more than expected in the fourth quarter. Despite this slowing, the general view in my District is that our regional economy is likely to expand at a moderate pace in 2006. Payroll employment continues to expand in our three states, but at a more moderate pace than we saw in the first half of 2005. Overall, market conditions remain firm. The three-state unemployment rate ended up at 4.8 percent, slightly lower than the national rate. Regional manufacturing activity continues to expand at a moderate pace. The index of general activity in our manufacturing survey declined to plus 3.3 in January, its lowest level in seven months. But the indexes of shipments, new orders, and employment were all up. This divergence is unusual. Typically, they move together. When they do diverge, I tend to put more weight on the shipments and new orders indexes, as these reflect the respondents’ own firms rather than the opinions about general economic conditions. In addition, the fact that our firms have not yet changed their capital spending plans for 2006 suggests that their outlook remains positive. Retail sales in our District are rising moderately. Retailers still express concern about the potential depressing effect of higher gasoline and heating costs on consumer purchases in 2006. Our auto dealers have not fared as well. In fact, our District has seen a decline in automobile sales. Growth in construction is one of the question marks in the 2006 outlook. In our District, nonresidential construction continues to improve. In fact, the office market absorption rate is rising in the Philadelphia metropolitan area, and office vacancy is declining in both the city and the suburbs. By contrast, over the past month or so, we have continued to receive anecdotal reports that a slowdown in residential construction may be at hand. Real estate contacts report that house-price appreciation has slowed or even ceased, and there has been an increase in inventories. These signs, however, seem to point to a softening of activity, not to a sharp drop. We have received some welcome indication of a moderation in price pressures in the District. Our survey measures of prices received and prices paid were down in January and well below their October peaks. Expected price increases also declined sharply. The only caveat I would put on that statement is that the survey was taken before the most recent run-up in energy prices. Turning to the nation, the advance fourth-quarter GDP report was quite a bit weaker than we were all expecting. That said, we, too, think it’s too soon to conclude that the weakness seen in the fourth quarter is more than a temporary soft patch. Our forecast for GDP over the next two years is similar to that of the original Greenbook that we received this month. We expect growth to be on average around 3½ percent, near potential. We have a somewhat smoother path than the Greenbook since we expect the boost in activity from the rebuilding effort in the hurricane-afflicted areas to be more spread out than front-loaded. We also see somewhat stronger employment growth next year than the Greenbook because we see somewhat stronger output growth in 2007. We project nonfarm payrolls to rise at an average of 160,000 a month this year, stronger in the first half as people displaced by hurricanes continue to return to work. We project an average increase in payrolls of about 150,000 per month next year. The Greenbook employment projection is similar to ours in 2006, but the Board staff sees a deceleration next year to an average of about 100,000, as was pointed out in the presentation. However, our unemployment rate forecasts are similar, about 5 percent, because we see somewhat higher labor force participation. We anticipate core PCE to rise a bit less than 2 percent in 2006 and then to accelerate to 2 percent in 2007, reflecting a modest acceleration in unit labor costs. In contrast, the Greenbook sees a slight deceleration in core inflation over the forecast period. Our forecast is predicated on being near the end of the tightening cycle. Exactly where we stop is yet to be determined; the data will tell the Committee. But all of these data suggest that we are closing in and we are close to being done. For this meeting, I think it’s prudent for us to do what the market expects and make another move of 25 basis points. But I think we also want to be in a position to pause if that is appropriate, given the incoming economic data. Of course, I will not be here for that interesting discussion. [Laughter] As you know, this is the last FOMC meeting that I will be attending as President of the Philadelphia Federal Reserve Bank. I am honored to have had the opportunity to lead that institution. Of all the experiences during my six years of service at the Fed, none was more challenging and more rewarding than serving on this Committee. I have enjoyed and learned from the first-rate staff of the Reserve Banks and the Board of Governors. I feel privileged to have served at a remarkable point in economic history. In my tenure, we’ve gone through a recession and a recovery, seen concerns shift from disinflation to inflation, moved to a record low funds rate, and then returned it to more-normal levels. And all of this was accompanied by an unprecedented degree of transparency in our policy discussions. I have also been inspired by the leadership shown by our Chairman, I may add, in forging a consensus from diverse opinions in periods of uncertainty and in fostering a collegial atmosphere among us. I want to thank you all for an important part you’ve played in making my service at the Fed a rewarding experience. Thank you, Mr. Chairman." FOMC20060920meeting--92 90,MR. STOCKTON.," I think the answer to that is probably never in the post-World War II period. We also have not had a rise in the unemployment rate of ½ percentage point stretched out over a year, as we have in this forecast, without running into a recession." FOMC20051101meeting--84 82,MR. STOCKTON.," Certainly. Basically, embedded in this forecast is some implicit deterioration in inflation expectations or underlying inflation momentum on the order of about ½ percentage point from the end of 2003 into 2006. We think we need some of that to explain the pickup in actual core inflation that we’ve had, which has been a deterioration of about a percentage point. Some of that follows from the fact that higher headline inflation probably has fed back a bit into inflation expectations, so we think there has been some slight deterioration there on net. With energy prices flattening out and then turning down, we have some very low headline inflation numbers coming soon; that will start to appear around the turn of the year. So we think some of the pickup that has occurred is likely to unwind, first, as the indirect effects of the higher energy November 1, 2005 21 of 114 year. As headline inflation comes down, that will reduce somewhat underlying inflation momentum, and we have inflation expectations moving back down into 2006. It’s a pretty small move. The deceleration we’re projecting in 2007 from 2¼ percent to 2 percent reflects mostly the indirect effects of energy prices and some slowdown in import prices. But we would think that that inflation expectations process, which we have built into this forecast and which is relatively minor, would begin to unwind later in the forecast period." CHRG-111hhrg48867--13 Mr. Garrett," Thank you, Mr. Chairman. And while we look at systemic risk, and there are some who are calling for consolidating even more regulator power and risk within the Fed to look at systemic risk, I find myself on the other side increasingly adverse to the idea. Now, the Fed has already been the de facto systemic regulator for at least much of our banking sector, which by the way is already the most regulated portion of our economy. Institutions like Citigroup and other large banks have some of the thorniest problems that we are facing in our financial markets. So instead of giving Fannie even more problems, despite its regulatory failures, I am convinced that we should actually reduce the regulatory powers and maybe at best let it concentrate on its monetary policy. The Fed's regulatory role, if it were to be increased, compromises its independence and threatens to undermine the value of the dollar. The reason for the Fed's independence in the first place is its monetary policies duties, not its regulatory role. It is difficult to see a scenario where the Fed is responsible for the health of our Nation's largest financial institutions would be reluctant to raise interest rates in order to assist financial institutions under its regulatory purview. Furthermore, in addition to my concerns about the conflictive nature of the Fed's role, as I mentioned at last week's hearing, I also have concerns about consolidating so much additional power in any entity that does not have to answer to the American people. Finally, beyond my specific concerns about the Fed, I have broader concerns, as Mr. Hensarling raises, about a new systemic regulator. What powers would it have? Would it be able to say what it is and what it is not allowed to invest in? And in its zeal to eradicate risk, and remember, this is a capitalist economy, would it fundamentally alter the nature of the American economy, the greatest economic engine in the history of the world by doing so? I thank you, Mr. Chairman. " FOMC20051213meeting--88 86,MR. FERGUSON.," Thank you, Mr. Chairman. The concept of the known unknown came to the national consciousness about a year or two ago, and I sense that it’s very much in this room today. The baseline forecast calls for a very nice, soft landing to potential growth with contained inflation if we just tighten our policy one or two more turns. I’m certainly prepared to accept that forecast for the purpose of today’s meeting, but the uncertainties or the known-unknown factors around it are to me quite obvious. To me the risks are clearly to the upside with respect to growth, but surprisingly may be more balanced with respect to inflation. It is easier to see an upside growth risk than a downside one, in large part because the incoming data have been surprisingly robust, making a slowing just a quarter or two away seem a little bit of a stretch. Much of the waning wealth effect on which the baseline is built is due to a slowing in the housing market. It is true that some of the indicators suggest some moderation there, December 13, 2005 56 of 100 when lined up against the actual strength shown in home sales themselves, both existing and new— and also prices, which have continued to appreciate at a double-digit pace through the third quarter— it is hard to say that the housing market is anything but robust. A second element of the wealth effect that the Greenbook assumes is that the equity price appreciation will be no more than needed to keep the current level of the equity risk premium about stable. But again, it is easy to see some upside potential here. The equity risk premium is now above average. The recent run-up in equity prices, coupled with sustained high levels of productivity growth, an attractive profits outlook, and healthy corporate balance sheets all make it perhaps a little more likely that equity prices will rise rather than fall, and indeed, rise more than expected. If this were to occur, the earnings-price ratio would decline and the equity risk premium would return to the normal range, and in doing so would provide more equity wealth impetus to the economy than perhaps the baseline assumes. Finally, global growth is a surprise to the upside. As Dino indicated, equity prices have shown remarkable strength globally. Monetary policy itself has in many cases been somewhat stimulative and generally financial conditions have been supportive of growth. All of this suggests a bias toward faster global growth due to accommodative financial markets broadly. On inflation, I judge that the risks to the baseline forecast are perhaps a little better balanced. While the upside growth risk would certainly pressure resources with inflationary consequences, that is not the entire story. For one thing, inflation has come in a little softer recently than we had expected. Secondly, energy prices seem to have flattened, and market participants expect them to moderate even further, providing a rapid diminution of the upward momentum to headline inflation. December 13, 2005 57 of 100 pass-through has been relatively low. Finally and importantly, longer-term inflation expectations are moderate. I would also add in this regard something that has not been much discussed here: Labor compensation itself has been on the weaker side, even as resource utilization has tightened. And finally, the productivity growth story, I think, has shown continued robustness. In this regard I’d point out that we talk a great deal about the upward adjustment to the structural productivity growth in the staff forecast, but all they’ve really done is just to maintain what has happened from 2001 to 2004. So maybe we’ve put too much weight on the temporary downward movement as opposed to just recognizing that things haven’t changed very much. So given this view of the risks around the forecast, why do I propose that we accept the baseline for purposes of today’s decision and communication? First, I am mindful that policy works with long and variable lags. While the risks for us are not totally balanced, the greater weight of the evidence, I think, is still for a good outcome, given that we have moved rates up quite considerably. And with inflation expectations still well contained, I think there’s no reason to adjust market perceptions of what we’re likely to do going forward. If those two facts did not adhere, my judgment might be different. Secondly, one would have to say that while the housing sector story is yet to come, there are, as we’ve heard around this table, a large number of anecdotes all pushing primarily in the same direction—supporting, I would think, the baseline. Third, I take some comfort in the fact that the baseline forecast is shared roughly by most outside forecasters. The Greenbook does not seem to be out of the trend. The Blue Chip consensus is that after more than two years of above-trend growth, activity in 2006 is likely to moderate to its trend December 13, 2005 58 of 100 underlie the Blue Chip are not distinguishable dramatically from the Greenbook forecast. President Moskow has already talked about what happened in Chicago at their outlook symposium. Again, the consensus seems quite consistent with our forecast from the staff. And the NABE members we met with in this room not too long ago also expect growth to be in the range of 3.25 to 3.5 in 2006. Finally, I am willing to take the baseline as the basis for policy today because I recognize that our language will convey the proper sense of caution to reflect the risks and leave us with the flexibility to respond to other changes. I will delay any further comment on that, as you have suggested, until the second part of our discussion." FOMC20070509meeting--44 42,MR. STOCKTON.," I certainly would not say that. [Laughter] I am glad to hear that the builders you talked to are not giving clear answers to that question because we have been talking to them as well and have not received clear answers. I think this is an open and unresolved question of the forecast. We are predicating our forecast or gauging it basically on an expectation that, in fact, builders would try to drive months’ supply back close to where it was on average over the past ten years, as if that had persisted long enough to reflect their desired equilibrium. But that is a big “if,” and as you note, if one wanted to take a twenty-year or thirty-year average, that desired months’ supply figure would be higher. So an upside risk to housing would be that there is not as big an overhang to be worked off as we are currently gauging in this forecast. On the sales of existing homes, I guess we, too, have taken some comfort from the fact that they stabilized a bit. More recently there was a dropback in existing-home sales and a decline in the index of pending home sales, which has some predictive content for existing homes going forward. So the picture is a little murkier, but I do think those data might suggest that, although it looks like a complete free fall in new-home sales, you need to factor in the possibility that overall housing demand is not quite as weak as those figures for new-home sales." FOMC20060629meeting--93 91,MR. STONE.," Thank you, Mr. Chairman. Economic activity in the Third District is also moderating in the second quarter. Our pattern is similar to that of the nation, but the District had less acceleration in the first quarter and less deceleration in the second quarter. Payroll employment growth in our three states is slowing. The unemployment rate has edged up slightly over the past several months, but the unemployment rate in most of the District’s labor markets is still lower than a year ago. Our business contacts still report some difficulty in filling open positions, and a quarter of the respondents to a special question in our Business Outlook Survey of Manufacturers say that the increases in wage rates needed to attract new hires this year are higher than they were last year. Regional manufacturing activity continues to expand at a moderate pace, but the indexes for new orders and shipments were up noticeably after a one-month slump in May. Despite this improvement, our manufacturers’ expectations about future activity have deteriorated. While they still plan to add to payrolls and expand capacity over the next six months, they have moderated these plans since the beginning of the year. At the last meeting, I reported that, in contrast to other Districts, retailers in our region did not express much concern that higher gasoline prices would eat into their sales; that view has changed. Conditions in our construction sector are similar to what I reported at our last meeting. Nonresidential construction continues to strengthen, but the acceleration doesn’t appear to be as strong as elsewhere in the nation. In contrast, residential construction in our three states has been flat this year, and home sales are down. Thus far the slowing in our region looks to be an orderly process. Unfortunately, consumer prices in the Philadelphia region appear to be increasing at a faster pace than those in the nation as a whole, primarily because of a larger increase in housing costs in the Philadelphia metropolitan area than in the nation. In addition, our manufacturers report that industrial price pressures have increased in recent months. Fortunately, we do not see a similar acceleration in labor costs, although the increases we are seeing in the Northeast are somewhat higher than in other parts in the country. In summary, current conditions and the outlook in our region continue to be positive, but the rate of expansion is expected to be somewhat more modest than we’ve seen over the past year. Price pressures continue to be a concern in our region. Turning to the national front, I would characterize the outlook in a similar way. Our growth forecast is similar to the Greenbook’s for 2006. We expect a significant slowing in activity in the second quarter followed by a pickup during the second half of the year to a pace that is slightly below potential. The slowdown in housing and high gasoline prices contribute to a slowdown in consumer spending, and the lagged effects of rising short-term interest rates and higher oil prices keep real growth slightly below potential. Our forecast for 2007 differs somewhat from the Greenbook. We see growth in 2007 slightly below that in 2006, whereas the Greenbook sees growth slowing appreciably. In our view, there has been more underlying strength in the economy. For example, we attribute more of the second-quarter slowdown to temporary factors. We are more optimistic than the Greenbook about employment growth. We see nonfarm payroll growth averaging a good deal more than the Greenbook forecast. We see unemployment rising to 5.1 percent by the fourth quarter of next year. Our inflation outlook is less optimistic than the Greenbook’s partly because we see less slowing of aggregate demand. We do not see core PCE inflation decelerating next year. We think the economy has been operating and will continue to operate slightly beyond full employment over the next several quarters and that foreign price competition will ease as the dollar depreciates. So despite our view that the indirect effects of the sharp rise in energy prices will wane in 2007, we expect core inflation not to decelerate. We do see some deceleration in 2008, but that is because we built in a slightly higher path for interest rates than that in the Greenbook forecast. Of course, there are risks to the forecast. Most of them have been mentioned; but in our view, the risks to growth, even at our higher level of growth, are roughly balanced. In contrast, the inflation risks are slightly to the upside. As people have noted, core inflation has accelerated in recent months, and it is above the range I consider consistent with price stability. Should aggregate demand moderate less than expected, there is a risk that strong inflation pressures could emerge. At this point, I believe that longer-run inflation expectations remain anchored, and our forecast is predicated on monetary policy ensuring that the recent high inflation readings do not raise longer-term expectations. This is likely my last meeting, but for sure I’ll be watching carefully as we go forward. I have confidence that the Committee, along with the new Philadelphia president, will do a good job to make sure that inflation expectations remain anchored. I’d like to thank the Chairman, the participants, and the rest of this staff for how well you have treated me over the past three meetings. I have to remember that I made the statement in June 2000 that it would be my last meeting, so I say “in the foreseeable future” [laughter] it will be my last meeting. Thank you very much." FOMC20070509meeting--194 192,MR. LACKER.," I’d second being a little more transparent within the Committee about the fed funds rate. Compared with other elements of the sausage factory that get revealed in the transcript five years from now, I don’t see why that should be so sensitive. More broadly, though, looking at these charts, I was really struck by the dispersion of inflation forecasts for 2009. I would think we would be quite uncomfortable releasing that. The natural interpretation of one’s forecast for inflation at that horizon is going to be what one’s objective for inflation is, and this portrays a Committee that has not come to agreement on its objective for the central thing that it’s responsible for controlling. Given that, I think that we want to come to closure on this issue before we go live. Indeed, we’re doing a dry run without having gone through that. I think the dry run after we go through that is arguably going to be different, and to my mind this argues for coming to closure sooner rather than later." FOMC20060131meeting--89 87,MS. MINEHAN.," Thank you, Mr. Chairman. There’s not a lot new in New England. So I thought I’d just skip over my usual probably more-lengthy-than-necessary comments on the region. Let me just mention a couple of things, though. Employment growth is still slower, and income growth is still slower than that of the nation. Our regional unemployment rate went up rather than down over the past year, and we have seen some slowing in residential real estate markets. However, surprisingly enough, there seems to be a good deal of optimism in discussions we have had with people about business spending and about commercial real estate markets. So, for the first time in five or six years, we’ve actually had net absorption of space, both downtown and in the suburbs. That situation is making a big difference in the smiles on people’s faces around town. I hope it means that New England is getting back and moving along the same trajectory as the nation. Turning to the nation, we, like most observers, were surprised at the modest growth rate of the economy in the fourth quarter. But we, like almost everybody else, believe that the reduced pace of government spending and smaller-than-expected inventory investment that affected the fourth quarter are likely to be temporary and reflect issues of timing rather than overall economic strength. Thus, we, too, anticipate a slightly stronger first quarter this year than we had before. But our forecast takes the same basic trajectory over the balance of ’06 and ’07—that is, strength in the first half of ’06 and then moderation as the effect of tighter monetary policy, cooling housing markets, and less fiscal stimulus takes hold. This is the same trajectory as that in the Greenbook. However, as we look at GDP, our forecast for ’07 is slower—½ percent or a little bit less— than the forecast for ’06, reflecting an expected outright decline in housing investment. We also see inflation trending off both this year and next, with core PCE inflation never above 2 percent over the two-year period. I mean, not “never,” which is a strong word, but at the points we’re mapping. Some of this difference in price pressures is accounted for by a sense of a somewhat greater supply of labor resources, as reflected in a slightly lower NAIRU and a higher labor force participation rate. Looking at these forecasts and assessing all the data and anecdotal inputs I have received since the last meeting, I am struck by a couple of things. First, these forecasts, and the vast majority of those available from other sources, describe an almost ideal outcome. U.S. demand is strong but slowing, as consumers save more and borrow less. Fiscal stimulus diminishes, business spending remains solid, employment grows, inflation edges off, and foreign growth is spurred by domestic demand at last and acts to create some export growth, though we continue to have a widening current account deficit. If these forecasts were to be realized, it would truly be just about the best of outcomes, and I would agree with President Yellen—a major sweet spot as the Chairman hands over the reins. But that scenario sort of begs the question of risks, both large and small, and how they are balanced. We could certainly be surprised by new energy shocks or geopolitical events of such magnitude to cause financial turmoil and consumer and business retrenchment. We could also witness the turbulence that could accompany a sharp unwinding of the nation’s ever-growing external deficit. But you don’t have to focus on major upsets. Risks of a lesser proportion loom as well. We could very well be wrong about the remaining capacity in labor markets, and the resulting upward pressure on wages and salaries could create a more rapid pace of inflation, particularly given the solid pace of external growth and pressures on a range of commodity prices. To date, however, the growth of wages and salaries has been on the slow side, particularly relative to productivity, and there is little evidence that firms believe they have the pricing power to pass on much more than energy surcharges. Indeed, their profit margins suggest that they have a cushion against increases in input costs. Alternatively, the impact of a cooling housing market could take a larger bite out of consumption than we now expect and cause a greater-than-projected, though welcome, increase in personal saving. This would, of course, slow the economy from baseline and damp price pressures. We haven’t seen this yet either, but it could be just as likely as missing on the inflation side. Thus, as I look at both the upside and downside risks, they seem to me to be more balanced than they have been. As some evidence of this, both the Greenbook and the fed funds futures markets anticipate that policy is near a tipping point—move a bit more now and then retrench in late ’06 or early ’07. I also find myself beginning to wonder about the cost of being wrong. When policy was arguably much more accommodative, it seemed to me that letting inflation get out of hand might be harder to deal with and ultimately more damaging to the economy than if growth slipped a bit. That may still be true. But just as our credibility regarding price stability is important in setting market expectations so, too, is some sense that policy will be supportive of growth when the threat of rising inflation is less imminent. In short, we need to be credible about achieving both our goals. At this point, another nudge toward a policy rate that neither stimulates nor restrains the economy seems appropriate. But the need for further moves seems to me to be increasingly driven by the incoming data." FOMC20080430meeting--58 56,MR. EVANS.," Thank you, Mr. Chairman. The Greenbook is aggressive and effective at portraying the U.S. economy as being in a mild recession. They've overcome the statistical evidence, which often prevents us from forecasting a recession since they are mostly surprises. There's a nonlinear step-down in the second quarter that begins this recession. So I'm a little curious as to why you didn't follow this up by forecasting a jobless recovery. In the last two recessions, that has been an important element of what followed. I wonder if it is now a feature of the Great Moderation business cycle. If you look at equilibrium real funds rates, they tend to bottom out during the period of most troubling joblessness in the aftermath of the recession. So if we're going to be relying on a period in which we're doing something we haven't done before, like buying a bit of additional inflation credibility, it will be unusual. I guess my question is why you made that choice. " FOMC20071031meeting--83 81,MR. MISHKIN.," Thank you, Mr. Chairman. My forecast is actually quite similar to the Greenbook forecast. In terms of inflation, I see a little faster movement back to 2 percent, where I think inflation expectations are grounded, but the difference is very minor. I do think the risks are quite balanced around that. In terms of economic growth, I am fairly comfortable with the Greenbook forecast, maybe a smidgen less sanguine in the next two quarters but really not very different. However, in terms of the issue of potential downside risk, I do think that, given the policy path that the Greenbook assessed, there are substantial downside risks and they come from several sources. One source is that the financial market disruptions have led to some tightening of lending standards. I think that could have some potential effect on business investment. The housing market is pretty grim. We still have a big inventory overhang, and there is a question about whether that large inventory overhang is going to lead to even fewer housing starts than the Greenbook has forecasted. Furthermore, it has raised the issue about house prices, which have spillovers into household spending. The spreads for commercial real estate are still very high, and so there is a question about whether commercial real estate will be as strong as it has been. That is a bit worrisome as well. Consumer confidence has not deteriorated too much, but it has been on a path of deterioration. So, again, I worry a little about what the consumer might do. In general, I worry more about these downside risks, given the policy path of keeping the federal funds rate constant. What about the financial markets and their disruptions? Well, I think that there are two elements to the disruption in these big, widening credit spreads. One is the valuation risk: All of a sudden people realized that they didn’t know as much about what kind of assets were in portfolios and how complicated the structures were in terms of those assets. Clearly, the solution to that problem is price discovery. We see that happening, but it is going to be very slow. So that problem, in terms of the credit markets, will take a fair amount of time to resolve. The second element is what I call macro risk, which is the concern about a downward spiral: The problems in the credit markets will lead to a weakening of the economy, which then makes price discovery harder to do, which means that you have wider credit spreads, which then make things worse. Of course, that’s the issue with the tail risk that all of us have been talking about. I think the policy change that we did in September clearly had a big impact. It did exactly what we wanted it to do. It is almost a textbook case in doing what we wanted it to do—it took out a lot of the macro risk. It didn’t take out the valuation risk, which is getting better but very slowly over time. So looking at this issue and thinking about going forward in terms of the credit markets, I am a little worried that credit markets are still quite skittish. That has several elements. One is the danger that macro risk could come back. So there is a question about shoes dropping. There is an issue about what we might do at this meeting, and then there are issues about what might actually happen that people don’t know about. One thing that is sort of surprising is that, when you look at what is happening in credit spreads, they seem pretty reasonable in their steady but very slow improvement. But then, you sense some discomfort—in particular, the reaction to the Treasury superconduit has not been very positive. If it worked, it would actually reveal information because it would look like the way that the old clearinghouses used to work, when they would combine assets. Randy knows all about this because he studied this stuff. You pool your assets, then you monitor each other, and then you actually create information that makes the markets work better. I think that is what the Treasury was trying to get at. But the skepticism in the markets is such that they think this could be used to hide information about assets and that other shoes may be dropping in this regard. This does not give me a lot of confidence, and so I worry very much at this juncture, which I think is a critical one, that a policy move could have an effect of sending the credit markets in a bad direction. That is something we have to take into account tomorrow. Thank you." CHRG-111hhrg54873--22 Mr. Scott," Thank you, Mr. Chairman. As we continue to monitor the current economic climate we are in and look towards some solutions and improvements that can be made, this hearing is quite timely as the credit rating agencies played a considerable role in what transpired and what will also impact in the future. Once a financial institution achieves the desired quality grade on a product, it pays the agency for the rating. This process is rife with conflict as I believe the agencies are acting as the market regulators, investment bankers, and as a sales force all the while claiming to be providing independent opinions. As these organizations are extremely important to the financial world, we should realize they did have a significant role to play in where we are now. And I also want to more intently focus on finding some consensus on how to move forward. These organizations determine corporate and government lending risk and are an integral part of our financial services sector. And as such, I want to ensure that we take all issues into account, including conflicts of interest, as well as the international financial world in reforming how we rate financial products. I am very interested to hear each of your thoughts and opinions on the recently introduced draft legislation by our chairman addressing rating agency reforms. And the requirement of disclosure revenue serving the Securities and Exchange Commission. Thank you very much, Mr. Chairman, for the time. And I look forward to this panel's discussion. " FOMC20050920meeting--102 100,MR. FERGUSON.," Thank you, Mr. Chairman. Beyond the tragic and sobering consequences of Katrina that we saw, the effect of Katrina with respect to monetary policy I think has been to create greater uncertainty, not just about the near term but also the intermediate term. Katrina clearly has become more policy-relevant than the previous natural disasters that we’ve seen, because it hit energy-producing regions of the country at a time of high and potentially rising energy prices driven by global supply and demand factors. It also came at a September 20, 2005 78 of 117 economy—supported by a particularly strong housing market and accommodative monetary policy—appeared to be growing above potential, Additionally, core measures of inflation, while not deteriorating recently, had been running a bit high for my taste. Near-term inflation expectations were also rising; and longer- term expectations, while still being described as contained, were somewhat less contained than they had been at the last meeting, as Dino’s chart showed. I think the staff has done an outstanding job of calibrating the effects of Katrina and the subsequent rebuilding on the economy, including a careful assessment of the loss of and need to rebuild the capital stock. I accept the baseline forecast as the basis for discussion today and note that its contours are similar to those of private sector forecasters as well. However, the range of uncertainty around the baseline forecast is large. The plunge of consumer sentiment reminds us of that fact, as do the rise in inflation expectations in the most recent survey data and the ongoing jitters in spot and futures energy markets. Faced with such uncertainty, we might be guided by our history in dealing with other periods of shock to the economic system. During previous episodes of shock and uncertainty, we have often lowered rates or at least temporarily refrained from raising rates to wait for the range of uncertainty to narrow. Therefore, before deciding to raise rates today, we have a burden of examining why we are not following the same reaction function we have in the past. I see at least four reasons why, unlike in the past 20 years or so, the uncertainty that we face now should not be a precursor to a pause. First, the relative impact of a natural disaster on growth and inflation is ambiguous and not easily comparable to the shocks that we have September 20, 2005 79 of 117 1987, and even Y2K—were clearly, or at least primarily, demand shocks, working through confidence effects and unsettled financial conditions, either actual or potential. Now, as others have said or implied, we are facing a shock to both the demand and the supply side of the economy. This is obviously an important distinction. Katrina is likely to elongate the period of high and rising energy prices that we were already confronting before the hurricane struck. In the longer run, theory tells us that a persistently high energy cost, exacerbated by occasional shocks, reduces both labor productivity and potential output over time, as the amount of energy used per worker declines. This effect is only partially offset by the installation of energy-saving devices. If households and firms recognize the impact of high energy prices on potential supply, all else equal, they should lower equity prices and also damp aggregate demand through expectational effects. The possible reduction in aggregate demand does not, however, ipso facto match fully the reduction in potential supply. President Lacker suggested that a naive policymaker might put greater weight on the demand effects, but I also think that a reasonable policymaker would certainly recognize the need to set policy to help maintain a balance between aggregate supply and aggregate demand. And that does not inherently imply reducing our target funds rate. Second, as already indicated, before Katrina we were seeing conditions of gradually rising inflation pressures. Staff estimates that seem reasonable to me indicate that the persistent energy price increases have contributed and will contribute ¼ to ¾ percentage points annually to core inflation between 2004 and 2007. Importantly, the staff forecast for inflation has been gradually rising from Greenbook to Greenbook as well. If we were to pause today, in my September 20, 2005 80 of 117 inflation to become embedded in inflation expectations, making it difficult to regain control over the inflation process and losing some of our hard-won credibility. Third, the effort to rebuild parts of the United States will undoubtedly require massive federal expenditures in addition to transfers from insurers to households and businesses. As the staff forecast shows, this will be highly stimulative to the economy next year. I won’t elaborate on that, as a number of others have already discussed it. And I think the final reason for not following a pause strategy here, as a few others have said, is that it won’t be clear when we can restart again. It is not clear to me at all that the data over the next few quarters will be free from the disruption of Katrina, but it is pretty clear to me that inflation pressures will continue to build. So, therefore, the staff forecast strikes me as a reasonable approach. That forecast manages to allow these various effects on growth—actual and potential—and inflation to end with a stable inflation outlook, in part by assuming that this Committee raises rates from the current accommodative level. This assumption seems warranted to me. In my judgment, we have sufficient reason not to follow our historical response of pausing. The one counterargument to all of this is that there are also clearly a number of drags on the U.S. economy. These drags include drags from the export sector and relatively slow growth of business fixed investment. These show through, in my judgment, in the form of a lower equilibrium real interest rate, which implies that at some point we certainly should discuss when we want to stop raising the funds rate or at least be clear that we’ve moved past the neutral level. That may be, as I think Tom Hoenig suggested, in the not-too-distant future. Be that as it may, September 20, 2005 81 of 117" FOMC20080430meeting--89 87,MR. PLOSSER.," Thank you, Mr. Chairman. In the Third District, there has been little change in economic activity since I reported in March. Business activity remained weak over the intermeeting period but no more or less than anticipated and than we reported in our March meeting. Manufacturing activity, residential construction, and employment remained modestly weak in the District. Retail sales were also sluggish. Our staff's coincident indicators of economic activity, which summarize our regional data, show a decline in activity in Pennsylvania and Delaware but moderate growth in New Jersey in March and, on average, for the last three months. Overall, our firms are not very upbeat about nearterm growth; and like many forecasters, they have revised downward their expectations since the start of the year. For example, in response to a special question in our business outlook survey, the number of manufacturers saying that current demand for their products fell short of what they had expected at the start of the year exceeded those who had underestimated demand. More firms have decreased their capital spending plans, with 10 percent indicating that they either delayed capital spending or postponed it indefinitely. While growth in the District has been weak, price pressures facing our firms and consumers have intensified. Area manufacturers continue to report higher production costs, and the percentage of firms raising prices on finished goods is larger than earlier in the year. The indexes of prices paid and prices received are near 20-year highs for our firms, and firms expect to see prices move higher over the next six months. These firms have a very pessimistic outlook for inflation. Turning to the national outlook, I have revised down my growth forecast from what I submitted in January, as almost all of us have, but that revision occurred largely between January and March. There has been little or no change in my outlook since our March meeting. Compared with my January forecast, I now see real GDP growth coming in around 1.5 percent for 2008 and close to 2.6 to 2.8 percent in 2009�10. Overall, this is about � percentage point weaker for '08 than my January forecast, but there is little difference in my forecast for '09 and '10. The indicators that have come in since our last meeting have generally been in line with my March outlook. Certainly they have pointed to continued weakness, but not worse than I had expected. Although some strains in the interbank markets remain, they do not appear to have intensified, and our alphabet soup of targeted tools seems to be having at least modest beneficial effect, even if only psychologically. I remain concerned, however, about inflation and our calibration of the appropriate level of the fed funds rate consistent with our goals. Inflation readings have abated marginally since our last meeting; but as the Greenbook suggests, there is reason to believe that this is a temporary reprieve and that the levels remained elevated--year-over-year CPI inflation was 4 percent in March, and year-over-year PCE inflation was 3.4 percent--well above their 2007 levels. As we have been noting, oil and other commodity prices continue to move up, and businesses and consumers continue to stress inflation as a concern. Near-term measures of inflation expectations have risen sharply. In the Michigan survey, one-year inflation expectations rose to 4.8 percent in April, up from 4.3 percent in March and 3.4 percent in December. Clearly, the greater media attention on inflation and the discussion among the public are bound to have some effect on expectations as time goes on. I have some concerns and difficulty interpreting the measure in TIPS given the disruptions in financial markets right now. So I take those with a little grain of salt. Nevertheless, five-year, five-year-ahead inflation compensation is 2.8 percent using the Board's measure. This is down a little from early March but is still higher than it was at the end of 2007. In fact, the instability of these measures of inflation expectations itself is a cause of concern for me. It may suggest that markets question our willingness to take actions consistent with sustained and credible price stability. Now, we have often alluded to the idea that near-term weakness will help mitigate some of the inflation pressures. However, I would just like to remind us that this critically depends on inflation expectations remaining well anchored. I hope that going forward we can reinforce that conditionality of the statement about weakness helping us on the inflation side so that we do not perpetuate the notion that a stable Phillips curve is at work here and that a slowing economy will always lower inflation. I believe that the FOMC's commitment to price stability remains credible at this time, but just barely. I worry that we may be resting too much on our laurels, trying to talk a good game, but unwilling to take the actions necessary to support and sustain that credibility. As I have said before in this group, we must not wait until expectations have broken out because by then it will be too late. Inflation has been well above at least our implicit goal for a sustained period. As the Bluebook points out, core PCE inflation has been above 2 percent since 2004 every year, and is projected to be so again this year, and the projections are even worse for headline numbers, either CPI or PCE. If we continue easing or maintaining a real funds rate well below zero for a sustained period despite inflation well above our goal, can we really expect inflation expectations to remain anchored? The Greenbook seems to think that we can. It assumes that the fed funds rate falls to 1.75 percent in June and remains there through the end of 2009. Given the inflation forecast, this means a negative or close to negative real funds rate for almost two years. Despite this, Greenbook baseline inflation expectations remain reasonably contained, and inflation is projected to decline over the forecast period even as growth picks up toward trend. To put it kindly, I have serious reservations about that scenario. The Greenbook discusses an alternative simulation in which there is greater inflationary pressure. The estimated Taylor rule funds path in that is somewhat steeper than in the baseline. Inflation ends up higher at the end of the forecast period--the end of 2011 and 2012--than in the baseline. More progress on inflation will require obviously a steeper path, but even in this alternative simulation, inflation expectations only drift up. They do not become unhinged. If they did, I would expect the policy path to have to be considerably tighter in 2009. Now, I know that talking about money in the context of monetary policy is not very fashionable these days. But I would like to note that the monetary aggregates as measured by M2 and MZM have exploded. Despite the flight to quality and the associated increase in the demand for money associated with that, M2 grew less than 5 percent during the fourth quarter of 2007. Since then, however, its growth rate has nearly tripled. In January it grew 8 percent on an annualized basis. In February after our rate cuts, it grew 18 percent, and in March it grew 13 percent. Growth rates of MZM are even worse over this interval--for the three months the annual rates were 14, 42, and 26 percent. Such rates suggest to me that there is substantial liquidity in the economy. While I don't really like the old P* model and have had a lot of problems with it, at the back of the Greenbook the story it is telling is one of considerable inflation over the next couple of years. Combined, the growth in the aggregates, the substantially negative real interest rates, and the fact that most versions of the Taylor rule call for a higher fed funds rate than we have currently heighten my angst about the outlook for inflation and our credibility. Market participants reacted to the incoming data by appreciably tightening their policy expectations--at least as implied by the futures markets, as Bill Dudley pointed out--and that has had a negligible effect, certainly no negative effect, on markets or the economy more broadly. One interpretation is that the market participants have also become uncomfortable, as I have, with a fed funds rate that remains too low for too long. I take this as a healthy sign actually and one that we shouldn't ignore. Indeed, we may just wish to use it to our advantage. I will stop there, Mr. Chairman. " FOMC20070131meeting--421 419,MR. WARSH.," Thank you, Mr. Chairman. In my views, I associate most closely with President Stern. So I will avoid going through all eight questions and will provide perhaps three further thoughts on what President Stern talked about—first, on what our dominant goal is; second, on what the benefits of going forward are; and third, on how we might go to market with something along these lines. First, with respect to the dominant goal, I think, as Governor Bies and many others have talked about, it is our credibility. Our credibility today is somewhat asymmetric, in the sense that I think that we have a lot more credibility that we could lose in this exercise than we could gain. Not only is the credibility of this institution very high, but I would say it is even higher than it was six months ago. That suggests to me that we should go slowly, conservatively, and prudently through this process. How does that relate to forecasts? When I think about the forecasts that we considered yesterday for the fourth quarter, which has passed, I’d say that our staff does a better job than anyone on Wall Street or than many of us could have done alone, but we see the errors involved—which is not at all a criticism but a reality of the business we’re in. I hesitate to think about making forecasts four times a year, including periods we were quite far into, and about how that affects our credibility. Instead of extending into a third or fourth year, I would think about making forecasts in a going-forward, rolling eight quarters way so that we would always have a full two years in front of us. We wouldn’t be in some ways culpable for making an error of information that we really should know in the market’s expectation. It does strike me as a little odd that our forecast period changes by virtue of our current calendar. I think about that from a credibility standpoint: I don’t want to mess up in front of these markets so obviously. I’d put the question of frequencies in the context of what benefits we are trying to achieve. It seems to me that the predominant benefit is strengthening the transmission mechanism of monetary policy between us and the capital markets and the reaction function of the capital markets back to us. If we provided forecasts four times a year, I fear that our numbers might replace the markets’ own forecasts. That is, they might say, “Well, I’m a little bit more robust in my views than the Fed. So I’m going to take their numbers and add a couple of tenths, because I’m the chief economist at Morgan Stanley” or Merrill Lynch or Goldman Sachs. I worry that our numbers might end up polluting the quality of the information they go out with, and then we would be reading back their numbers and saying, “Boy, our numbers look a lot like theirs. Aren’t we very good at this?” I worry about that transmission mechanism effect. In terms of the quantitative and qualitative information we put forward, the focus really should be on what Don described as the story, the narrative—one that Wall Street and the rest of our constituencies, like Capitol Hill, can think about, ask tough questions about, and try to interpret. What we get back then in terms of their quantitative and qualitative assessment could be better. All of that speaks to the focus on the narrative rather than on the numbers. Finally, how would we go forward with whatever we conclude, and what would be the best means of ensuring that this incremental work that we’re doing has the beneficial effects that we hope for? To achieve this goal efficiently—I’ll use words that may be a bit more glib than I intend—we should use a “benevolent leader” model. I’m not saying a “benevolent dictator” model in which we all say, “Hey, Chairman, here are our best views; they are all yours.” Nor is the model a pure democracy, where all nineteen of us parade, “These are my numbers. This is my view of the world. These are my estimates.” In which case we provide more information, but I’m not sure we’ve really helped the cause of what the Fed is trying to achieve. The “benevolent leader” model probably falls somewhere between the two. With that model, we would use the opportunity or the timing of the monetary policy testimony, when everyone’s attention is on the Chairman and the Fed for those macro forecasts. The Chairman would report the work product, and the work product would have two pieces. The first—and I don’t mean to prioritize one over the other—would be the Chairman’s work product, which would incorporate the views of others as he sees fit, and he might well want to reference where his views coincide with the central tendency and where they differ. But in that we ought not to constrain the Chairman. In that way, I don’t view the Chairman, in his testimony or in his announcement of projections, as the press spokesman for the FOMC. Those are his views. But second, and very much alongside his views, he would present our views. His presentation of our views is useful in making certain that a lot of attention is focused on them. In answer to one of the questions from the subcommittee, in some ways we might well be delegating to him the ability to draw a central tendency and make appropriate conclusions. I trust in his ability to do this. If a future Chairman doesn’t think independently and honestly provide accurate views of what the Committee members have said, the Committee has plenty of checks and balances at its disposal to make sure that we have some discipline over that second half. So that’s an appropriate way to think about getting the most bang for the buck of this incremental work with which we’re proposing to go forward. One of the memos said that the public is likely to place the most weight on a forecast made by the entire Committee. I think that’s true only if the Chairman’s views happen to coincide with the Committee’s. If the Chairman’s views differ from the Committee’s views— which I presume is not impossible—it is not obvious to me that the statement in the memo is correct. If the Chairman’s views differed substantially, there would be, for better or for worse, different power centers and sources of information, and I think the markets would be looking at each. So that’s perhaps another reason that I think this “benevolent leader” model might be the best way to go forward. Those are just some preliminary thoughts. Thank you." FOMC20050322meeting--205 203,CHAIRMAN GREENSPAN.," The critical issue is: Do we know something? There’s going to come a time when we can’t forecast and we have no idea what our next policy move will be. And to be forward-looking in that context is, obviously, inappropriate." FinancialCrisisInquiry--793 HENNESSEY: OK. You’re saying—so if I’m hearing correctly, you’re saying it reduces the probability we have a double dip. Do you think that it lowers the expected value of unemployment? Do you think the ten and a half, 11 forecast, you know, what’s the first... FOMC20051101meeting--91 89,MR. STOCKTON.," This is probably putting far too fine a point on it, but they’re both about equal in the forecast in terms of their overall effects—in terms of the underlying thrust or the underlying restraint that is being put on growth going forward." FOMC20080130meeting--114 112,MS. LIANG.," We have revised this forecast up quite a bit since the first time we looked at this maybe in June or August, in part because of lower house prices and tighter credit conditions. The model requires as inputs defaults and prepayments, and the prepayment rates have been fairly slow but not zero. The 2006 vintage, as it approaches its first reset, has been that 20 to 25 percent are able to prepay. They are able to find something. So we don't want to assume that none of them will be able to. The model would approach both of those, so that is the positive side. The downside is that our forecast, with the national house-price assumption of roughly minus 7 over the forecast period, does imply house-price declines on the order of minus 20 percent a year or more in California, Florida, and some other places. That does leave the loan-to-value ratio, as I mentioned, pretty high for many borrowers. We have never had this kind of episode, so we have to make a judgment about the point at which subprime borrowers walk away from their houses. The current assumption is that at about 140 percent we just say you are out; but it has to be almost an assumption that, if by then you hadn't defaulted, we would push you out. So there is an upside. On the other hand, saying 40 percent of the outstanding stock will default over two years sounds like a big projection as well. So we tried to balance. There are risks on both sides, for sure. " FOMC20080430meeting--67 65,MR. STOCKTON.," I think that is a fair characterization. You know, one thing that we're struggling with--and I assume you are as well in giving your own views about the uncertainty and the skewness around your forecast--is whether things have changed. Is the skew large enough for us to argue that, in fact, the risks look unbalanced? We thought about that and about the potential upside and downside risks. Clearly, as I indicated, upside risks would be associated with ongoing increases in underlying prices for oil and other commodities that would probably feed through indirectly into core inflation over time. On the downside, we have been struck with how little upward pressure there has been on labor compensation and labor costs. Now, if you pinned me down and said draw a fine line on this, I'd probably say that, given the pattern of the past few years, it would look to me as though there's probably a little more upside risk than downside risk, but I don't see that skewness as being material in the forecast. " FOMC20060328meeting--204 202,MR. REINHART.," Well, as part of the discussion from yesterday, these policy rules are pretty inertial, and in the seven quarters of data to the right of the forecast line, you’re not really going to see a material difference from your choice of inflation objectives. As you can see in the table, it really means only 10 basis points for the policy rules whether you have a 2 percent goal or a 1½ percent goal. Ultimately it matters a lot, and you see that in the extended Greenbook forecast. You see it in the optimal-control exercises we showed previously, particularly in versions of the model that involve perfect foresight. You bring forward some of that action, and so that ½ percentage point difference in your inflation goal does actually control the amount of overshooting of the funds rate that you’re going to find appropriate." FOMC20080430meeting--168 166,MR. STOCKTON.," 4 We left at your place, and I hope you have found, a GDP advance release for the first quarter. It came in at plus 0.6 percent versus our Greenbook forecast of 0.4. It was really very close to our expectations, both for the total and for the individual components. There were a few small differences. Nonresidential structures, as you can see about halfway down that sheet, are estimated to have been weaker than we were forecasting. I think that additional weakness certainly reinforces the story I was telling yesterday about this being an area in which we are now seeing more convincing signs of softness. Residential investment was not quite as weak as we thought, but I don't think the difference between a minus 27 and a minus 31 changes the basic tenor of that particular story. Two small areas for which we had some upside surprises were federal spending and inventory investment, but those surprises were really quite small. I don't see anything in this report, quite frankly, on the real GDP side that would cause us to change our basic outlook. Obviously, when we get the detail, we might make some minor adjustments to the second-quarter forecast. As for prices, the final two lines of that table, total PCE came in right as we had expected. Core PCE was estimated by the BEA to be a tenth higher than we had projected, but that is still � percentage point below what we were projecting back in the March Greenbook. So, again, I don't think that the report that I gave yesterday would be altered by this release. We also received the employment cost index. In the release, we get those figures only to one decimal place. To one decimal place, we are right on for total compensation--wages and salaries and benefits; in terms of the 12-month change, it was 3.2 percent, and that was what we 4 The materials used by Mr. Stockton are appended to this transcript (appendix 4). were forecasting. Wages were a bit higher than we thought--3.2 versus the 3.1 we projected-- but benefits came in a little lower than we were projecting. There again, I think the data just basically confirm the story that we are not really yet seeing any signs of pressure on the labor cost side. " FOMC20060629meeting--107 105,VICE CHAIRMAN GEITHNER.," Thank you, Mr. Chairman. I guess I’d say the center of gravity of this discussion is a little stronger than the Greenbook, and I think that’s pretty much where we are, too. We expect real GDP growth to follow a path pretty close to potential in the balance of ’06 and in ’07, and we expect core PCE inflation to moderate gradually to around 2 percent in ’07. This forecast assumes a monetary policy path close to that of the Greenbook, somewhat under the market’s forecast. Since May, in our view, the balance of risks has shifted a bit toward the less-favorable mix of somewhat more downside risk to real growth and somewhat more upside risk to inflation. Relative to the Greenbook, however, this implies that we have a stronger trajectory for demand growth and a slightly lower path for inflation. On the growth side, I guess I’d say we see a pretty healthy adjustment process under way with a change in the composition of growth. We don’t see the incoming data, the anecdotes, and the recent developments in financial markets as supporting the view that real growth is likely to stay significantly below potential over the full forecast period. We had already anticipated the slowdown in residential investment that has now materialized; therefore, we didn’t see that as a basis for revising down our forecast. We believe the changes in household wealth in general have less effect on consumption than the Board staff believes, and as a result we expect a more modest deceleration in growth. We expect stronger employment growth, too, and we have a stronger view of the rate of growth in private investment going forward. The world economy still looks pretty robust to us. So overall, in our view, this supports a forecast for the economy to be growing at a rate a bit above 3 percent over the next year and a half. But the risks to this forecast of growth seem a little less balanced than they did in May. We see less chance that the expansion is going to reaccelerate to a pace significantly above potential, and we see a bit more chance for a weaker outcome. The principal source of downside risk to us remains the possibility that households are going to reduce consumption growth significantly because they feel less rich, less secure, less comfortable borrowing, and less certain about the future. On the inflation outlook, we have moved up our expected trajectory for core PCE price inflation, but we still expect this measure to moderate, as I said, to around 2 percent by the end of ’07. This forecast is pretty favorable. It rests on the familiar fundamental forces of energy prices, if they follow the futures curve, becoming a source of moderation to price pressure going forward. Strong productivity growth keeps unit labor costs from accelerating sharply. Profit margins adjust to absorb any increase in unit labor costs that might come if labor’s share starts to move back toward its historical average. Growth of aggregate demand moderates to potential— it probably has already moderated to potential—which attenuates the risk of further upside pressure on resource utilization going forward. Most important, long-term inflation expectations have come down a bit. They remain in the range of the past few years, and they have proven responsive to changes in policy expectations in a more reassuring way than we saw very recently. As in May, however, we believe the risks to this forecast are still somewhat to the upside because of the following: Headline inflation and near-term inflation expectations have been running substantially above core for some time. Virtually all the ways we try to capture underlying inflation have been running above core. The recent rise in core may imply more momentum in inflation dynamics. You might say that long-term inflation expectations are a little higher than we want over time, and they may have been too responsive to changes in the incoming data. The medium-term trajectory for the dollar seems likely to be down. Profit margins, for reasons we don’t fully understand, have been very high and have been rising, and maybe that tells us something about inflation psychology that we don’t see in the long-term breakevens and TIPS. The long-term forecasts of inflation that the staff presentations give us show a lot of persistence of inflation. Inflation falls very, very slowly over time; and if that path is right, it could cause some further damage to inflation psychology. If you just step back and look at how much our expectations and the markets’ expectations about the terminal rate, the funds rate at which we’d stop tightening, have changed over the past two years, it’s really remarkable. The expectations eighteen months ago were about 200 basis points below where we are now. That change may imply that we will learn in retrospect that we were too loose for too long, and therefore we’ll have to do more than we thought to counteract that effect on inflation. That’s a possibility, not a prediction. So as I said in the beginning, in some sense the balance of risks has shifted in a way that complicates the monetary policy choice for us, and the shift leaves us with less confidence about the appropriate path for policy going forward. On balance, monetary policy appears to be getting some traction in the United States, and the expansion still looks to be in good shape. Inflation risks seem a bit tilted to the upside, and monetary policy needs to continue to be directed at ensuring significant moderation in the trajectory of inflation over the next few years. Thank you." FOMC20071031meeting--64 62,MR. LOCKHART.," Thank you, Mr. Chairman. As I have noted in the past, the industrial mix in the Sixth District looks a lot like the country as a whole. The regional data and anecdotal information show that, although the Sixth District economy is still expanding, the pace is marginally weaker than it was in September. In earlier meetings I commented on the severity of the housing situation in the District. There is no improvement in sight for the housing market, and there are signs that the sharp decline in residential construction is spilling over into nonresidential real estate segments, such as shopping center development. Employment growth is softening as well. Although the largest negative effects are in construction-related sectors, the slowdown in job growth appears to be fairly broad based. The broad contour of our national forecast is similar to the Greenbook baseline. Like the Greenbook, our forecast includes a slowing in business investment. Based on our survey of District business contacts, it appears that the low levels of expected capital expenditure are due mainly to pessimism about the pace of economic activity rather than restrictive credit conditions per se. Specifically, financial market turbulence does not appear to have directly affected economic activity, but it has created a greater uncertainty about the outlook for the economy. As a consequence, the majority of my directors and business contacts are reporting very little in the way of plans to increase capital expenditures in the coming year. Where business investment is discretionary, most respondents report a wait-and-see posture. More positively, the weaker dollar does appear to be having a positive effect on exports from the region. For the year to date, the dollar value of exports through the Sixth District ports was up 35 percent through August, whereas import growth was only 21 percent. Not coincidentally, the majority of businesses that indicated they were increasing capital expenditures over the coming months were exporters. In the run-up to this FOMC meeting, I again made calls to a few financial market participants, and they reflected a range of institutional and market perspectives. A synthesis of this opinion is consistent with the views that were expressed earlier by Bill Dudley and others. There’s a widespread view that persistent volatility in credit markets is bound to negatively affect the general economy. Credit market conditions have improved somewhat, but stability may be a long way off. A second wave of volatility may accompany incoming details regarding mortgage delinquencies caused by rate resets in 2008, and there’s a suspicion that third-quarter writedowns may be followed by substantial further losses recognized at year-end. Also, as referenced in the Bluebook, there is skepticism about the M-LEC (master liquidity enhancement conduit) proposal from several angles. In summary, our soundings of the economy, informed by formal modeling work, point to a continued slowing of the economy that will likely persist well into next year. Anecdotally, credit constraints outside the housing sector do not appear to be a major factor at this stage. But uncertainty created by financial market turbulence does seem to be acting as a constraint, and I believe that the heightened uncertainty regarding the economic outlook for 2008 warrants consideration of insurance against this downside risk. With respect to the outlook for inflation, I agree with the view expressed by others that recent developments in energy prices, if they persist, make it likely that we are about to enter another period in which headline numbers substantially exceed the trends suggested by core measures. Because of this, I feel it’s appropriate to characterize inflation risk as having increased. Thank you, Mr. Chairman." FOMC20060510meeting--57 55,MR. STOCKTON.," Well, that’s a good question. The reason we don’t publish an inflation expectations series is that we’re using a lot of different measures of inflation expectations to gauge where underlying inflation is. We’re using a lot of different models for that matter, too. Some are purely backward-looking models, in which inflation expectations and underlying inflation are basically proxied by lagged inflation. In other models, there are explicit measures. For example, in FRB/US we use the Philadelphia Fed Survey of Professional Forecasters as a long-run anchor on inflation expectations, and then we allow that to move over time as people are assumed to learn about the Fed’s inflation objective. So in constructing the scenario, we actually had a variable in FRB/US that we could add-factor up ½ percentage point from what it was. Now, I think the deeper question you’re asking is, what do we think underlying inflation is currently in the economy, and what lies under the staff’s inflation projection? We think there has probably already been, roughly speaking, something like ½ percentage point deterioration in underlying inflation from where it was in 2003, when actual inflation was running just a little above 1 percent. We thought that was unusually low, and our estimate of underlying inflation was about 1½ percent. What fits into this forecast now is that there probably has been some upward creep roughly on the order of ½ percentage point to something like 2 percent. The scenario that we were showing you in this Greenbook had some further deterioration over and above that. Until recently, there wasn’t a lot, other than the pickup in actual core inflation itself, that we could point to for a deterioration in inflation expectations. I think we’re still nervous about making that call in this forecast. It could very well be that inflation expectations have remained well anchored, and we have been showing some scenarios in the Greenbook that take that possibility into account. As I noted in my briefing, although one could use what’s happened to inflation expectations and inflation compensation over the intermeeting period as being supportive or consistent with what underlies the forecast, we still think it’s too early to make the call that a determination has definitively occurred. So, our basic view is that there has probably been some pickup. It’s been limited. But obviously, there are risks on both sides of that. One side is that inflation expectations could have stayed better anchored. On the other, there may be the risk that inflation expectations are at the front edge of a process of increasing and that they will continue to deteriorate." FOMC20050322meeting--230 228,MR. BERNANKE.," Thank you, Mr. Chairman. I support the recommendation. I think the addition of the phrase “appropriate policy action” is actually useful, because it will emphasize that our forecast is conditional on continued tightening rather than being an unconditional forecast. I agree with Governor Kohn and Governor Ferguson, among others, that it’s important to provide as much information as we have about future developments in the economy and policy. And I think perhaps we should consider the alternative C language that Vincent Reinhart has suggested. Finally, I would just like to raise the issue of process. Of course, it’s very useful to get March 22, 2005 98 of 116 reflect the discussion at the meeting and the condition of the economy. Therefore, it needs to be understood that we have some flexibility to make changes nearer to the meeting. I think that’s an important point to recognize. Thank you." FOMC20050202meeting--202 200,CHAIRMAN GREENSPAN.," We originally raised the issue of accommodation when we hit 1.75 on the funds rate on the way down. At what point do we begin to get responses? I haven’t heard anybody raise the question as to a seeming asymmetry in our judgment of where accommodation is, unless it’s perceived as a significantly moving target. One could argue that up to now there is no necessary inconsistency; one answer is that we forgot to mention that our policy was accommodative earlier on the way down. But we have to have some way of approaching this question because it’s going to come up with the first speed bump that you were referring to. I think we have to address it, and hopefully we’ll do so somewhat in advance. Further questions for Vincent? If not, let me get started. I’ll be very short because I don’t have very much more to say that I haven’t said previously. There is one issue, however, that I think does require continuous awareness. And that is that, as many of you have mentioned, the chance of our getting through to the end of 2006 with the economic outcome having the benign aspects of the forecast that we see has to have a very low probability. There’s something built in to both our econometric structures and, indeed, in the way markets function, that is giving us this continuous, smooth path coming off of Governor Ferguson’s sweet spot. The reason we get that is, in part, because as an economy continues to grow in a seemingly balanced way, the rational projection includes an increased probability that growth will continue that way in the subsequent six months. That is, if you’re in the early stages of an economic February 1-2, 2005 131 of 177 that the next six months will continue to be favorable is lower than it is when you’re much further into the cycle. The latter point is when you begin to have a projection that the recovery will continue. You think of it in terms of: Well, economic activity has been going up for the last two years, or three or four years, and what is the probability that it will continue to do so? And that gets built in to the decisionmaking process. You begin to see a quickening of capital investment. You see orders that begin to be a little forward-looking. The degree of confidence continues to be buoyed, stock markets rise, and yield spreads fall to exceptionally low levels. The problem with that scenario is twofold: One, history suggests that it will come to an end; and, two, arithmetic in a way produces an end, largely because, when you get risk premiums down at very low levels, they can only go in one direction. It is the inverse of where you can go when you’re at the top of the mountain. So this will break down at some point. Something is going to happen because it always has. And human nature never seems to have veered very far from this type of model. Since the early 1980s, we seem to have been able to take these adjustments very smoothly. The imbalances occur, but there’s sufficient flexibility in the system that the corrections seem to occur in a manner which essentially, at least in the past 20 years, has given us a business cycle of extraordinarily shallow dimension. There’s no question that it’s not only the experience of this most recent period that is driving risk premiums down but also the fact that nothing material has happened in the past 20 years. In other words, yes, stock prices have fallen, and yes, interest rates have gone up, but they’ve always reversed. And over the longer run, the rates of return in the past 20 years have been perceived as quite beneficent. So, what concerns me about the outlook is that while I can’t give you a better alternative than the Greenbook forecast—because that is, indeed, the presumed most likely outcome—it has built in to it the seeds of its own imbalances, and we don’t know where they are. I’m not even talking about exogenous shocks. I’m talking about an endogenous system that creates a problem February 1-2, 2005 132 of 177 stability will continue the longer stability is what they have perceived. We can’t get that into our econometric models because there isn’t an endogenous or even exogenous variable that would essentially be “human nature,” and yet we know it’s going to happen. So, we have to be careful because something is going to go wrong here, and I think the most probable thing is that we’re underestimating the potential inflation pickup. I’m not saying that the probability is for an inflation pickup; I’m just saying that our forecast of the probability of a pickup is too low. And that will change the dynamics of this whole situation. The sweet spot will turn sour. And until then, I suggest that we just sit around and enjoy what we have. [Laughter] It’s not going to get any better and it’s not going to continue indefinitely. So, my bottom line conclusion is what everyone around this table, I presume, would prefer— namely, another 25 basis points on the funds rate and the same statement except for one word. I think when we look back, we will find that what we have been able to do—and are still able to do— really has been quite successful. But that will stop. And when it stops, we’re going to have a lot of the problems we’ve just been discussing with regard to how the statement should be modified. I suggest to you that when it stops, our ability to forecast what’s going to happen next will fall very dramatically, because we’re not going to anticipate the stop. I was looking at the weak figures in January, and they were sort of building up. So I was saying to myself over the last couple of weeks that there’s something a little disturbing about the numbers that are coming in. Now that has stopped. We are beginning to get countervailing positive forces again. Presumably, we will look back at January as something of a pause, with retail sales not doing all that well, motor vehicle sales falling, and the purchasing managers’ data in New York, Philadelphia, and for the country as a whole generally starting to look a bit less formidable. In other words, there’s been the feel of an unreal significant slowdown and change. But that has been the way this whole cycle has evolved. It has had a pattern of pause/un-pause, pause/un-pause; it doesn’t go flat. And this is the process by which the recovery has been moving forward. At some point, February 1-2, 2005 133 of 177 soup. Something will happen. So, I merely put forward that very tightly analytical—[laughter]— empirical model of the outlook and make the recommendation I’ve been making for quite a while, namely, an increase in the funds rate of 25 basis points. And, in this case, the statement I’m proposing is literally almost wholly unchanged from the previous statement. Comments? President Guynn." FOMC20070628meeting--5 3,MR. DUDLEY.,"1 It is hard to follow that. Thank you, Mr. Chairman. Today, I want to focus on the significant rise in long-dated Treasury yields that has occurred since the last FOMC meeting. As you can see in exhibit 1, Treasury yields have moved sharply higher over the past six weeks, although they have recovered a bit in the past few days. At two-year and longer maturities, the shift in the yield curve has been nearly parallel, with yields roughly 50 basis points higher over this period. As can be seen in exhibit 2, the rise in nominal ten-year Treasury yields has been accompanied by a rise in ten-year TIPS yields. Because the rise in nominal yields has been slightly larger than the rise in real yields, forward breakeven inflation rates have risen a bit since the last FOMC meeting. For example, exhibit 3 shows the trajectory of the breakeven inflation rate five to ten years in the future estimated using nominal Treasury and TIPS yields. This measure has risen more than 20 basis points from its trough in May. So how does one explain the rise in nominal and real Treasury yields and the increase in breakeven inflation? In my opinion, there is one very compelling explanation—market participants generally believe that the downside risks to growth have diminished, and this has led to (1) a sharp shift in monetary policy expectations and (2) a modest change in investors’ assessment of inflation risk. But other factors 1 Material used by Mr. Dudley is appended to this transcript (appendix 1). also played a role, including mortgage convexity hedging and, perhaps, the gradual shift in the appetite of foreign central banks away from U.S. Treasury securities toward other assets. As shown in exhibit 4, monetary policy expectations as embodied in the Eurodollar futures market have shifted sharply since the last FOMC meeting. In May, a drop of more than 50 basis points in Eurodollar rates was anticipated to occur by the end of 2008. In contrast, currently the Eurodollar futures strip is virtually flat—indicating that market expectations are close to neutral through 2008. This shift in expectations is also evident in responses to our survey of primary dealers. Using exhibits 5 and 6, we can compare the dealers’ forecasts before the May 9 meeting with their forecasts before our meeting today. The green circles represent the average forecast of the dealers; the size of the blue circles indicates the frequency of different forecasts; and the horizontal dark lines represent market rates. As can be seen in these exhibits, over the intermeeting period the dealer forecasts have moved upward, but much less than market expectations. This presumably reflects the fact that the market rate represents the mean of potential outcomes whereas the dealer forecasts are modal forecasts. Also, the smaller shift evident in the dealer forecasts may reflect the fact that dealer forecasts tend to lag changes in market expectations when expectations are changing rapidly. As can be seen in these two exhibits, much of the dispersion evident in the forecasts toward lower rates has vanished since the May 9 FOMC meeting, and the skew to the downside has disappeared. Dealers who had forecasted a flat or higher federal funds rate path generally did not alter their forecasts. In contrast, dealers who had earlier anticipated easing have eliminated or dramatically scaled back those expectations. For example, the blue circles evident in exhibit 5 at rates of 3.5 percent and 4.0 percent are not present in exhibit 6. The dealer forecasts support the notion that expectations are changing mainly because market participants are less worried about downside risks to growth rather than because they think that the growth rate of real GDP will likely be stronger. With the exception of the current quarter, in which GDP forecasts have been revised upward sharply following a very weak first quarter, the real GDP forecasts of dealers have generally not changed materially through 2008. This is illustrated in exhibit 7. Instead, as shown in exhibit 8, dealers are now, collectively, more certain about the growth outlook—in other words, the downside risks to growth have diminished. The reduction in the downside risks to growth may also be important in explaining the modest rise in breakeven inflation measures. If the downside risks to growth have diminished, then a corollary may be that the upside risks to inflation have increased. In that case, investors should show more interest in purchasing inflation protection. The breakeven inflation measure calculated from nominal Treasury and TIPS yields has several components, including expected inflation and the premium paid by investors for inflation protection. In assessing the rise in these breakeven inflation measures due to diminished downside risks to growth, it is unclear how to apportion the rise in the overall breakeven inflation measures between a higher premium for inflation protection and higher expected inflation. In theory at least, reduced downside risks to growth might reasonably be expected to push both components a bit higher. Three other factors behind the backup in Treasury yields bear mentioning. First, the shift in monetary policy expectations and the rise in longer-dated yields have been a global phenomenon. When yields are rising elsewhere, that shift should put some upward pressure on U.S. long-term rates. Second, mortgage-related convexity hedging may have exacerbated the speed and magnitude of the rise in yields. A rise in yields causes expected rates of prepayment on lower-coupon fixed-rate mortgages to fall, which lengthens the average duration of mortgage portfolios. Mortgage servicers, the housing-related GSEs, and other mortgage holders respond by selling long-dated Treasury securities and long-dated interest rate swaps to reduce the average duration of their holdings. Exhibit 9 shows that most conventional fixed-rate mortgages are below current mortgage rates. As rates rise, these mortgages get further “out of the money.” This lowers expected prepayment rates and lengthens duration, and people react by hedging. As long-term rates keep rising, the effect of higher interest rates on duration gradually lessens as the rates on most outstanding mortgages fall further below current market rates. The effect of mortgage convexity hedging is evident in the relative underperformance of ten-year Treasuries, which is one of the preferred hedging vehicles versus mortgages, relative to other Treasury maturities. The week ending on June 13 had the biggest rise in longer-term Treasury yields. As shown in exhibit 10, this was also the week in which ten-year Treasury yields rose the most compared with five-year and thirty-year Treasury rates. To the extent that mortgage convexity hedging pushes up nominal ten-year Treasury yields more than other yields, then it may also temporarily distort breakeven inflation measures. Third, diminished appetite among central banks for Treasury securities may have also been a factor behind the rise in longer-dated yields. Central bank buying was often a featured part of the story when bond term premiums were unusually narrow. Foreign central banks may have played a role in the recent rise in bond term premiums. As shown in exhibit 11, the growth rate of Treasury custody holdings at the Federal Reserve Bank of New York has slowed sharply since April. But it is important not to push this point too strongly. Although foreign central banks with the largest foreign exchange reserve holdings are diversifying their portfolios away from Treasuries, they still appear to be extending the average maturity of those Treasuries that they hold, which implies a continued bid for longer-dated Treasuries from this source. Turning now to other market developments, the most striking aspect of this period of rising Treasury yields has been the limited effect that this rise has had on the risk appetite of investors in most other markets. This is in sharp contrast to the reduction in risk appetites that occurred in a broad array of asset classes in late February and the first half of March. For example, as shown in exhibit 12, the rise in long-term yields has not caused the U.S. equity market to retrench. As shown in exhibit 13, until the past week or so, corporate debt spreads have been relatively stable. Also, in the foreign exchange markets, the carry trade remains alive and well. One way to see this is in exhibit 14, which illustrates the change in the value of the yen against high- yielding currencies such as the Australian dollar and New Zealand dollar as well as against the U.S. dollar and the euro. As can be seen, in the late February selloff, the yen rallied, and the high-yielding currencies sold off sharply. In contrast, during the recent rise in interest rates, the yen weakened and the high-yielding currencies appreciated. Similarly, as illustrated in exhibit 15, although volatility in the U.S. Treasury market moved up sharply (shown by the rise in the MOVE index), volatility in the equity and foreign exchange markets remained quite low. In the foreign exchange markets, movements between the major currencies continue to be driven mainly by changes in expected interest rate differentials. Exhibit 16 shows the movement in the spreads between the September 2008 Eurodollar futures yield versus Euribor futures for Europe and Euroyen futures for Japan. As can be seen here, interest rate expectations shifted more sharply upward in the United States relative to Japan than relative to Europe. Not surprisingly, as shown in exhibit 17, the dollar appreciated more sharply against the yen than against the euro over this period. The yen’s weakness, which has been persistent but stealthy, may begin to receive more attention. After all, as shown in exhibit 18, while the nominal yen/dollar exchange rate has fluctuated in a relatively narrow range in recent years, the real effective yen exchange rate has declined sharply over this period—a rate of decline that may be intensifying. For example, in May the real effective exchange rate of the yen—as estimated by the BIS—had fallen to its lowest point since the early 1980s and had declined nearly to half of its early 1995 peak. Although the June BIS data are not yet available, the rate of depreciation has likely increased over the past month. Although calm generally pervades U.S. financial markets, there is one important exception worthy of note. The subprime mortgage space is still very unsettled—hurt both by poor housing market fundamentals and by the problems of two hedge funds sponsored by Bear Stearns. Exhibit 19 shows the behavior of the spread on the ABX 06-2 index, which is an index based on a basket of credit default swaps on underlying cash securities. As can be seen, the spread has increased to a new high, and underlying CDS spreads have also increased. There is a danger that forced liquidation of illiquid subprime-based securities could exacerbate the pressure on this market. However, it should be noted that the Bear Stearns-sponsored hedge funds that are in trouble are not particular large; the problems of these hedge funds appear to be mostly exceptional rather than the norm; and the counterparty exposures generated by these hedge funds are broadly distributed and have already shrunk sharply in size. That said, there still are risks that forced selling could drive market prices down sharply, leading to lower marks for other portfolios of assets related to subprime mortgages. This, in turn, could lead to margin calls, investor redemptions, and further selling pressure in this market. In terms of lessons learned, three points come to mind. First, high credit ratings don’t fully capture measures of risk. The ratings are based on the risk of default, not the market risks associated with illiquidity. As a result, highly leveraged portfolios of highly rated but illiquid assets are subject to significant market risk that the ratings may obscure. Second, the performance of some of these complex securities is very sensitive to the correlation of returns. As correlations move higher, the subordination protection offered to senior tranches in complex securities such as CDOs, and CDO- squared products—CDOs of CDOs—can evaporate quickly. Because the ratings for the tranches within such products are typically established on the basis of historical correlations, the default risk for some of these tranches may be understated. Third, marked-to-model asset valuation may artificially smooth returns and obscure risk— both to portfolio managers and to investors. The health of the broader CDO and CLO (collateralized loan obligation) markets may rest on this same fragile set of assumptions—that credit ratings fairly capture risk and that historical correlation relationships will continue to apply. This implies the potential for problems: If investors questioned these assumptions in the subprime area, they could also rethink their assumptions about these risks in the broader markets. Such a development might lead to considerably less buoyant conditions in the corporate debt and loan markets. It could be noteworthy that some of the indexes that reference credit default swaps in the corporate debt and loan markets have shown some deterioration in the past week. Finally, there were no foreign operations during this period. I request a vote to ratify the operations conducted by the System Open Market Account since the May FOMC meeting. Of course, I am very happy to take questions." FOMC20061212meeting--140 138,CHAIRMAN BERNANKE.," Some disconnect between the private forecasters, the economists, and the bond markets is evident. Even in their assumptions it’s quite explicit. So I don’t think those two things are necessarily inconsistent. Are we ready to begin our policy round? President Hoenig." FOMC20070131meeting--399 397,MR. MOSKOW.," I have just a quick question about the narrative. Would you see a narrative significantly different from the narrative that’s now in the Monetary Policy Report, other than the fan charts or anything else that would be added? Would you see the same type of thing—a few paragraphs describing the forecast?" CHRG-110hhrg41184--91 Mr. Bernanke," Well, policy is forward-looking. We have to deal with what our forecast is. So we have to ask the question, where will the economy be 6 months or a year down the road? And that's part of our process for thinking about where monetary policy should be. " FOMC20060328meeting--124 122,MR. STOCKTON.," Actually, it has been an area that has improved as well. So the one part in which we haven’t seen much yet has been the office building side. And that is an area where our forecasting improved, so I was actually a bit relieved to hear of some cranes out there. [Laughter]" FOMC20070918meeting--60 58,MR. STOCKTON.," That is basically correct. I mean, we expect some recovery. We weren’t expecting that August figure to prevail through the forecast period. If that were to occur, we would be looking at an even weaker outlook than we are seeing. Again, in all these things, I don’t want to make it sound too precise, but we do think underwriting standards and the cost of consumer credit are likely to increase, and that rise is likely to impinge on consumer spending. In our models, the fed funds rate shows up in our consumption equation. We have some consumption equations that we run with consumer credit rates. They don’t actually do any better than our standard equation. So we have added a little for something that we think is outside the model on consumption, probably operating through the credit channel. But I don’t want to deny that in some sense, again, if we saw a significant rebound in consumer sentiment from its current levels into the low 90s, it would be inconsistent with what we are currently forecasting." CHRG-110shrg50409--9 Chairman Dodd," Well, thank you very much, Mr. Chairman. And let me just briefly say I appreciate the efforts of the Fed regarding both credit cards and the things dealing with predatory lending practices. We welcome those rules, and we welcome the suggestions in the credit card areas, and a future point here, we will maybe have more discussion about that. But I wanted to at least reflect my appreciation of what the Fed has done regarding those matters, and we appreciate it very much. I am going to put this clock on at 5 minutes so we can give everyone a chance to raise any questions they have on the monetary policy issues. Some of the questions may overlap, and at the conclusion of that, Secretary Paulson and Chairman Cox will be here to have a broader discussion about the proposals being made by Treasury over the weekend. Let me, if I can, jump to the economic projections for 2009, the concerns about economic growth that you have raised in your statement here this morning. Given the fact that we have, as you point out, acknowledged the risk to your forecast for economic growth are skewed to the downside, to use your words, and given the fact that the stimulus package is about to--the effects of it are going to run out by the end of the year. The housing crisis continues, obviously, as we all know painfully. Gasoline prices, as you point out, are at record levels, costing consumers tremendously. The issues involving the weakness in the labor market are significant, 94,000 jobs lost every month for the last 6 months on a consistent basis. Inflation, as you point out, while it may abate in the coming years, it certainly is going to be with us for some time. What suggestions do you have for us in all of this? And I realize you may want to reserve some final judgment on the effects of the stimulus package and will not know the full effects of that until maybe toward the end of the year. But as we look down the road as policy setters here in the Congress looking at ideas, including a possibly a second stimulus package, one of the suggestions we made to increase productivity is to invest more heavily in infrastructure, the infrastructure needs of the country. I wonder if you might just share with us your views as to what ideas, as a menu of ideas, without necessarily embracing one or the other, but what you would be planning to do rather than just sort of waiting out the year and a new administration coming in, we will be leaving here, adjourning in late September, early October, maybe coming back, maybe not until after inauguration of the President late in January, it seems to me this would be an opportune time for us to be considering very seriously policy considerations that would provide for greater economic growth and opportunity than what we are presently looking at. " FOMC20070131meeting--104 102,MR. MOSKOW.," Thank you, Mr. Chairman. I just want to follow up on Vice Chairman Geithner’s first question—on inflation. It seems to me that most of the factors that are leading to lower inflation in this forecast period are temporary—energy prices, owners’ equivalent rent, and import prices. The longer-term factors are the pressures in the labor market that we’ve talked about and maybe some follow-through from the earlier accommodative financial conditions that we’ve had. As you said, chart 6 of the Bluebook, when you look past the forecast period, doesn’t show inflation coming down. Inflation actually goes up a bit with both the 1½ percent target and the 2 percent target. Doesn’t this mean that expectations have moved up a bit when you see inflation go up in ’09 and beyond?" FOMC20060629meeting--23 21,MR. STOCKTON.," I’ll jump in, given that it looks as though you’re still looking at me. [Laughter] This may either dismay you or encourage you. I wasted a great deal of staff time in the past four or five weeks actually asking our folks whether or not they could create a measure that would be useful to you, verifiable, and auditable. We haven’t yet concluded that the answer is “no,” but the task is very complicated, in part because our forecast, to a great extent, is a pooling exercise that encompasses a large number of models. David showed in his presentation today two of those models—one that uses just lagged price inflation and another that uses a combination of a weighted average, in some sense, of lagged price inflation and expected inflation from the Survey of Professional Forecasters. We are also looking at models that use the Michigan survey and that use TIPS spreads. The question is, Is there some sort of latent concept in there that would be useful to you? Underlying inflation is a sense of both momentum and expectations because there are costs of adjustment associated with inflation and there are forward-looking expectations. When I was talking about underlying inflation, I was talking about the convolution of both of those two concepts. The figures I cited are very rough—they are based on a sort of decomposition of how much we can explain by what’s been going on with slack in resource utilization, productivity changes, energy prices, import prices, and a variety of other things. As I said, I could certainly write those down for you. But I have come to the view that perhaps the better thing to do is to be clear about what the raw inputs are that go into the forecast. I think we could expand the material that we’re presenting in the Greenbook to include such things as the lagged price component that might be in essence inflation momentum or underlying inflation. The actual variable that we use in FRB/US is a variable that in the most recent observations uses the Survey of Professional Forecasters but in history is concatenated with the Hoey survey that we had in the early 1980s and before that a time-series technique that Sharon Kozicki and Peter Tinsley developed for us to incorporate when we estimate the longer- term model. I could picture us doing a better job of actually showing you what the pieces are that we struggle with and pool together in coming up with a forecast. To my mind, that would be more useful than giving you a number. You might look at a number and think, well, it changed two- tenths, so the staff must think this or that. In this pooling exercise, any number, given the standard errors associated with these various models, would give “underlying inflation” a level of precision and importance in your thinking that it shouldn’t have. I’d rather provide you with the inputs that I think will be helpful in giving a sense of what we’re looking at and what’s conditioning our thinking about the inflation outlook. So, again, we are still looking at this question. With the natural rate of unemployment, for example, we can tell you what three coefficients in our estimated models go into producing the estimate there and can calculate standard errors and provide you with confidence intervals. That’s a lot harder to do in this exercise with models with such diverse estimates of inflation expectations and the momentum of cost of adjustment. I think we can do a better job. I think we owe it to you to give you more than we currently are giving you. I’m still of the view, after having looked at this for another four or five weeks, that giving you a number on an envelope might be a greater disservice to the Committee than a service to the Committee. So I hope we can improve the quality of the analysis without necessarily providing you with some false level of precision or accuracy in this estimate." FOMC20060328meeting--88 86,MS. YELLEN.," Thank you, Mr. Chairman. May I say it’s a great pleasure to see you back at the table. And while I hesitate to wish your predecessor’s eighteen years of service on anyone, I look forward to many interesting and productive meetings under your leadership. The latest monthly data show significant strength in activity for the quarter just ending, and I agree with the Greenbook’s assessment that this strength represents a temporary catch-up after the weak fourth quarter. I anticipate that growth will likely settle back to trend as the year progresses, especially as the lagged effect of tighter financial conditions damps interest-sensitive sectors. The current risks to this scenario are by now a well-known litany—housing, energy prices, the saving rate, foreign demand, and term premiums. Overall, I judge the risk to the growth forecast to be pretty well balanced. I did want to comment briefly on the risks associated with housing. This is the sector that obviously bears close watching because it can represent the leading edge of the effects of the monetary tightening. Thus far, published data on housing starts and permits provide rather little evidence of a significant weakening in construction activity, although other indicators such as home-buying attitudes and new home sales, along with a growing amount of anecdotal evidence, suggest that tighter financing conditions are finally exacting a toll. I think one possible reason that starts and permits have remained so strong is that the inventory margin is taking up some of the slack in demand. Indeed, the stock of unsold homes on the market has now reached quite high levels. I noted a similar phenomenon in talking to a real estate developer in what has been the sizzling Phoenix housing market. In that market, demand has been so strong that builders couldn’t build houses fast enough to satisfy buyers. So delivery times for new homes were very long. And as the demand for new homes has slowed recently, we haven’t seen a noticeable change in building activity, but there has been a significant decline in delivery times. As this margin, like unsold inventories, returns to more historical norms, I think that we’ll see the moderation in demand show up in new construction numbers as well. Turning to inflation, I think it’s worth stressing how good recent readings have been. Over the past twelve months, core PCE prices are up 1.8 percent, the market-based component 1.5 percent, and the core CPI just 2.1 percent. As I’ve noted in previous meetings over the past six months, we have been more optimistic than the Greenbook about the prospects for core inflation during 2006. For quite some time now, we have been on the order of several tenths of a percentage point lower. And I continue to think that core PCE price inflation will come in at about 1.8 percent this year. As the Greenbook forecast drifts down, I think maybe my stubbornness is paying off. My relative optimism partly reflects my view, based on econometric evidence using data after the early 1980s, that there is little pressure for higher inflation coming from the pass-through of energy prices to labor compensation or core prices. Another important element in my optimistic inflation outlook is inflation expectations, which I consider to be well contained and unlikely to provide significant upward impetus to inflation. At the same time, I think it’s important not to ignore the potential adverse inflationary consequences from a resurgent economy. I realize the link between resource utilization and inflation is a contentious topic. Actually, the Philadelphia Fed’s Survey of Professional Forecasters asked its respondents whether they used the concept of a natural rate of unemployment in their macroeconomic projections, and the replies indicate a split of about 50–50. About half the economic forecasters, in other words, use such a rate, and the other half don’t. And my guess is that there is also a considerable difference of opinion around this table. Personally, I’m persuaded that excess demand in a market does tend to push up prices and that the domestic labor market is no exception to this rule. I think that the econometric evidence supports that view. President Fisher has been arguing, and perhaps some others would agree, that what matters is not just U.S. productive capacity but worldwide capacity. I do agree that the world—or, more accurately, the aggregate supply curve—has probably become flatter. But while globalization has had a profound impact on the U.S. economy in a number of ways, I think that there are a number of reasons to doubt that it will overturn, at least completely, the normal historical relationship between domestic labor market slack and inflation. The first point here is simply that many goods and most services still must be produced in the United States, and so foreign capacity isn’t an issue. The second point is that, in order to utilize productive capacity in foreign countries, we do need to run a trade deficit; in principle, such deficits eventually put downward pressure on our exchange rates, which tends to raise the prices paid for imports in the United States. I’m sure this is a topic we will be discussing in a lot more detail going forward. Of course, the measurement of aggregate excess demand or slack is difficult, and I’m sympathetic to the view that there is no bright red line for the unemployment rate that, once crossed, triggers higher inflation. But by examining a variety of indicators, I think it’s possible to get a useful notion of aggregate resource utilization. I would judge that these measures currently fall in a range from a modest amount of slack to a modest amount of excess demand. Specifically, the unemployment rate, the vacancy rate, the employment–population ratio, capacity utilization, and other measures are all within a few tenths, in unemployment rate terms, of full employment. Looking ahead, with the unemployment rate already at 4.8 percent, I think it’s logical to worry that wage and price inflation will rise over time if resource slack diminishes further. And with GDP growth forecast at 3¾ percent this year, a naïve calculation based on Okun’s law suggests that the unemployment rate could fall to 4½ percent by the fourth quarter. In contrast, the Greenbook assumes that the unemployment rate will remain unchanged. The Greenbook inflation projection is, accordingly, more optimistic than a forecast based on the naïve model. Now, given the importance of the behavior of unemployment to one’s forecast of inflation, my staff has been looking at the performance and fit of Okun’s law—namely, the relationship between output growth and the change in the unemployment rate. And I think their analysis provides support for the Greenbook assessment. Using a dynamic version of Okun’s law that fits exceptionally well after 1961, my staff finds evidence of an error correction between the output and the unemployment gaps. During 2005, unemployment declined substantially more than a simple version of Okun’s law would have predicted. And this dynamic model suggests that, even with fast economic growth, the unemployment rate will likely be pushed up a bit this year, as this unusual decline in 2005 is reversed. So to sum up, I see steady growth and few pressures for price acceleration." FOMC20081007confcall--49 47,MR. STERN.," Thank you, Mr. Chairman. I support reducing the funds rate target 50 basis points and doing it now. I think we ought to take advantage of the situation that has arisen with regard to coordinated action with other central banks. That seems to me to be important and appropriate at this point, given the extraordinary circumstances that we confront. I'd just make a couple of other comments. Larry Slifman marked down the economic outlook for the next several quarters for sure and I guess longer than that. If I were doing my forecast today, I would mark down the near-term outlook even more. It seems to me that the restraints on the economy together with the nature of the incoming evidence suggest that the nearterm outlook at least is not terribly promising--not that we can do very much about that, of course. But I think maybe more important, I have been one who for some time thought that it was likely that inflation would diminish relatively quickly. That apparently isn't going to happen or didn't happen in the third quarter as measured by core, but the incoming evidence both nationally and globally suggests to me that inflation risks have diminished. I've expected that to be the case. It seems to be unwinding in that fashion. Obviously I didn't anticipate the path of commodity prices and the stress in the financial markets to the degree that it has occurred, but they only reinforce my confidence that inflation, in fact, will run lower from here. Thank you. " FOMC20050202meeting--23 21,MR. ELMENDORF.," If the Committee chose to specify a numerical price- related objective, it would need to resolve a number of operational issues—the subject of your next exhibit. The top left panel of the exhibit presents a checklist of these issues. The first item is the choice of a price index. We favor consumer prices on several grounds shown in the top right panel. On the practical front, indexes of consumer prices are probably the most familiar to the public and the best measured. From a theoretical perspective, the costs of inflation relate to many different sorts of prices. But because inflation rates generally move together in the long run, anchoring some measure of consumer price inflation would, for the most part, pin down other broad measures of inflation as well. The second item on the checklist is the choice between inflation control, where “bygones are bygones” with respect to inflation surprises, and price-level control, where such surprises are eventually offset. I will not review the pros and cons of these approaches here, but simply repeat our conclusion in the paper that, if the Committee were to go down this road, an inflation-based strategy probably makes the most sense at this point. February 1-2, 2005 10 of 177 Analyses of microeconomic wage data suggest that individuals have a special distaste for nominal wage cuts, raising the possibility that lower inflation could lead to a higher equilibrium rate of unemployment. Yet, such downward rigidity has left little imprint on macroeconomic outcomes, at least so far, as low inflation over the past 15 years has not been associated with elevated unemployment. However, this phenomenon might matter more in the future if productivity growth slows or inflation moves even lower, because either of those developments would push a larger share of equilibrium nominal wage changes below zero. Another cost of very low inflation is that the equilibrium nominal interest rate could decline to a level that would limit the Committee’s scope for cutting rates. The table in the bottom panel presents illustrative estimates of the effect of the zero bound based on stochastic simulations of the FRB/US model. For these estimates, we assume that monetary policy follows an updated Taylor rule with a larger coefficient on the output gap that better matches the responsiveness of the funds rate to output movements since the late 1980s. If, as shown in the rightmost column, the bias-adjusted inflation objective is 2 percent, the funds rate equals zero just 6 percent of the time, and the standard deviation of the output gap is 2.2 percentage points. As the inflation objective falls, the funds rate is constrained at zero an increasing percentage of the time, causing economic performance to deteriorate at an increasing rate. For example, with a bias- adjusted objective of zero—in the left column—the funds rate is pinned at zero 16 percent of the time, and the standard deviation of the output gap rises to 2.5 percentage points. To be sure, there are alternative ways to implement monetary policy if the funds rate becomes stuck at zero. But these alternatives are much less familiar than traditional policy actions and therefore less predictable in their effects. To sum up our analysis of the optimal long-run inflation rate, we read the admittedly scant evidence as suggesting that a cushion of 1 percentage point on true inflation would provide sufficient insurance against the costs associated with the zero lower bound and downward nominal wage rigidity without imposing a high cost through the other effects of inflation. However, the results from the literature are not so precise as to rule out other figures in the neighborhood of 1 percent as representing a sensible balance between these competing considerations. February 1-2, 2005 11 of 177 objective would depend on why the Committee chose a range and how it explained that range to the public. Your fourth exhibit considers the accuracy with which the FOMC could achieve an inflation objective. Because inflation is volatile and because monetary policy influences it only indirectly and with a lag, the Committee could not hit a point objective precisely or guarantee to keep inflation within a narrow range. To assess the likely accuracy with which inflation could be controlled, we use stochastic simulations of the FRB/US model. The table in the middle panel shows results for a variety of alternative assumptions. The first row uses the shocks that are estimated to have occurred between 1968 and 2004. Under these conditions, total PCE inflation averaged over four quarters could be held within plus or minus 1 percentage point of the desired rate 59 percent of the time, and core PCE inflation could be held in the same interval 64 percent of the time. If the volatility of economic shocks were lower—in line with the 1984 to 2004 experience—the Committee would be able to control inflation somewhat more precisely, as shown in the second row. Indeed, total PCE inflation on a four-quarter basis has been within 1 percentage point of its average level almost 70 percent of the time since the mid-1980s and nearly all of the time since the mid­ 1990s. A key uncertainty about the inflation process, and thus an important risk to these figures, is the nature of expectations formation. The first two rows of the table assume that expectations follow a simple vector autoregression [VAR] in which the public’s long-run forecast of inflation responds gradually to actual inflation and is not influenced by FOMC announcements. Row 3 just repeats the results from row 2, with the label emphasizing that expectations are VAR-based with imperfect credibility surrounding any announcement of a long-run inflation objective. In row 4, we continue to assume that near-term expectations are formed using a VAR, but we assume that long-term expectations are perfectly pinned down by the FOMC’s announced objective. In this case, four-quarter total PCE inflation stays within a 1 percentage point band 80 percent of the time. The Committee could tighten its control of inflation, relative to the results discussed so far, by responding more aggressively to movements in inflation and output. However, as shown in the paper, this effect is fairly small. All told, as noted in the bottom panel, the Committee could likely keep four-quarter total PCE inflation within a plus or minus 1 percentage point band about two-thirds to three-quarters of the time. February 1-2, 2005 12 of 177 provided in exhibit 5 can help to shape this discussion, however unlikely that may seem to you at the outset. The key question before you is listed in the box in the top row: Would an explicit, numerical specification of price stability be helpful in furthering the achievement of your goals of maximum employment, price stability, and moderate long-term interest rates? Weighing the arguments that David and Doug just posed, you might be of the view that the Committee’s behavior over the past two decades has revealed enough to the public and to each other about your inflation preferences to make the marginal benefits of this additional step small relative to the additional costs. If that is the case, you would presumably prefer the status quo as represented in the left branch of the tree. Even so, there might be scope for incremental improvement while preserving the current structure. At the margin, the Committee could encourage participants to be more specific about preferences about inflation, both within this room by periodically having discussions like this and in public through speeches and interviews. The Committee could use the minutes, testimonies, and Monetary Policy Reports to provide additional guidance to the public, so as, in effect, to signal the shape of the zone surrounding your working definition of price stability. As the memo from the Division of Research and Statistics noted, in the summer and fall of 2003, comments from various policymakers and mention in the policy announcement and minutes of “unwelcome disinflation” sent a clear message to the public that inflation had fallen about as low as you would tolerate. This meeting provides another such opportunity. You could, for instance, indicate in the minutes that, after considering the issues related to the inflation rate most likely to achieve maximum employment and price stability in the long run, the Committee viewed the current rate of underlying inflation as consistent with its goals. February 1-2, 2005 13 of 177 minutes for them to remain an accurate depiction of your discussion. And, besides, the world would learn of (and likely little appreciate) your secret pact five years later when the transcripts were released. Thus, the odds that you would settle at the end of this branch of the decision tree seem remote, which is why the box has a thick red band around it. Thus, if you want to settle on a numerical definition of price stability amongst yourselves, I believe that it almost surely has to be a decision announced to the public in some form or other, introducing the question in the right box of row three: Should the inflation goal be decided by the Congress (presumably though the process of amending the Federal Reserve Act) or by the Committee? The choice of an inflation objective that best achieves the multiple goals that the Congress has assigned might be viewed as a technical decision most appropriately delegated to specialists—the members of this Committee—the left branch. But if you see the major benefit of stating an inflation objective as anchoring longer-term expectations, then you presumably would want to commit to it in a fairly binding way. That might incline you to prefer legislative action, the right branch, as it is less likely to be reversed at some future date. Such a route through the legislature, however, may well lead to the issues listed in the box directly below in the fourth row. In particular, is the Committee comfortable in seeking amendment to the Federal Reserve Act? Reopening the act could lead to other changes that the Committee might not welcome, and success in obtaining guidance on an inflation objective is by no means assured. Indeed, on two occasions in recent memory, proposed legislation to make the goal of price stability more explicit never made it out of committee. Moreover, if you request consideration of an inflation goal by the Congress, are you confident that it would pick a target you viewed as appropriate? There are good reasons, grounded in the economic theory of time inconsistency, that a decision about an inflation target should be delegated to a conservative central banker. That seems to have been the compromise worked out over time, and you might not want to perturb that equilibrium now. February 1-2, 2005 14 of 177 But if a numerical quantification of price stability were to be exclusively an FOMC decision, you will have to ask, as in the box at the left, how will the FOMC choose that objective? The bottom row offers two possibilities. As at the left, the Committee might view a quantification of its price-stability goal as a group decision, similar to choosing ranges for the monetary aggregates from the late 1970s to the mid-1990s. Periodically, the Chairman could propose and the Committee vote on a single number or a range for the growth of a specific price index or indexes representing the long-run inflation outcome consistent with best achieving your dual mandate of price stability and maximum sustainable employment. Structuring the proposal in this manner underscores that you are not undercutting congressional intent but rather providing numerical guidance on how best to achieve your legislated instructions. Some of you, however, could view this as an excessively rigid procedure at odds with the Committee’s tradition of diversity. You are not asked to share a common economic framework or agree on the outlook for the economy, so might it not be appropriate to allow room for differences in opinion about your definition of price stability? In addition, you may harbor the concern that a formal vote might lead the public to believe mistakenly that the price objective is your sole focus. One way of capturing this diversity, the right branch, would be to poll participants periodically as to their preferred specification of the Committee’s price objective. For example, this could be done directly by adding such a question to your semiannual survey of participants’ economic forecasts. Or it could be done indirectly by adding a few years to that forecast, on the logic that a longer-ahead forecast likely implicitly reveals your inflation objective. On the same logic, further- ahead forecasts of real GDP growth and the unemployment rate would also convey your views, respectively, of the rate of growth of potential output and the natural rate of unemployment. Indeed, such specificity, particularly if it were offered more frequently than the semiannual schedule of your current survey of economic forecasts, may make it possible to trim back on the policy statement released after each meeting. There are a lot of issues to cover today and I suggest, as listed in your final exhibit, one possible strategy for organizing the discussion. February 1-2, 2005 15 of 177 Having shared those views about your inflation objective, you may next want to consider what role that objective plays in the Committee’s regular business. There are three chief possibilities listed in the lower panel, which correspond to the branches of the decision tree that did not seem to be dead-ends. The first alternative is to maintain the status quo in which the Committee defines price stability in terms of behavioral attitudes. Resisting strict quantification does not mean being silent, however, and you might choose to provide more information to the public over time as to your attitudes toward prevailing and prospective inflation, so expectations can be more firmly anchored. As a second alternative, you may choose the formal apparatus of voting on an inflation objective—explained as the best means to achieve your dual mandate—at some regular frequency. If you do not view this as consistent with the diversity of the Committee process, the third alternative is to use the semiannual survey of economic forecasts to summarize the central tendency of your individual indications of the inflation objective. While these issues are no doubt interrelated, separating discussion of the appropriate inflation goal from discussion of how the Committee should incorporate that knowledge in the policymaking process might aid progress today. That concludes our presentation." FOMC20050630meeting--303 301,CHAIRMAN GREENSPAN.," One thing we can be sure of is that the value of the dollar will be worth 100 cents. [Laughter] David, do you contemplate that the end-of-month NIPA revisions could alter the intermediate history, which could have an effect on the forecast?" FOMC20081029meeting--194 192,MR. MORIN.," Right now, although the odds are that there will be a fiscal package next year, it is not a feature of the baseline forecast. We discussed two alternative simulations for different packages, but additional fiscal stimulus is not a feature of the baseline. " FOMC20051101meeting--210 208,MR. MOSKOW.," Mr. Chairman, I agree with your recommendation on the rates and I support your plan to review the language, as we’ve all talked about here or, as you put it, to continue our ongoing discussion of the language going forward. Just a comment on the point—I forget who said this but I think it was Tim—that the statement speaks for itself and the minutes speak for themselves. I agree completely with that. And I think it is important, as we give talks and answer questions, that we make it clear that our comments represent our own personal views. They are not interpretations of the minutes. They are to be read as “In my view, X or Y….” I think that is a very important distinction to make going forward. Let me add just one final point. I, too, am concerned about inflation, as we all are around this table. And I must say that I think the costs of inflation coming in above the Greenbook forecast now outweigh the costs of inflation coming in below the Greenbook forecast going forward." FOMC20070918meeting--67 65,MR. PLOSSER.," I appreciate that clarification. The other question I had has more to do with the NAIRU and employment issues. I wish you could clarify a bit for me—the downward shift in employment numbers for the past three months is for me significant. At the same time, I say to myself, “Well, you know, now it is about at the level that the Board has been forecasting all along.” In your previous discussions you have talked about participation rates and other things, and now the level seems to be about where you had been predicting it all along. Yet you still interpret that as bad news from the economy point of view. So I would like a little discussion of that. The second thing is that, at the same time, you have lowered the NAIRU. I am a bit puzzled and would like a little discussion about the interaction between those two things. Finally—and you may have said this, but I may have missed it—if you had not changed the NAIRU, would inflation have been 0.1 or 0.2 percentage point higher over the forecast period? Or what would it have been? I just need a little clarification." CHRG-111shrg62643--228 RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM BEN S. BERNANKEQ.1. Back in December 2006, during the U.S.-China Strategic dialogue, you described China's undervalued currency as ``an effective subsidy for Chinese exporters.'' During your testimony you confirmed that you believe this to still be the case. Do you agree with many economists that the subsidy approaches 40 percent? If not, what is the price subsidy range, and what evidence are you using to support this conclusion?A.1. This note briefly summarizes the professional literature that seeks to assess the undervaluation of the Chinese renminbi (RMB). While this literature has generated an array of estimates, most studies put the extent of this undervaluation in the range of roughly 10 percent to 30 percent. For many reasons, when discussing currency misalignments and their implications for current account balances, economists generally prefer to focus on the behavior of the real effective exchange rate (which takes into account the value of a country's currency against the currencies of all of its trading partners and adjusts for cross-country differences in rates of inflation) rather than on bilateral nominal exchange rates. The estimates reported here, therefore, focus on the extent of undervaluation of the real effective Chinese exchange rate, rather than of the nominal value of the RMB vis-a-vis the dollar. There is no single accepted methodology for determining whether a country's exchange rate is appropriately valued. Studies have employed a variety of approaches to measure a currency's misalignment, including the following: One approach seeks to estimate how far the real effective exchange rate is from the level that would ensure a sustainable current account balance over the medium term. Another approach aims to estimate how out of line a country's real effective exchange rate is compared with those of other countries, taking into account the country's level of development, income, and other macroeconomic and financial considerations. Yet a third approach attempts to gauge how far a country's real effective exchange rate is from the level that would be necessary to stabilize the country's net creditor position at a reasonable level relative to the size of its GDP. Using these approaches, researchers have found a wide range of estimates for the extent of undervaluation of the Chinese RMB. There are some outlier estimates that put the Chinese currency at being even 5 percent overvalued and, at the other extreme, at as much as 60 percent undervalued. The bulk of the studies, however, fall in the range of 10 percent to 30 percent, undervaluation. For example, a very recent study, Cline and Williamson (2010), follows the first approach described above and obtains the result that the RMB is approximately 15 percent undervalued. \1\ Cline and Williamson arrive at this result by assuming China's sustainable (or ``target'') current account surplus to be about 3 percent of GDP and using a forecasted value of the current account surplus in the absence of any exchange rate adjustment of about 7.5 percent of GDP. \2\ They then estimate that the amount of real effective appreciation of the RMB that would be necessary to move the current account from 7.5 percent of GDP to 3 percent of GDP is about 15 percent. \3\--------------------------------------------------------------------------- \1\ William R. Cline and John Williamson, ``Estimates of Fundamental Equilibrium Exchange Rates, May 2010'', Peterson Institute for International Economics, Policy Brief Number PB10-15. \2\ They take the forecasted value of China's current account from the International Monetary Fund's World Economic Outlook, April 2010 with some adjustments. \3\ Last year, when the IMF was forecasting a bigger medium-term current account surplus for China, Cline and Williamson's estimate of the degree of undervaluation of the real effective RMB was a little over 20 percent.--------------------------------------------------------------------------- Another study, Goldstein (2007), finds that ``the RMB is now grossly undervalued--on the order of 30 percent or more against an average of China's trading partners.'' \4\ However, this finding uses data that go only through 2006. Generally, estimates using more recent data find a somewhat smaller degree of undervaluation. The IMF staff has also determined that the ``renminbi remains substantially below the level that is consistent with medium-term fundamentals.'' \5\ Clearly, these estimates and other estimates in this literature are quite sensitive to a number of underlying assumptions about which there is often not much consensus, as well as to the approaches used to compute the undervaluation and the exact vintage of Chinese data used in the analysis.--------------------------------------------------------------------------- \4\ Morris Goldstein, ``A (Lack of) Progress Report on China's Exchange Rate Policies'', Peterson Institute for International Economics, Working Paper 07-5. This study updates results from Morris Goldstein and Nicholas Lardy, ``China's Exchange Rate Policy Dilemma'', American Economic Review, Vol. 96, No. 2 (May, 2006), pp. 422-426, which provides more details of the methodology used. \5\ ``People's Republic of China: 2010 Article IV Consultation'', International Monetary Fund, IMF Country Report No. 10/238, July 2010.--------------------------------------------------------------------------- ------ FOMC20080430meeting--176 174,MR. STERN.," Thank you, Mr. Chairman. Well, I have given serious consideration to both alternatives B and C, and I think a credible case can be made for either one. There are, of course, risks associated with adopting either one as well. On balance, I come out in favor of alternative B, for the following reasons. First, we are certainly not yet out of the economic woods. Although my forecast is for a relatively mild recession, I would not be particularly surprised if it turned out to be both deeper and more prolonged, given, among other things, the persistent overhang of unoccupied, unsold homes and the severity of the financial dislocations of the past nine months. As I have tried to emphasize, I think it could be dangerous to underestimate the effects of the financial headwinds now in train and likely, in my judgment, to get more severe. Second, and closely related to those observations, financial conditions remain quite sensitive. Even if improvement is now under way in some markets, I think it will be some time, as I said yesterday, before credit conditions are fully supportive of economic growth. To amplify a bit, I think we need to be a bit careful about the weight we put on the low level of the real federal funds rate per se for, as Governor Kohn pointed out yesterday, the credit situation is a good deal more complicated than that. My principal reservation about supporting alternative B has to do with the inflation outlook. The news here has not been uniformly bad, especially with regard to core inflation, but I am not convinced that inflation will abate in a timely way without policy action. On the other hand, I take some comfort from the fact that apparently financial market participants do not anticipate further reductions in the federal funds rate target beyond this meeting. I think the language associated with alternative B should help to reinforce the view that, at a minimum, a pause in the reductions in the target is not that far off, given what we know today. I think it important that we find opportunities to bolster that view when we can. Thank you. " FOMC20080130meeting--178 176,MR. LOCKHART.," Thank you, Mr. Chairman. In my view, the decision we took on January 21 reflected a broad consensus that economic fundamentals were weakening at a rapid pace in an environment of continuing, even heightened, concern about financial market stress and fragility. My contacts over this last week in the business and financial markets may add a little texture to the picture on which we based our January 21 policy action. Conversations with these contacts in various industries provide information generally consistent with a downward revision of the outlook. Forward-looking sentiment of the directors of the Federal Reserve Bank of Atlanta turned decidedly pessimistic in January. Retail contacts noted quite disappointing results through mid-January and are taking a conservative approach to 2008 in terms of hiring and inventory. Regarding the residential construction industry, regional weakness continues and is spreading from coastal markets to interior markets. In addition, I had a conversation with the CEO of a large public homebuilder of national scope. He cited historically high contract cancellation rates, especially on the West Coast and the D.C. area, because of the buyers' difficulty selling existing homes and getting financing. This limits their market to first-time buyers. His judgment is that a change in market atmosphere will require inventories falling to around six months. He pointed out that the spring is traditionally the key season for sales, so the next several months will be particularly telling. Weakness in the region's commercial real estate market appears to be spreading. The retail segment is continuing to experience declining leasing activity, and weakness is now emerging in the warehouse and office markets as well. In partial contrast, reports from the manufacturing sector are more mixed. Activity remains very weak in housing-related industries. One CEO, reflecting the concern of others, predicted business failures in lumberyards and construction supply firms because of excess capacity and the slow response to a lower building environment. The trucking sector continues to slump. However, industries related to oil and gas production; import-substituting industries, such as steel, aerospace, and defense; and the foreign brand auto sector are all performing quite well. Atlanta's national forecast is largely consistent with the Greenbook in direction, and our differences with the Greenbook in magnitude and timing are not material. Like the Greenbook, we premise our forecast on a lower funds rate at the level of 3 percent. So the principal risk to the forecast in my view is the fragility of the financial markets. Uncertainty and fear continue to loom large. I made a number of calls to financial market players, and my counterparts cited a variety of concerns relevant to overall financial stability. For instance, one of the recent concerns, as Bill Dudley depicted, has been the situation of the monoline credit insurers. Several of my contacts had comments, but I spoke to the newly appointed interim CEO of one of the two monoline insurance firms most prominent in the news, and he characterized the firm's solvency and liquidity fundamentals as in question only toward the far end of current independent forecasts of subprime losses. Perhaps predictably, he contrasted his assessment with what he views as alarmist atmospherics resulting from press coverage, quixotic rating agency actions, and state regulator political positioning. A regional bank's CFO cautioned that more data on actual mortgage performance in 2007 will soon be available, and that could force restatements in 2007 bank earnings. Commenting on market illiquidity, one source said that in some fixed-income markets, where many on the buy side currently depend on moderate leverage to achieve the required rates of return, banks have greatly reduced their lending. He also indicated that, even though there are real money investors--as he called them--interested in return to the structured-finance securities markets but currently on the sidelines, they are reluctant to expose themselves to volatility that arises under mark-to-market accounting using prices set in such illiquid markets. These anecdotal inputs simply point to the continuing uncertainty and risk to financial stability with some potential, I think, for self-feeding hysteria. I share with my colleagues on the Committee worries about the heightened levels of inflation and uncertainties around my working forecast that inflation will moderate in 2008. The assumptions about energy prices are the most precarious. Nevertheless, I am prepared to take the position that the economy, with its apparently rapid deceleration compounded by continuing financial volatility, is a greater concern than inflation at this juncture. Thank you, Mr. Chairman. " FOMC20080318meeting--102 100,MR. MADIGAN.," 2 Thanks, Mr. Chairman. I will be referring to the revised version of table 1 distributed earlier today in the package labeled ""Material for FOMC Briefing on Monetary Policy Alternatives."" The revised table presents the same basic set of alternatives that was discussed in the Bluebook. However, we have proposed some changes in language that affect the statements for alternatives A and B. I will discuss those changes, shown in blue, shortly. Alternative D, presented in the right-hand column, would leave the federal funds rate unchanged at this meeting at 3 percent. Committee members might be inclined to favor this alternative if they were particularly concerned about prospects for inflation and if they believed that, with due allowance for lags, the monetary and fiscal stimulus in train would likely be sufficient to lead to a resumption of moderate growth over time. The wording of this alternative would acknowledge the downside risks to growth. But as shown in paragraph 3, the statement would indicate that inflation has been elevated, cite several factors that could put additional upward pressure on inflation, and state that the upside risks to inflation have increased. No net assessment of the balance of risks would be included. Under alternative C, the stance of policy would be eased by 25 basis points today. A modest easing of policy might be motivated by judgments that the economic outlook has weakened, but by appreciably less than in the Greenbook, and that the inflation outlook is troubling. Members might see financial strains as concerning but likely to exert less restraint on growth than in the Greenbook forecast. 2 The materials used by Mr. Madigan are appended to this transcript (appendix 2). In these circumstances, the Committee might want to be cautious about policy adjustments that could add impetus to inflation, particularly given the substantial easing of monetary policy to date and the lags in the effects of policy. The language proposed for alternative C would note that the tightening of credit conditions and the deepening of the housing correction are likely to continue to weigh on economic growth. The inflation paragraph for this alternative is the same as that for alternative D. As shown in paragraph 4, the Committee would make an explicit judgment that the downside risks to growth outweigh the upside risks to inflation. Under alternative B, the Committee would reduce the federal funds rate 50 basis points today, to 2� percent. Such an approach could be seen as consistent with the Greenbook forecast. Indeed, under that forecast, the Committee is assumed to ease policy 50 basis points at this meeting and another 75 basis points over the next three months. The motivation for such a trajectory is provided partly by the 1� percentage point downward revision to the Greenbook-consistent measure of short-run r*. The Committee might concur with the staff's assumption regarding the amount of cumulative easing that will eventually prove necessary and find a gradual shift in policy attractive, particularly in view of what seems to be some upward drift of late in inflation expectations. Such a path would also be qualitatively consistent with the optimal control simulations shown in the Bluebook for a 2 percent inflation target, in which the federal funds rate is eventually eased to around 1� percent. As shown in paragraph 2, the statement issued under this alternative would indicate that the outlook had weakened. We have suggested striking the reference to risks as that thought is picked up in the risk assessment. The statement would go on to mention several factors that could weigh on economic growth, and we have suggested adding ""over the next few quarters."" With regard to inflation, the Committee would note that inflation has been elevated. It would also indicate an expectation that inflation will moderate in coming months and cite several factors that could contribute to that moderation but note that uncertainty about the inflation outlook has increased. Notably, the list does not mention ""reasonably well anchored inflation expectations"" or some variant of that phrase, which has been used recently in the minutes and other policy communications. Indeed, the first sentence of the paragraph notes that some indicators of inflation expectations have risen. Partly because inflation compensation includes a premium for inflation risk as well as inflation expectations, we thought that ""indicators"" of inflation expectations might be a better word than ""measures"" and have suggested that substitution. Over the past few days, inflation compensation as read from TIPS has plunged; however, we are skeptical that the decline represents primarily a drop in inflation expectations or inflation risk. Rather, we suspect that it is importantly a result of shifting liquidity premiums, as yields on nominal Treasury securities have fallen sharply partly because of increased demands for safety and liquidity. The final paragraph of alternative B would repeat the risk assessment issued after the January meeting. It would again indicate that downside risks remain and emphasize that the Committee will act in a timely manner to address those risks. Finally, under alternative A the Committee would lower the funds rate 75 basis points today. Given the extent of policy easing assumed in the staff forecast, this alternative could easily be consistent with an outlook along the lines of the Greenbook. This policy approach could also be motivated by concern about the possible implications for the economic outlook of the worsening in financial market conditions in the five days since the staff forecast was finalized or by a riskmanagement approach that gave particular weight to the downside risks around the outlook. The language proposed for the rationale section, paragraphs 2 and 3, of alternative A is identical to that proposed for alternative B. As with alternative B, the risk assessment paragraph says that policy actions should promote moderate growth over time and mitigate downside risks, but this version also alludes to the measures that the Federal Reserve has implemented to promote market liquidity. This language could also be used in alternative B. Rather than providing an assessment of the balance of risks, as we did in the Bluebook version, here in alterative A we have suggested simply indicating that downside risks to growth remain. Given the high degree of uncertainty, you might again prefer not to make an overall risk assessment. This paragraph differs from the corresponding part of the January statement also by indicating that the Committee will act in a timely manner as needed to promote sustainable economic growth and price stability. Thus, while the Committee eases 75 basis points, this language of alternative A would signal some increase in the Committee's concern about inflation in several ways: by indicating that inflation has been elevated; by noting that some indicators of inflation expectations have risen; and by incorporating a traditional formulation of the dual objectives, including price stability, in the final sentence. As Bill noted this morning, market participants appear to place substantial odds on a 100 basis point policy move at this meeting. Thus, implementation of any of these alternatives would involve at least somewhat less easing than expected. Given what would appear to be very fragile market conditions and highly skittish investor sentiment, you might see somewhat greater risks than usual in diverging from market expectations, and obviously the risks would be larger the greater the gap between anticipation and your actions. At the same time, you might see good reasons for some divergence. First and most obviously, you might see a smaller move as appropriately calibrated given your outlook and sense of the risks. Also, some indicators do seem to suggest that inflation expectations have become a bit less firmly moored. Even if you see gradual dollar depreciation as likely to be appropriate given the weakness of the U.S. economy and quite possibly a necessary factor in fostering an improved current account balance over time, you may be concerned about the downward lurch in the dollar over recent days and the potential for disorderly conditions to develop. You may judge that a policy decision today to implement somewhat less easing than markets expect and a statement that implies somewhat greater concern about inflation could be helpful in leaning against inflation expectations and any sense in markets that you are indifferent to downward pressure on the dollar. Alternative A would likely prompt some increase in shorter-term interest rates; but given that the risk assessment would point to continued downside risks, market participants would infer that further easing is a likely prospect, and the effects on other financial asset prices and financial conditions more generally could be reasonably limited. The 50 basis point easing of alternative B, in contrast, would suggest to market participants that you are inclined to be considerably more cautious in easing policy further, even with the downside risk assessment, and short- and intermediate-term interest rates could ratchet considerably higher, equity prices decline, and credit conditions tighten--responses that presumably would be amplified, perhaps nonlinearly, under alternatives C and D. " FOMC20070509meeting--122 120,MR. STERN.," Not for me personally. But as I thought more about this and listened to some of the conversation, the uncertainty seemed to be at least as great as it was in March. In fact, the Greenbook marked up core inflation a touch. That doesn’t lead directly into greater uncertainty, but it is not the direction in which I would have gone if I were changing the inflation forecast." FOMC20070131meeting--150 148,VICE CHAIRMAN GEITHNER.," Just in orders of magnitude—if we did another 25 or 50 basis points and there were some sort of associated changes in overall financial conditions so that that was reinforced, you’d get a core PCE inflation forecast that would go how far down? Would it go to 1.5?" FOMC20050322meeting--91 89,MR. STERN.," Dave, I’m interested in your work on labor force participation. We’ve been looking at that a bit, too. Can you give me a sense of what’s driving the new forecast of a leveling off in labor force participation rates of women?" FOMC20080130meeting--148 146,MR. PLOSSER.," So are these ""extra channels""-- if you want to call them that--typically part of the forecast change and how you evaluate? That is to say, in the fall, when the stock market booms 10 percent, are we going to get another kicker upward in r* due to these same factors? " FOMC20060629meeting--43 41,MR. KAMIN.," That seems quite likely the case. If the U.S. economy were to slow to a significantly greater degree than embodied in the baseline forecast, probably many economies, particularly the Asian economies that depend on us very heavily for their export markets, would indeed slow down much more than we are anticipating at this time." FOMC20081029meeting--167 165,MR. LACKER.," In the forecast, the federal funds rate goes to 50 basis points, and I take it that's essentially as low as you think it can go. You treat that as sort of the lower bound on nominal interest rates. Is that right? " FOMC20061025meeting--47 45,MR. MOSKOW.," No, I saw it coming down—oh, you mean in the outer years. Well, I think several things are going on. There is still the spillover of energy price increases flowing through the economy, but also there are more resource constraints than are built into the baseline forecast." FOMC20050503meeting--53 51,MR. MOSKOW.," You now have higher energy prices built into the forecast—significantly higher energy prices—and the futures market does, too. I’m just wondering if you could talk about how that factors into your thinking about potential output going forward." FOMC20070131meeting--199 197,MR. PLOSSER.," Thank you, Mr. Chairman. I’ll start off by saying that today I favor maintaining the federal funds rate at 5¼ percent. As we discussed yesterday and we learned this morning, the picture that seems to be emerging from the latest economic information is one of reasonably strong underlying growth, which has been temporarily weakened by housing and autos. Given that temporary weakness, I think it would be premature to raise rates today; but I am not confident that core inflation will continue to decelerate in the coming quarters, and that could risk our credibility. The level of inflation continues to be higher than I’d like to see, and in my forecast we may not see a return to price stability unless monetary conditions are tightened further. Although I don’t think today is the day to do it, I do want us to consider tightening if we see growth accelerating back to trend more quickly than in the Greenbook. I say this not because I think that growth will put upward pressure on inflation but because the associated equilibrium real rates that are implied by that higher growth, which we are beginning to see in the marketplace, will eventually force our hand. As I mentioned in my remarks on the economy at the past two meetings, I have been of the mind that a somewhat slower economy, combined with a constant funds rate, might be sufficient to ensure a decline in core inflation. As the economy strengthens, that scenario becomes a little less likely. If the economy continues to strengthen, a failure to act not only puts our price stability goal at risk but also risks our credibility with the public. Thus it would be ill-advised to suggest in our statement that we are finished acting for a while, and therefore I would not favor the language that Bill Poole circulated last week. My preference is for the language describing the rationale given in alternative C in table 1 of the Bluebook. The rationale in alternative C, including both sections 2 and 3, is really not more hawkish than the language of alternative B, yet it’s more concise and comes closer to my views on the current state of the economy. Indeed, since under alternative B, section 3, or alternative C, section 3, we would be making sizable changes in the language from our last statement, I also think that it’s appropriate at this time to purge the language about the high level of resource utilization having the potential to sustain inflation pressures or lower oil prices to mitigate core inflation. All the recent work on the forecasting of medium-term and longer-term inflation that I have seen says that these Phillips-type models don’t help us forecast core inflation very well. The FRB/US model of the Greenbook looks as though it has very flat tradeoffs, certainly in the near term anyway; so I think it would be useful to change our language at this point. I have not been a fan of that language, but in the past I was persuaded that we should leave it so as to avoid unnecessary changes that might confuse the public. But since we are considering changes at this time, I would favor going with alternative C, which gets rid of this language. I’m happy to continue with the risk assessment that we had last time, eliminating the word “nonetheless,” although frankly I would not greatly resist actually going with the assessment of risk in alternative C. Thank you, Mr. Chairman." FOMC20080625meeting--73 71,MR. LOCKHART.," Thank you, Mr. Chairman. I would like to start with some anecdotal feedback from the region. As you know, we have a lot of Branches, so we have a lot of directors, and we ask our directors a lot of questions. The anecdotal feedback from our 44 directors about the second half can be characterized as subdued. Almost all reported that they expect economic activity to be flat or slower, and I took special note that these expectations deteriorated in June after having actually improved a bit in May. The residential housing situation in the District resembles the national picture. Both sales and new construction are weak. High levels of inventories are being exacerbated by foreclosures, which are adding to downward pressure on prices. However, there are tentative signs of a bottom forming. Our survey of Realtors across the District indicates that the pace of decline of single-family home sales may be abating. Industry contacts tell us that foot traffic and buyer interest are picking up, particularly in Florida, although I would say that what constitutes progress in Florida would not be considered very encouraging elsewhere. Nevertheless, our view is that the beginning of an adjustment process is under way, but the end of the process looks to be a long way off. Some further home-price deterioration is likely to accompany this bottoming process. Credit conditions in the District continue to tighten because of perceived risk and also liquidity pressure on our banks. Our banks indicate that the process of deleveraging continues, which is affecting lending for residential real estate and, to some extent, commercial real estate. We are also hearing from several sources that funding of community banks is becoming an increasing problem because of their previous dependence on wholesale and correspondent bank sources. Higher energy prices are, not surprisingly, affecting our outlook. Hospitality industry contacts, for instance, expressed concern about low summer bookings. Although most tourist destinations have reported solid activity to date, few expect this to continue. The reacceleration of energy and commodity price inflation has businesses focused on cost pressures. Several business contacts indicated that price increases had been relatively easy to pass through and make stick in this environment. I wouldn't say that it's widespread yet, but I do hear some reports that businesses are expecting wage increases to eventually reflect the recent increases in the cost of living. This could be a significant factor, particularly in service price inflation. This and other anecdotal input has colored my outlook for the national economy for the balance of the year and into 2009. I have revised up my forecast for headline inflation in 2008 and 2009 by 50 and 25 basis points, respectively. I am also assuming that the recent inflationary pressures from elevated energy and food prices will unwind more slowly than I previously projected--a view reinforced by expectations expressed by my District contacts. Like everyone else, I am deeply concerned that inflation expectations seem to be rising and that expectations of general price inflation, reflecting second-, third-, and fourth-order effects of recent oil and commodity price rises, risk becoming institutionalized. I am prepared in the near term to think tactically regarding the conflict between growth and employment policy objectives and inflation objectives; but sustained inflationary pressures that extend well into the fourth quarter and rising expectation readings may force, at least on my part, a more strategic look at the tradeoff. I would like to talk for a moment about financial markets. I made a number of calls during the intermeeting period, and the growth-versus-inflation tactical dilemma is complicated further by a very mixed picture in financial markets. My contacts all acknowledge improved conditions since mid-March, but discussion of the current market circumstances and the outlook had a sort of half-full/half-empty quality. My contacts, taken together, pointed to several positives, including the health of the corporate loan market, improved CDO pricing, the readiness of forming distressed funds to buy asset-backed securities, alt-A mortgage demand, the growing perception that subprime loss estimates have been overstated, and some comment on Goldman's Cheyne deal, which they believe will help create price determination for certain securities. At the same time, these contacts cited areas of continuing or worsening weakness, including: HELOCs and second mortgages; option ARMs and alt-A hybrids; indirect auto, given the collateral value of SUVs in current circumstances; in contrast to CDO pricing, CDO squared pricing is very weak and deteriorating; the obvious concern about the growing liquidity issues of regional banks; and the view that the auction rate securities market valuations, given illiquidity, are suggesting that this market has little probability of returning to normalcy. Overall, my contacts in financial markets were encouraged but expressed worries over still-substantial downside potential. Let me turn now to my national forecast compared with the Greenbook forecast. The Atlanta projections for the national economy are broadly similar to those of the Greenbook. We have the same general narrative of slow growth for the balance of the year followed by a gradual pickup through 2009 and 2010. My projections for headline and core inflation are virtually identical to the baseline Greenbook projections. However, I believe that there may be less disinflationary pressure than seems implicit in the Board staff's forecast. As a consequence, the fed funds rate path that supports my inflation outlook is well above the Greenbook's at the end of 2009 and 2010. We are 75 basis points higher at year-end 2009 and 100 basis points higher at year-end 2010. Notwithstanding the upward revision of the first-quarter GDP number and the better expectations for this quarter, I still believe the near-term risks to growth are weighted to the downside. At the same time, as suggested by my revised forecast, I see the risks to our inflation objective as weighted to the upside. On the subject of the long-term projections, I favor the third approach, which is three years plus long-term averages, and certainly would be comfortable with approach number 2. I'm generally dubious about the ability to do actual forecasting for the outyears, even as near-term as the third year. So I really don't favor approach number 1. My experience, in the brief time I have been with the Fed, has at least personally been, shall I say, challenging from the point of view of forecasting. I tend to think of the long-term projections as being roughly equivalent to our targets or policy goals. In fact, the approach we have generally taken with our three-year forecasts is making the outyear approaching at least what we would consider to be the trend rate for growth and the employment and inflation objective. So I think long-term projections really do amount to more-explicit targeting, and very likely the first question we get when we come out of the blocks--if we have this kind of approach--will be, Is this your target? I am comfortable saying ""yes"" to that question and, therefore, would support the third approach. Thank you, Mr. Chairman. " FOMC20050920meeting--84 82,MS. YELLEN.," Thank you, Mr. Chairman. It goes without saying that the devastation September 20, 2005 51 of 117 economic effects, we’re paying special attention to energy and international trade. So far, at least, the effects on the Twelfth District economy appear to have been muted. Since the end of August, retail gasoline prices are up about 30 cents per gallon on the West Coast, less than elsewhere in the nation. There was some early concern that Gulf Port cargo would be diverted to the West Coast, creating bottlenecks or significantly increasing shipping costs, but these concerns have largely dissipated. Our contacts remain fairly optimistic about the prospects for the regional economy but are very concerned about the future path of energy prices, especially since Hurricane Katrina. Even before the hurricane, they were worried that higher gasoline prices and impending increases in home heating expenses would curb consumer demand. Indeed, PG&E, the public utility for northern California, just announced that rising natural gas prices could drive home heating costs in the area up by as much as 40 percent this winter. Discount retailers in the District expect these increases to put a dent in holiday spending. In addition, higher fuel prices already have trickled into prices for building materials, and contacts expect post-hurricane rebuilding efforts to boost those prices further and lengthen queues on some orders. Turning to the national economy, I share the Greenbook’s assessment of the near-term impact of Hurricane Katrina on economic growth. Pre-Katrina, the outlook was for very strong growth in the second half of 2005. It now seems likely that second-half growth will be substantially reduced due to the disruptions to production in the Gulf region and the negative impact of the run-up in energy prices on consumer spending. Of course, over this time frame September 20, 2005 52 of 117 While the proposed policy statement associated with alternative B acknowledges increased uncertainty about economic performance in the near term, I believe that the uncertainties associated with the medium-term outlook have also risen substantially, and risks now exist that in my view pose a clear and persistent threat. On the upside, rebuilding commitments are escalating by the day. The recovery and bounceback fueled by massive fiscal stimulus could more than make up for the slowdown this winter, propelling the economy on an unsustainable upward trajectory similar to the optimistic scenario laid out in the Greenbook. But downside risks to growth also loom. Rebuilding schedules could easily slip. Moreover, the pace of restarting closed oil and natural gas platforms and rigs in the Gulf of Mexico has leveled off, and the prognosis for restarting the remaining closed facilities as well as refineries and natural gas treatment plants remains in question. If disruptions persist or further shocks to supply occur, the economy could develop more along the lines of the pessimistic scenario in the Greenbook. Moreover, we may not yet have seen the full brunt on spending of the pre-Katrina energy price increases. It’s sobering to note that in the postwar period, the U.S. economy has rarely escaped such severe run-ups in oil prices without suffering a significant downturn. Turning to inflation, I was quite concerned at our August meeting by the elevated rate of core PCE inflation, which was skirting the top of my comfort zone. Since that meeting, I’ve become more confident that core inflation remains well contained. Recent data on core price inflation have been encouraging. Core PCE prices have risen at a 1½ percent rate over the six months through July, right in the middle of my preferred range, and core CPI inflation has also September 20, 2005 53 of 117 index and from the household survey, a series that our research staff has recently started compiling and tracking. These remain remarkably subdued. The elevated rate of growth in compensation per hour from the productivity and cost report over the past year far exceeds the readings provided by these other series and may be more an outlier than a strong signal of tight labor markets and wage pressures. While my comfort level with respect to core inflation has improved since August, the Board’s staff has raised the Greenbook forecast of core PCE price inflation in 2006 by 0.2 of a percentage point to 2.3 percent due to the run-up in energy prices since the August meeting. I must say that I actually found the low-inflation alternative simulation in the Greenbook more compelling. This scenario assumes that inflation expectations remain well anchored, and it shows core inflation falling over the next two years, reaching 1½ percent in 2007. On that point, the relative stability of longer-term break-even inflation rates derived from the TIPS market this year, even as oil prices surged, provides evidence that the public remains confident in the Committee’s commitment to price stability. Of course, the jump in inflation expectations seen in this month’s preliminary Michigan survey was worrisome, but we must be cautious not to read too much into that report since it was taken so soon after Katrina. To assess the likely pass-through of energy into core consumer inflation, our staff has estimated Phillips curve type forecasting models akin to those employed at the Board. An important finding emerges. Changes in real oil prices did have an economically and statistically significant effect on core inflation, but only up to the early 1980s. Importantly for the current situation, they find no evidence of such a relationship in the data since the early ’80s. The September 20, 2005 54 of 117 inflation expectations. During the 1970s, they became unmoored from price stability but now appear to be well anchored, as in the Greenbook’s low inflation scenario. With respect to policy, I support a 25 basis point rate increase rather than a pause today. A pause at this meeting justified by a need to further assess Katrina’s impact would be sensible if we actually expected to know a lot more about the medium-term outlook by November, but that’s unlikely to be the case. A pause could counterproductively mislead market participants about the likely future path of policy or create the misimpression that the Fed is unduly pessimistic about the outlook. So I consider it wiser to stick with our “measured pace” approach for now. I think it’s well justified by the Greenbook forecast, uncertain as it is, and consistent with market expectations. But going forward, we obviously need to be flexible and adjust our views about where we’re ultimately heading on the basis of new data and forecasts." FOMC20060920meeting--121 119,MS. YELLEN.," Thank you, Mr. Chairman. Since our last meeting, the data bearing on the near-term economic outlook suggest both slower economic growth and a bit less core price inflation going forward. In terms of economic activity, the recent news has been uniformly negative, resulting in a significant downward revision to growth in the Greenbook. Indeed, compared with the outlook of other forecasters, the Greenbook’s projection of real GDP growth for the second half of this year is quite pessimistic; it would now rank in the lower 5 percent tail of the distribution of individual Blue Chip forecasters. I think this pessimism is not completely unfounded, however, largely because of my worries about the housing sector. The speed of the falloff in housing activity and the deceleration in house prices continue to surprise us. In the view of our contacts, the data lag reality, and it seems a good bet that things will get worse before they get better. A major homebuilder who is on one of our boards tells us that home inventory has gone through the roof, so to speak. [Laughter] He literally said that. With the share of unsold homes topping 80 percent in some of the new subdivisions around Phoenix and Las Vegas, he has labeled these the new ghost towns of the West. In fact, he described the situation at a recent board meeting in Boise. He had toured some new subdivisions on the outskirts of Boise and discovered that the houses, most of which are unoccupied, are now being dressed up to look occupied—with curtains, things in the driveway, and so forth—so as not to discourage potential buyers. The general assessment is that this overhang of speculative inventory implies that permits and starts will continue to fall. Inventory ratios will rise, and the market probably will not recover until 2008. So far, builders remain hesitant to cut prices, fearing that doing so will cause a surge in cancellation rates on sold but unfinished homes. However, builders now routinely offer huge incentives, and price cuts appear inevitable. We have been following the Case Schiller house-price index, which is based on house-price data in ten large urban markets, three of which are in California. Beginning in May of this year, futures contracts on this price index also began trading; they suggest that house prices will be falling at an annual rate of about 6 percent by the end of this year. Of course, trading in this new futures market is still somewhat thin, but it is a signal that we need to keep a very close eye on the incoming data and watch whether the housing slowdown is turning into a slump. Turning to inflation, core measures of consumer price inflation remain well above my comfort zone, but the latest readings on consumer prices have been modestly better. Unlike the Greenbook, I think the outlook for inflation has actually improved a bit since our last meeting largely because of the recent drop in commodity and crude oil prices. The relief on energy prices is, of course, very welcome, but we do have to be careful not to overestimate the extent to which past energy price pass-through has been boosting core inflation. For example, airfares might seem like an obvious case in which outsized consumer price increases reflect energy price pass-through. However, our staff recently calculated the share of jet fuel costs to total airline operating expenses and estimated that the jump in those costs likely accounted for less than half the rise in airfares this year. Instead, airfares may reflect strong demand and constrained capacity as indicated by very high airline passenger load factors. Still it seems likely that energy pass-through has played at least some role in the run-up of core inflation this year, so any energy price pressure on core inflation is likely to dissipate over time. Now, as David noted, the Greenbook has completely offset the favorable effects on core inflation from lower energy prices by boosting the growth rate of labor costs. In contrast, I attach a little less weight to the recent data on compensation per hour. My guess is that most of the difference between hourly compensation and the ECI does relate to profit-linked items like bonuses and stock options, and that suggests to me that marginal costs of production are not rising significantly faster. Even if they are, it remains true that markups are high. So with sufficient competitive pressures, firms have room to absorb cost increases without fully passing them into prices. Finally, I want to add my compliments to those of others to the Board’s staff for a very interesting analysis of inflation dynamics and monetary policy. As I mentioned at our last meeting, it may be unduly pessimistic to assume that the recent rise in inflation will be highly persistent. Over the past ten years, estimated reduced-form models suggest that core inflation generally returns to its sample average after several quarters. Recently our staff examined persistence at a more disaggregated level and found that the same general pattern also holds for each of the major components of the core PCE price index, with price inflation for durables only slightly more persistent than price inflation for nondurables and services. In the current situation, this suite of regressive models indicates that core PCE inflation should fall to just below 2 percent by the middle of next year. I am not quite as optimistic as these simple models, but on balance my concerns about the inflation outlook have been slightly alleviated by recent developments." FOMC20060808meeting--43 41,MS. JOHNSON.," If the full trajectory going through the rest of this year that is in the Greenbook takes place, then the United States is going to take the world back just a bit, and it will bring Canada with it probably. At least that is what our forecast says will happen. We see China stepping harder on the mechanisms that it uses to try to slow its economy. In some sense, I would say that the Greenbook picture we’re painting is that global capacity utilization is perhaps at a peak right about now and that we anticipate the slowing in the United States and the efforts in China certainly to outweigh the continued strength, say, in Europe or Japan, which is probably going to happen. Still in all, that may be the mean of our forecast, but there’s a distribution around that, and it’s certainly possible that there are upside risks as well as downside risks in those capacity pressures." FOMC20070628meeting--37 35,MR. LEAHY.," As you know from the Greenbook, recent news on foreign economic activity has been generally upbeat, supporting our view that growth abroad will continue at a solid pace. The top panel of exhibit 10 shows our weighted average of total foreign GDP growth and our outlook. If our forecast is borne out, foreign growth will soften slightly over the forecast period, to about 3½ percent, which is also our current best guess of the rate of foreign potential growth. As you can see from the chart, rates of growth of 3½ percent (the thin horizontal line) or better are not unprecedented, but a stretch of five consecutive years, like that from 2004 to 2008, would be unusual. The chart also shows foreign growth maintaining most of the momentum it developed over the past couple of years even as U.S. growth has taken a more substantial step down. This is also a bit unusual. However, as shown in the middle left panel, foreign domestic demand gained strength throughout the current expansion, leaving foreign economies less dependent on demand from the United States. Foreign investment spending, in particular, has been picking up. As shown to the right, fixed investment spending as a share of GDP has moved up a couple of percentage points since 2003. With foreign activity expanding slightly faster than potential, it is not surprising that we are seeing signs in some foreign economies that labor market slack is dwindling. The unemployment rate in Japan, shown in the bottom left panel, is at a nine-year low; in Canada, the rate is at a thirty-year low; and the euro-area rate is also at a multiyear low. Tight labor market conditions are less apparent in emerging- market economies, although we are hearing stories of labor shortages in certain sectors in China, where growth has been extremely rapid. What is more apparent is that in markets for oil and other primary commodities, shown in the bottom right panel, demand has outstripped available supply, driving prices higher. Supply capacity is expanding, however, and we are projecting, consistent with futures markets, that commodity prices will flatten out by the end of the forecast period. Before they do, our forecast calls for oil prices to rise a bit further over the remainder of 2007 and 2008. Food commodity prices are projected to move slightly higher on average as well, in part as energy-related demand for grains remains strong. If this forecast is realized, oil and energy prices should impart in coming quarters noticeable but only moderate upward pressure on headline consumer price inflation abroad. In part this is because the projected increase in oil prices is relatively modest, at least compared with what we’ve seen in recent years. In addition, the direct effect of oil prices on consumer prices in many cases is damped by tax structures or more-active government intervention in energy markets. The top panels of exhibit 11, which examine the pass-through of crude oil prices to gasoline prices, provide some evidence of how such pass-through varies across countries. These panels present local-currency prices of unleaded gasoline and imported crude oil over the past couple of years or so, plotted on a ratio scale so that vertical distances correspond to percent changes in prices. Looking across the panels, you can see that the price of imported crude oil in local currency—the black line at the bottom of each panel—moves similarly across countries. In contrast, the prices that consumers pay at the pump—the red lines—are less volatile in the foreign economies shown than in the United States and have moved up more slowly. In part, this reflects some differing movements in refinery and distribution margins, which are represented by the gap between imported crude oil prices and retail gasoline prices excluding taxes (the blue lines). This is most noticeable for Japan, where margins are proportionally higher and more of the increase in crude oil prices was absorbed than in the United States and the other countries. In addition, higher gasoline taxes abroad have inserted a greater wedge between the pre-tax price and the retail price of gasoline—the difference between the blue and the red lines. Accordingly, increased crude oil prices have pushed up retail gasoline prices proportionally less abroad than in the United States. The middle left panel presents some calculations of the rates at which the changes in crude oil prices were passed through to the retail gasoline prices between September 2004 and March of this year, the most recent observation I have for these countries. During this period, rates of pass-through were lower abroad, particularly for Japan and Germany, the countries with relatively high taxes. The smaller pass- through of oil prices to retail gasoline prices abroad has also shown through to broader measures of consumer energy prices. As shown to the right, consumer energy prices in Canada, Germany, and Japan have increased less than those in the United States over the past four years. An extra factor holding down energy price inflation in Canada over this period was the substantial appreciation of the Canadian dollar, which made imported energy relatively cheaper. Overall, this suggests that the effects of past increases in global energy prices on headline inflation, as well as on consumer sentiment and inflation expectations, were likely smaller abroad than in the United States. In many emerging market economies, gasoline and other retail energy prices are controlled or subsidized, so that energy-related fluctuations in consumer prices, if they occur at all, tend to be gradual. For this group of economies, what has left a bigger imprint on headline consumer price inflation in recent months is the global rise in food prices. The black line in the bottom left panel shows that food price inflation in Mexico has been heavily influenced in recent years by enormous, weather-induced swings in domestic tomato price inflation, shown in red (of course). [Laughter] This year, however, food price inflation has not followed tomato price inflation down. Rather, it has been sustained in part by a sharp acceleration in prices of tortillas and other corn products, shown by the green line, which are responding to the fuel-related surge in the global price of corn. Food price inflation in China, shown to the right in black, has also been boosted by higher grain prices, as higher feed costs, along with an outbreak of swine flu, have driven up meat and poultry prices. Prices for corn and other grains are forecast to level out by the end of 2008, after they have increased enough to align supply and demand growth. A risk, of course, is that further rapid expansion of demand might continue to outstrip that of supply, making food price inflation more persistent and more likely to spur inflation in other sectors. The Bank of Mexico cited such a risk following its policy tightening in April, and China’s authorities have raised concerns that food prices may exert upward pressure on wages. Evidence for emerging market economies that inflation pressures might already be spreading outside the food and energy sectors is limited so far, however. The top left panel of exhibit 12 shows core inflation rates in four of our largest emerging market trading partners. China’s core rate (in blue), which excludes only food, shows no sign of wider inflation pressures. In Brazil, inflation has declined substantially over the past few years, despite a slight uptick recently. Core inflation in Korea has been trending upward, but it is still low. Mexico’s core inflation rate has edged up toward 4 percent, a rate that concerns Mexican authorities, but this upward trend may merely reflect the fact that core inflation in Mexico does not exclude processed food such as corn tortillas. The advanced foreign economies appear to be exhibiting more broadly based inflation pressures. As shown on the right, in Canada, the euro area, and the United Kingdom, core inflation has been on a rising trend since the middle of 2006 or earlier. In response, the central banks in all three economies, as well as the Bank of Japan, are expected to tighten policy in the near term. Core inflation is still in generally acceptable ranges, however, except perhaps for the Bank of Japan, for which it might be too low, and market sentiment does not indicate concern that inflation pressures are going to rise substantially. As you can see from the middle left panel, ten-year government bond yields in the major markets have all risen since the beginning of the year. Except for Japan, most of the increases in nominal yields (the first column) can be attributed to higher real yields, shown in the second, which is consistent with stronger prospects for growth. The table to the right shows that survey measures of inflation expectations for the year 2007 rose moderately for Canada between December and June and a bit less for the United Kingdom, whereas the measures fell off some for the euro area and Japan. Longer-run inflation expectations as of the most recent survey date in April were still locked in at rates consistent with inflation targets in Canada, the euro area, and the United Kingdom. Our outlook for headline inflation abroad, shown in the bottom panels, reflects a diminishing inflationary impulse from oil and other primary commodity prices as they flatten out over the forecast period. It also incorporates the view that some further monetary policy tightening will be needed to restrain domestic demand and guide inflation in each economy toward its price stability objective by the end of the forecast period. Your last two international exhibits focus on the extent to which external adjustment is under way. A little more than a year ago, in May, was the last time we forecast that the U.S. current account deficit in 2007 would exceed $1 trillion. Since then, as shown in the top left panel of exhibit 13, our outlook for the current account has improved substantially, so much so that currently we don’t see the deficit reaching $1 trillion within our forecast period. As shown to the right, much of the improvement has come through an improved outlook for the trade balance. What surprised us? Two likely suspects fail to provide the answer. Given the recent strength of foreign growth, one might have thought that a year ago we were perhaps too pessimistic on foreign activity and consequently undershot on U.S. export performance. However, as shown in the middle left panel, our outlook today for foreign economic activity is very similar to what we had in mind a year ago. Similarly, the decline over the past year in the broad real dollar, shown to the right, which has helped curb the deterioration in the trade balance, has turned out to be not much different from our forecast a year ago. Part of the answer, it turns out, is that, even though the assumptions we fed our model for exports have not proved much off the mark, our model forecast for core exports, shown at the bottom left, failed to catch the unusually strong growth of exports in 2006. We attribute this miss to the composition of foreign demand rather than its overall magnitude. As shown in the table to the right, the largest contributors to growth of U.S. core exports in 2006 were in the categories of capital goods (line 2) and industrial supplies (line 3). With capital goods making up a large fraction of core exports, the rise in foreign investment as a share of GDP (mentioned earlier) likely provided a boost to core exports above that indicated by our aggregate measure of foreign GDP. Similarly, the global commodity boom likely favored U.S. exports of industrial supplies. Additional factors behind the improved outlook for the U.S. current account are described in exhibit 14. One is the lower path of U.S. real GDP, shown in the top left panel, which prompted real imports of core goods, shown to the right, to expand along a shallower trajectory than we had predicted last year. A third factor, illustrated in the middle left panel, is that we did not forecast the dip in the price of oil in the second half of 2006, which reduced the value of oil imports substantially. These three factors explain the bulk of the upward adjustment in our forecast for the trade balance in 2007. In addition, the improved outlook for the current account reflects an upward revision to net investment income, shown in the middle right. This adjustment results from a number of factors, including new data on U.S. holdings of direct investment abroad, new procedures for determining interest payments to foreign holders of U.S. Treasuries, and a change in the methodology used to record interest flows on cross-border holdings of other fixed-income securities. As a result of these surprises, the external accounts have clearly improved. Going forward, we expect the current account deficit to resume widening nonetheless as interest payments on the net external debt mount. But the combination of solid, demand- driven foreign growth and weaker U.S. growth has led the external accounts to make a more positive contribution to U.S. GDP growth in the near term, as shown in the table. In our current forecast, shown in the rightmost column, we project that the arithmetic contribution of real net exports to GDP growth should be roughly neutral starting in the second half of this year, as strong foreign growth helps sustain real export gains that match those of real imports." FOMC20080130meeting--84 82,MR. REIFSCHNEIDER.," The only thing I would add to Brian's statement is that I think uncertainty about inflation in the long run could be moving up noticeably without really bringing into play disinflation or something like that. In other words, you could be more worried about going down to 1� or 1� than you were before--I don't know--it could be more just as it was in the forecast. " CHRG-110shrg50410--117 Secretary Paulson," That would not be my proposal. But for the Fed it would be. And so again, as you have stated, it would not be co-regulator. Not at all. It would be, we would have a strong independent regulator. And then the Fed would have a consultative role, as we are suggesting more broadly across the whole economy but for the reasons that I have stated before. But again, I am not suggesting that role for Treasury. Senator Shelby. Well, I think the Fed will obviously play--since they are the central bank here--they will play a role in any kind of a rescue package or whatever you want to call it. On the other hand, we have not reached the point of legislation to fulfill some of your recommendations on what role the Fed will play in the future in our financial regulator, what role the SEC will play, or what role Treasury will play, and so forth. So I think these three things, Senator Dodd and I would recommend, Senator Dodd as just a member of the Committee, that we try to work with you on this. And that we also try to protect the taxpayer and see where we are going, Mr. Chairman. " FinancialCrisisReport--396 Abacus 2007-AC1 was the first and only Abacus transaction in which Goldman allowed a third party client to essentially “rent” its CDO structure and play a direct, principal role in the selection of the assets. Goldman did not itself intend to invest in the CDO. 1603 Instead, it functioned primarily as an agent, earning fees for its roles in structuring, underwriting, and administering the CDO. Those roles included Goldman’s acting as the placement agent, collateral securities selection agent, and collateral put provider. Unlike previous Abacus CDOs, Goldman employed a third party to serve as the portfolio selection agent, essentially using that agent to promote sales and mask the role of its client in the asset selection process. Goldman originated Abacus 2007-AC1 in response to a request by Paulson & Co. Inc. (Paulson), a hedge fund that was among Goldman’s largest customers for subprime mortgage related assets. Paulson had a very negative view of the mortgage market, which was publicly known, and wanted Goldman’s assistance in structuring a transaction that would allow it to take a short position on a portfolio of subprime mortgage assets that it believed were likely to perform poorly or fail. Goldman allowed Paulson to use the Abacus CDO for that purpose. In entering into that arrangement with Paulson and simultaneously acting as the placement agent responsible for marketing the Abacus securities to long investors, Goldman created a conflict of interest between itself and the investors it would be soliciting to buy the Abacus securities. Paulson established a set of criteria to select the reference assets for the Abacus CDO to achieve its investment objective. 1604 After establishing those parameters, Paulson worked with the actual portfolio section agent to select the assets. Documents show that Paulson proposed, substituted, rejected, and approved assets for the reference portfolio. Goldman was aware of Paulson’s investment objective, the role it played in the selection of the reference assets, and the fact that the selection process yielded a set of poor quality assets. Of the final set of 90 assets referenced in the Abacus CDO portfolio, 49 had been initially proposed by Paulson. Yet Goldman did not publicly disclose the central role played by Paulson in the asset selection process or the fact that the economic interest held by an entity actively involved in the asset selection process was adverse to the interest of investors who would be taking the long position. ACA Management LLC, the company hired by Goldman to serve as the portfolio selection agent, told the Subcommittee that, while it knew Paulson was involved, it was unaware of Paulson’s true economic interest in the CDO. The ACA Managing Director who worked on the Abacus transaction stated that ACA believed that Paulson was going to invest in the equity tranche of the CDO, thus aligning its interests with those of ACA and other investors. 1605 ACA and its 1603 As collateral put provider, which it performed for a fee, Goldman did carry risk in the Abacus 2007-AC1 transaction. In addition, shortly before the Abacus 2007-AC1 transaction closed, Goldman agreed to take the long side of a CDS contract on the performance of a small portion of the underlying assets when Paulson wanted to increase its short position at the last minute. Goldman tried to find an investor to assume its small long position, but was unable to do so. 1604 1605 April 27, 2010 Subcommittee Hearing at 82. Subcommittee interview of Laura Schwartz (ACA) (4/23/2010). See also In the Matter of Abacus 2007-AC1 CDO , File No. HO-10911 (SEC), Statement of Laura Schwartz (January 21, 2010), ACA ABACUS 00004406 at 408. (hereinafter “Statement of Laura Schwartz ”). parent company both acquired long positions in the Abacus CDO as did a third investor. The Abacus securities lost value soon after purchase. The three long investors together lost more than $1 billion, while Paulson, the sole short investor, recorded a corresponding profit of about $1 billion. Today, the Abacus securities are worthless. FOMC20071031meeting--11 9,MR. SHEETS.," Although the foreign economies appear to have grown at a moderate pace during the third quarter as a whole, indicators for September and October suggest that the recent financial turmoil may yet leave an imprint on activity in some countries. Perhaps the most striking evidence on this score has been the ECB’s survey of euro-area bank lending. In the third quarter, this survey showed the sharpest shift toward tightening in its five-year history, along with evidence of more- stringent credit standards for business and housing loans. In addition, we have seen downward moves in surveys and measures of sentiment in the euro area, particularly in Germany, although these indicators have generally remained in expansionary territory. In the United Kingdom, the growth of mortgage lending continued on a downward path in September, and a recent Bank of England survey suggests a tightening of corporate credit conditions. All in all, we see this (admittedly fragmentary) evidence as broadly consistent with our assumption in the September Greenbook that fallout from the financial turmoil is likely to exert some drag on growth over the next several quarters in the euro area, the United Kingdom, and Canada. This assessment, however, is marked by significant upside and downside risks—as it is still too soon to gauge these effects with much confidence. As in our previous forecast, we do not see the turmoil weighing directly on activity in Japan or the emerging-market economies. More generally, the contours of our forecast remain similar to those in September. Recent data have confirmed our expectation that average economic growth abroad declined to about 3½ percent in the third quarter, cooling from the very rapid rate in the first half of the year. We see growth edging down further in the current quarter, to just over 3 percent, and remaining at about that pace in 2008 and 2009. After the Greenbook went to bed, we received Chinese GDP data, which according to our seasonally adjusted quarterly estimate grew at an annual rate of just over 8 percent in the third quarter—a little slower than we had expected and down from the 14 percent rate in the first half of the year. This deceleration appears to have been led by a slowing in investment and a smaller contribution from the external sector. Going forward, economic growth in China should remain below its previous double-digit pace, as the Chinese authorities take further action to cool the country’s booming real estate market and the rapid growth of bank lending. In addition to uncertainty about the eventual effects of the financial turmoil on real activity, other risks to our generally favorable foreign outlook are worth noting. First on this list is the possibility of a softer-than-expected performance from the U.S. economy. Although there is talk in some quarters about so-called decoupling—that is, that the foreign economies may now be less linked to developments in the United States than has been the case in the past—the jury is still out on this point. Although domestic demand does appear to have firmed in some foreign countries in recent years, a marked slowing in U.S. growth would affect the rest of the world through trade channels (particularly Canada, Mexico, and emerging Asia) and, as highlighted by the recent turmoil, probably through financial channels as well. As a second risk, house-price valuations in many advanced economies appear elevated. Given that, a correction in housing markets abroad—with potentially sizable accompanying wealth effects—strikes us as an important downside risk for some countries. Third, although we see average foreign inflation remaining well behaved, at near 2½ percent over the next two years, inflation risks cannot be dismissed. After several years of exceptionally strong economic growth, the foreign economies on average are now operating near potential, and resource constraints may be more binding than we currently envision. In addition, food prices have moved up in many countries, and the prices of oil and other commodities are at high levels. Indeed, recent developments in oil markets seem to pose intensified risks. The spot price of WTI is trading today at nearly $92 a barrel, up $5 since the Greenbook went to bed. Since your last meeting, the spot WTI price has climbed $13 per barrel, while the far-futures price has increased about $10 per barrel. It suffices to say that underlying supply-demand conditions in the oil market are exceptionally tight. Over the past several years, as the global economy has expanded briskly, oil production has increased only sluggishly—reflecting both OPEC supply restraint and diminishing production from OECD countries. Against this backdrop, the price of oil has been driven up further in recent weeks by reports of decreasing inventories (at a time of year when such stocks are typically on the rise) and by intensified concerns about the stability of Middle East oil production, triggered by tensions between Turkey and Iraq and by concerns about U.S. relations with Iran. We see OPEC’s plans to expand production 500,000 barrels per day beginning on November 1, even if fully implemented, as unlikely to go very far in defusing the tightness in the market. Futures markets call for WTI prices to remain elevated, in the neighborhood of $80 per barrel, through 2015. I conclude with some upbeat news on U.S. external performance. Exports continue to surprise on the upside, having shown exceptional strength in the July and August trade data, as exports of aircraft, autos, and agricultural products have all expanded briskly. Consequently, as Dave mentioned, real exports of goods and services are now thought to have surged at a pace of 17 percent in the third quarter, up 3½ percentage points from the last forecast. We estimate that real imports in the third quarter grew at a comparatively modest rate. Taken together, these data suggest that net exports made an arithmetic contribution of 1¼ percentage points to U.S. real GDP growth in the third quarter. Going forward, we see export growth moderating to just under 8 percent in the current quarter and proceeding at a solid 6½ percent average rate through the next two years. Relative to our September forecast, the path of export growth is up nearly 2 percentage points in the fourth quarter and by lesser—but still sizable—amounts in 2008 and 2009. This higher projection reflects stimulus from recent declines in the dollar, which have exceeded our previous projections. The broad dollar index has dropped more than 3 percent since your last meeting. But in addition to support from the weaker dollar, we now see greater underlying strength in exports than we had previously thought. Our projected path for imports, in contrast, is little changed from the last Greenbook. Import growth is slated to bounce up in the current quarter, largely because of a seasonal rebound in oil imports. Thereafter, the projected strengthening of U.S. growth and a deceleration in core import prices should provide increasing support to imports. All told, we see the external sector making a neutral contribution to U.S. real GDP growth in the fourth quarter, contributing 0.4 percentage point to economic growth next year, and returning to neutrality in 2009 as imports accelerate. Thus, to the extent that our forecast materializes, large negative contributions from net exports might very well be a thing of the past. Brian will now continue our presentation." FOMC20071031meeting--277 275,VICE CHAIRMAN GEITHNER.," Tom, if you took a view about what appropriate policy was last Friday and you have a chance now to assess, in light of what the Committee did, what appropriate policy is going forward, whether that has changed, and what implications that change has for your forecast—isn’t that the way to say it?" FOMC20080625meeting--51 49,MR. WASCHER.," Well, we don't account for that in our compensation model. That said, as I mentioned, the models have been surprised about how low compensation has been. That would be one possible explanation for that residual. If that factor were to diminish, it would imply that that residual would diminish, but we haven't built such an effect into our forecast. " FOMC20071211meeting--39 37,MR. STOCKTON.," Thank you, Mr. Chairman. We had a great deal to contend with over the intermeeting period, and the forecast has changed in some important ways. Nevertheless, the basic story underlying our projection remains largely unchanged. The fallout from the slump in the housing sector, the ongoing turbulence in financial markets, and elevated energy prices result in subpar growth over the next several quarters. With some further easing of monetary policy, a leveling-off of oil prices, and a gradual improvement of financial conditions, growth picks back up toward potential in 2009. The gap in resource utilization that opens up over the next several quarters, in combination with the anticipated flattening-out of energy prices, puts total and core inflation on a mild downtrend over the longer haul. Overall, our forecast could admittedly be read as still painting a pretty benign picture: Despite all the financial turmoil, the economy avoids recession and, even with steeply higher prices for food and energy and a lower exchange value of the dollar, we achieve some modest edging-off of inflation. So I tried not to take it personally when I received a notice the other day that the Board had approved more- frequent drug-testing for certain members of the senior staff, myself included. [Laughter] I can assure you, however, that the staff is not going to fall back on the increasingly popular celebrity excuse that we were under the influence of mind- altering chemicals and thus should not be held responsible for this forecast. No, we came up with this projection unimpaired and on nothing stronger than many late nights of diet Pepsi and vending-machine Twinkies. While our basic story hasn’t changed much, the events of the past six weeks have resulted in a considerable darkening of our outlook for activity over the next year. In particular, the incoming data have been weaker than expected, the projected path of household net worth has been revised down owing to lower prices for both equities and houses, oil prices average about $7 per barrel higher than in our previous forecast, and the brief improvement in financial conditions that we experienced in September and October has been reversed in recent weeks. As a consequence, we now project that real GDP will be about flat in the current quarter after having increased at an annual rate of 5 percent in the third quarter. Although the sharp swing in activity from the third to the fourth quarters is exaggerated by some wide fluctuations in inventory investment, we are reading the incoming data as suggesting that there has been a greater downshift in the underlying pace of growth than we had previously anticipated. Furthermore, we expect activity to remain sluggish next year, growing 1¼ percent, nearly ½ percentage point less than in our October projection. In 2009, real GDP is projected to grow at a 2.1 percent pace, a touch below our previous forecast. Most of the disappointing news that we have received over the past six weeks has centered on the household sector, most especially on residential construction. Single- family housing starts came in a bit below expectations, and permits plunged, suggesting some further intensification of the decline in construction activity in the months immediately ahead. Moreover, substantial downward revisions to estimates of new home sales for earlier months indicate that housing demand has been weaker than we previously thought. Meanwhile, conditions in mortgage markets have deteriorated further and appear likely to remain impaired longer than we had projected in October. Nonprime markets remain moribund, spreads on jumbo mortgages have widened further, and spreads on conforming mortgages to Treasuries have increased. These developments along with the weaker incoming data on sales and starts led us to mark down our housing forecast once again. We now expect that sales and starts will post a further drop of nearly 10 percent by early next year. Moreover, we have delayed our projected recovery in starts until 2009. As a consequence, the contraction in residential investment is now expected to subtract over ½ percentage point from the growth of real GDP next year, about ¼ percentage point more than in our October projection. In addition to these softer readings on housing activity, the incoming data on consumer spending also have surprised us to the downside. Real outlays are now estimated to have been nearly flat between August and October, rather than increasing modestly as had earlier appeared to be the case. That subdued pace seems consistent with the slump in consumer sentiment that has followed in the wake of the increased financial turbulence. We now project that real PCE increased at a 1¼ percent pace in the current quarter, 1 percentage point less than in the October Greenbook. I don’t want to overstate the strength of our case that a noticeable slowing in consumer spending is under way. Light motor vehicle sales ran at a 16.2 million unit pace in November, an observation that creates a bit of tension with the survey reports of bummed-out consumers. Moreover, it wouldn’t take much more than a few modest upward revisions to earlier months or a pop in spending in December to undermine this part of our story. That said, the picture doesn’t seem likely to us to brighten much soon. The recent jump in oil prices, coupled with a restoration of currently narrow gasoline margins, points to steep increases in retail energy prices that will take a bite out of the purchasing power of household incomes and further restrain overall consumer spending in coming months. Furthermore, with the lower level of the stock market and a downward revision to our house-price forecast, household net worth is expected to exert more of a drag on consumer spending over the next two years than in our previous forecast. While we don’t expect a dramatic shift, we are anticipating that households will face tighter standards and more-expensive terms for consumer credit. All told, we are projecting real PCE to increase 1½ percent in 2008, about ¼ percentage point less than in our October projection. In contrast to the almost uniformly weaker-than-expected data on the household sector, the information that we have received on business spending has been more mixed. Investment in high-tech equipment has been well below our expectations, especially for communications equipment. That observation squares with some reports we have heard that orders for high-tech gear from financial institutions have fallen off. Other equipment spending has come in close to our expectations, with the recent data on orders and shipments consistent with our projection for some modest slowing in capital spending. The data also have been mixed for nonresidential structures. As I noted at the last meeting, the GDP data for the third quarter pointed to stronger drilling activity than we had earlier anticipated, and we have revised up our projection for this category in response to both the incoming data and the higher projected path for energy prices. For nonresidential buildings, the October data for construction put in place were a bit below our expectations, and we have lowered our near-term projection of activity in this sector. Beyond the near term, we have reduced our forecast for both equipment spending and nonresidential investment. Most of that revision reflects an expected endogenous response of investment to the slower growth of final sales and business output in this projection. But we also have made some small allowance for what we expect to be less favorable financing conditions and greater uncertainty over the next year. Taken as a whole, the spending data have clearly fallen short of our expectations. It might appear that, like the spending data, last week’s labor market report was also a downside surprise for us; after all, we noted in the Greenbook that we had penciled in an increase of 100,000 for private payrolls in November. However, we did that only grudgingly after seeing the ADP survey last Wednesday morning, and basically we did not allow that change to alter any other important aspect of our forecast. In fact, the payroll employment figures are slightly stronger than we expected at the time of the October Greenbook. Indeed, I still see the generally firm conditions in labor markets as suggesting some upside risk to our view that the economy is in the process of slowing sharply. Let me now turn to the inflation forecast. Total PCE prices are projected to increase at an annual rate of 3½ percent in the current quarter, about ¾ percentage point above our previous forecast. Most of that revision reflects higher retail energy prices. But we have also raised our projection of core PCE prices for the third and fourth quarters by ¼ percentage point. That adjustment resulted from the upward revisions made by the BEA to nonmarket prices in earlier months. As you know, we had been consistently surprised by the mild increases in nonmarket prices that had been reported since the spring. As a concession to those persistent errors, a couple of forecast rounds ago, we pushed off the reacceleration of those prices into 2008. Well, we should have stuck with our earlier story because the revised data now show that those prices picked back up in late summer and early fall. Our slight upward revision to core PCE prices in 2008, from 1.9 to 2.0 percent, reflects the indirect effects of the higher oil prices in this projection. We continue to believe that the pass-through of energy prices is small, but not zero. The other major influences on our price projection have remained relatively tame. Although the exchange value of the dollar has fallen a bit, global prices for non-oil commodities have revised down as well, leaving the forecast for core non-oil import prices roughly unchanged. Increases in labor compensation remain subdued. And taken as a whole, readings on inflation expectations have not changed much. The Michigan survey measures of inflation expectations are up some, the Survey of Professional Forecasters was flat, and inflation compensation as inferred from TIPS has edged down slightly. With some slack emerging in labor and product markets in the second half of next year and with energy and import prices projected to decelerate, we are forecasting a slight drop in core price inflation from its projected pace of 2 percent this year and next to 1.9 percent in 2009. In contemplating our forecast, you might be concerned that our relatively benign muddle-through scenario is increasingly looking like the average of two considerably less benign outcomes—one in which the economy proves considerably more resilient, growth bounces back more quickly, and inflation picks up by more than we are projecting and another in which we drop below stall speed and the economy experiences outright recession. While I would readily acknowledge those risks, I still see something like our forecast as the more plausible outcome at this point. At the September meeting, I quoted from the Greenbook of March 1999, in which we had raised the white flag of surrender on our story that the financial turbulence of the autumn of 1998 would significantly restrain the growth of the economy. We could be making that mistake again, but it seems less likely to me now. In particular, one important feature of the episode of the late 1990s was that we were almost immediately fighting the incoming data, much of which came in well above our expectations over the final months of 1998 and early 1999. By contrast, as I have noted today, the recent data seem to be lining up comfortably with our projection of slower growth ahead. I also noted in September the possibility that we could be facing a situation similar to the fall of 2000, when we were forecasting a period of muddling through but were, in fact, on the brink of a mild recession. Again, this possibility certainly can’t be ruled out. But here, as well, there are some noteworthy differences from that earlier episode. In particular, through the fall of 2000, we were receiving increasingly grim stories, especially from manufacturers, about the dismal state of order books and a sharp shift in business psychology. At the time, we didn’t have the conviction to embrace those anecdotes given the strength of the official data. I’ll be interested to hear your reports today, but my sense is that the anecdotes from businesses, while mixed, are not sharply at variance with the data at present. Both seem to be pointing to slower growth but not to a serious retrenchment in activity. For these reasons, we are inclined to stick with our muddle-through story for now. Nathan will continue our presentation." CHRG-111shrg54533--96 RESPONSES TO WRITTEN QUESTIONS OF SENATOR KYL FROM TIMOTHY GEITHNERQ.1. Anecdotal reports suggest that the regional offices of Federal bank regulators are not applying regulatory standards uniformly across the Nation, may not be adequately coordinating with their State counterparts, and are in some cases advising banks not to make loans that would otherwise be profitable. Are you aware of this problem? If so, what can be done to facilitate coordination among the regional offices of our Federal regulators to ensure standards are applied uniformly? What role would State bank regulators play under the Administration's reform proposal? How can States be better integrated into a seamless regulatory scheme in order to leverage local regulators' unique knowledge about their own marketplace?A.1. Federal bank regulators seek to apply regulatory standards uniformly across their organizations. However, this does present challenges in that some degree of examiner discretion, based on local knowledge and other factors, also plays an important role. Moreover, regional economic differences may necessitate some flexibility in the application of requirements. The Administration's regulatory reform proposal preserves the role of State chartered banks and State supervision. Today, Federal and State banking regulators coordinate their examination programs and share information. In 2006, the State Liaison Committee (SLC) was added to the Federal Financial Institutions Examination Council (FFIEC) as a voting member. The SLC includes representatives from the Conference of State Bank Supervisors, the American Council of State Savings Supervisors, and the National Association of State Credit Union Supervisors. The FFIEC is a formal interagency body designed to prescribe uniform principles, standards, and report forms for the Federal examination of financial institutions by the banking regulators and to make recommendations to promote uniformity in the supervision of financial institutions. Having State regulators represented on the FFIEC should help to leverage local knowledge." FOMC20070628meeting--128 126,MR. PLOSSER.," Thank you, Mr. Chairman. Since our last meeting, the news in the Third District economy has been mixed but, on balance, slightly more positive than the previous report. The District continues to grow at a moderate pace, and we expect that pace to continue. The bright spot since our last meeting is a rebound in regional manufacturing activity, which had been flat for the past six months. In June, the Philadelphia Business Outlook Survey index of current activity rose sharply—18 percentage points—from a level of 4.2. This is the highest level it has obtained since April 2005. The index of new orders also showed a sizable jump, and capital spending plans firmed in the survey. Respondents also expected further improvement in manufacturing activity over the coming months. Job growth in the region, however, was somewhat slower over the past two months compared with earlier in the year, but we really didn’t expect much since payrolls seemed to rise much more rapidly than expected during the first quarter. Year-to-date payroll growth is running about 0.6 percent at an annual rate. That rate is slower than the national average but is fairly typical of our region, where population growth is rather flat. Labor force participation is rather flat as well. Unemployment rates, however, remain low in our three states, and firms still report having difficulty finding both skilled and unskilled workers. It is no surprise, as everyone has said, that residential construction in our region continues to decline and remains weak. The value of contracts for residential buildings has fallen more than 30 percent in the region during the first five months of this year compared with last year at this time—but that, we have to remember, was near the peak. Real estate agents and homebuilders generally report slowing of sales in May. While the number of existing homes for sale on the market has increased, average selling prices have not changed much. I would characterize the nonresidential real estate market in the region as fairly firm, although construction is not as strong as last year. Office vacancy rates continue to fall, and in Center City Philadelphia, they dropped to 10 percent. They were about 17 percent just around eighteen months ago. Real estate firms report that overall demand for industrial space continues to be robust and that vacancy rates for this type of space are near record lows in some markets. Rental rates continue to rise, particularly for warehouse space, and rents are at a record high in those areas. I take these reports as indications of continued expansion in economic activity going forward. Interestingly enough regarding building, I had two observations from CEOs. One is CEO of a building supply company that manufactures throughout the United States and has sales of almost $10 billion. He said that, remarkably, even with what is going on with homebuilding, his sales are holding up very, very strongly and they are doing very, very well this year. Another CEO, whose company produces products mostly for residential cabinetry and other types of things, one of the largest in the country, says that, while new home sales for his work are way down, they have largely been offset by remodeling activity—people have substituted remodeling for buying a new home. As long as I’m reporting anecdotes here, I will pass on one other anecdote, for what it is worth, about trucking. I listened to President Fisher and President Poole talk about volumes in trucking. Just as an observation, an executive who runs a trucking company throughout the country told me that one thing that has happened in trucking is that, rather than shipping boom boxes, they are shipping iPods. [Laughter] That is true of a lot of consumer goods. Instead of shipping large CRT screens, they now ship flat panel displays. So even while the volume of goods is being reduced, gasoline prices are high, and they are laying off truckers and downsizing the volume, the value of what they are shipping has been maintained pretty well. So he was noting a dynamic of value versus volume here, which I thought was very interesting. On the inflation front in the District, prices for industrial goods continue to increase, but retail price increases have not been widespread. However, many of our business contacts continue to express concern over rising energy costs and food prices and the effect on their businesses and the consumers. I interpret this to mean that they continue to be puzzled by our focus on core inflation when they see that overall inflation is what affects the consumer and their businesses, and they seem to doubt core inflation’s value as a policy objective or a measure of underlying inflation. They may be wrong in that, but it tells me that, if they continue to be confused by how we view core inflation and what we use it for, we might need to improve our communication to the public about how we think about it and why we focus on it. On the national level, I have become more comfortable with the economic situation as the year has progressed. At our meeting in May, we were beginning to see some positive signs regarding both real economic activity and inflation. Durable good orders were up, allaying some concerns about the first quarter’s weakness in business investment. Improved ISM numbers were signaling that the slowdown in manufacturing might be ending; and although housing markets remained weak, there were limited signs of any significant spillovers to other sectors. Labor markets remained firm. At that time there were signs that core inflation might be moderating. As a consequence, I expressed hope that in the coming months those data would be reinforced. Fortunately, from my perspective, those hopes have been largely realized. Coming into this meeting, we have received more positive news on the economy, and I have become somewhat more confident that the economy is on track to return to near-trend growth later this year as the effect of the housing correction moderates, albeit very slowly. Indeed, data received to date suggest that we will see a substantial rebound in real GDP growth this quarter, as the Greenbook has noted. After several months of stagnation, manufacturing activity seems to have picked up, and business fixed investment is moderately strengthened. Labor markets remain firm, and yet in recent quarters we have noted a seeming disconnect between strong labor markets and weaker GDP growth. However, we now may be getting some hints that this puzzle is more apparent than real, and I want to reinforce the point that President Yellen made earlier in that I think two factors suggest this. First, from December to May the household survey showed almost no employment growth whatsoever, whereas the establishment survey showed 1.2 percent annual growth during that period. Second— and again as President Yellen noted—the Business Employment Dynamics report came out. It was only for the third quarter of last year, but it showed about 155,000 fewer jobs created in the third quarter than we thought. What is important about that report is that it arguably does a better job of tracking the birth and death of firms in the data, and so there is some reason to believe that, while this is suggestive, the payroll employment that we have been seeing may not be as strong as perhaps we thought, and that may make some of this puzzle less of a concern. Moreover, as President Yellen pointed out, it is also relevant for the longer term because, if employment wasn’t as strong as we thought, productivity is going to end up being higher than we thought, and it will help resolve some of that slowdown in productivity. So I think there are various hints that that may be the direction that we are headed. In my own forecast, I see slightly more underlying strength and so a somewhat faster return to trend growth than the Greenbook does. The current stance of monetary policy is maintained. I see strength in personal income, a strong balance sheet (as we saw earlier today), strong equity markets, and a resiliency already shown by consumers despite the lower home equity values and higher gasoline prices, suggesting that there is probably slightly more momentum in consumer spending than suggested in the Greenbook. I am modestly more optimistic about the labor market than the Greenbook—modestly, as I anticipate less of a downturn in labor force participation rates than is built into that forecast. The rise in long-term interest rates reflects the market’s upgrading of its assessment of the economy’s strength going forward. Indeed, as has been noted a couple of times, that uptick in long-term interest rates has been, I won’t say a worldwide phenomenon, but certainly widely spread in many countries around the world, which may be saying that global growth is more stable, predictable, and positive than perhaps we thought. Now, this is not to say that I do not see risks around this growth forecast. Of course, as everyone else does, I see housing as the biggest downside risk that we face. There is still considerable uncertainty out there, and I do not want to underestimate the risk. Housing inventories remain high, and I do not see any strong evidence of pickup in demand. Despite the problems in subprime lending markets, however, I think the financial sector remains healthy—healthier now than it was perhaps in the early ’90s with the previous housing boom. I am more comfortable with the notion that there will be no spillovers into other parts of the economy, and thus I have become more comfortable with forecasts of return-to- trend growth in the second half of this year and into ’08. On the inflation front, higher energy prices have led to an acceleration of headline inflation, but there has been some improvement in core inflation measures in recent months. The three-month growth rates in the core CPI and the core PCE have been decelerating since February. Although these developments in inflation are encouraging, I remain cautious about extrapolating too much from recent data. During this cycle we have seen periods of deceleration reversed a couple of months later. Indeed, the Greenbook expects that much of the favorable readings on core PCE inflation will prove transitory. So I remain concerned that our core inflation rates may not continue their recent drift down. I would also caution that headline inflation, as I noted earlier, has remained stubbornly high. Thus, in approaching my forecast, I have assumed that the appropriate policy path was one that would return the economy to steady-state growth and to my inflation target by the end of the forecast period. Given my outlook on the underlying strength of the economy and an inflation goal of 1.5 percent for the PCE, it should not be surprising that my forecast incorporates a slightly tighter policy path than the Greenbook does. In particular, in my forecast the federal funds rate rises 50 basis points, to 5.75 percent, by early ’08. As progress is made on bringing down inflation starting in the second half of ’08, the fed funds rate moves down, ending at about 5 percent by the end of 2009. This policy path reflects my view that, unless we take further action by additional firming or an announcement or both that commits us to an inflation goal that is lower than the market currently expects, which seems to be about 2.5 percent, I believe it will be difficult to sustain an inflation rate that is in keeping with my view of price stability. I believe this can be accomplished with relatively little effect on real growth in 2008. My assumption in the model with which I’m working is that, once we begin to raise rates, the markets will quickly recognize our commitment to lower inflation and expectations will move down accordingly, mitigating the real output effects of this modest tightening. The movement down in expectations could be expedited by the Committee’s explicitly announcing the target. This view of expectations formation is more heavily weighted to forward-looking elements than to distributed-lag elements of past inflation. By the way, I want to applaud the staff for their work on inflation dynamics. I thought it was an excellent piece of work. I found the discussion very helpful and a step in the right direction, both conceptually and empirically. In any event, the bottom line for my forecast is that I anticipate that the economy will grow just below trend of 3 percent in 2008 and at trend of 3 percent in 2009, and we achieve an inflation goal of 1.5 percent by the end of the period. Of course, this forecast is based on my desired inflation objective, which may not be representative of other members of the Committee. If there were a common objective that differed from my own view, then my presumed appropriate policy path might be different. Given this observation and the lack of an agreed-upon goal, I think we need to be concerned about how the public will interpret these forecasts, but I will save my thoughts on that for the next go-round." FOMC20080430meeting--110 108,VICE CHAIRMAN GEITHNER.," Thank you, Mr. Chairman. In terms of markets, Fed credibility, and negative surprises on the data relative to our forecasts, I think this has been the best intermeeting period in a long time. The markets reflect increased confidence that policy will be effective in mitigating the risks both of a systemic financial crisis and of a very deep, protracted recession. We have seen a substantial upward movement in the expected path of the fed funds rate and in real forward rates, significant diminution in the negative skewness in fed funds rate expectations, and a significant move down in a range of different measures of credit risk premiums, and markets have been pretty robust despite bad news over the past few weeks or so. Medium- and long-term expectations in TIPS have moved down, and we have had a very important and substantial additional wave of inflow of equity into the financial system. Our forecast, though, is roughly the same as it was in March, and it is broadly similar to the path outlined in the Greenbook. We expect economic activity to follow a path somewhere between the last downturn--a relatively mild downturn--and that of 1990. We expect underlying inflation to moderate somewhat over the forecast period to something below 2 percent. We see the risks to the growth forecast still skewed to the downside, though somewhat less so than in March, and we see the risks to the inflation outlook as broadly balanced. Uncertainty around both paths, though, is unusually high. I want to make four points. First, on economic growth, again, I still think we face substantial risk in this adverse self-reinforcing interaction among falling house prices, slower spending, and financial headwinds. Even with the very substantial adjustment in housing construction that has already occurred and even if demand for housing stays stable at these levels, we still have several quarters ahead of us before the decline in housing prices starts to moderate. A further falloff in aggregate demand during this period would raise the prospect of a much larger peak-to-trough decline in housing prices, with higher risk of larger collateral damage to confidence, spending, credit supply, et cetera. Weakness, as the Chairman has reminded us several times over the past few years, tends to cumulate and spread in these conditions, and weakness may only just be beginning outside of housing. The saving rate here may have to rise substantially further. The world is behind us in this cycle, and it is likely to slow further, diminishing potential help from net exports going forward. Second, financial conditions are, I think, still very fragile. The financial system as a whole still looks as though it is short of the capital necessary to support growth in lending to creditworthy households and borrowers. Parts of the system still need to bring leverage down significantly. Liquidity conditions in some markets are still impaired; securitization markets are still essentially shut. I think the markets now reflect too much confidence in our willingness and ability to prevent large and small financial failures. We are going to disappoint them on the small ones, which may increase the probability they attach to the large. At least I hope we disappoint them on the small ones. Third, I think the inflation outlook, as many of you have said, still has this very uncomfortable feel to it--very high headline inflation, very high readings on the Michigan survey, and the dollar occasionally showing the spiral of feeding energy and commodity prices and vice versa. I sat next to Paul Volcker when he gave his speech in New York the other day, and he said that the world today feels as it did in the 1970s. I was alive in the 1970s, but only just. [Laughter] But I think it is better than that. It has to be better than that. Core has come in below expectations. David is not going to explain all of that away by these temporary, reversible factors. You have all acknowledged that there is somewhat of an improvement in inflation expectations at medium-term horizon. It is very important that you have not seen any material pressure in broad measures of labor compensation. Profit margins are coming down, but they are still unusually high. The path of output relative to potential, both here and around the rest of the world, is going to significantly diminish pressure on resource utilization going forward even if you have other forces that push up demand for energy and food secularly. I think it is worth remembering that we had a very, very large sustained relative price shock in the years preceding this downturn, with very little pass-through to core inflation. In fact, in many ways, core inflation moderated over that period with output to potential much tighter. Fourth, on monetary policy, it seems to me that we are very close to a level that should put us in a good position to navigate these conflicting pressures ahead. What matters for the outlook is the relationship between the real fed funds rate and our estimates of equilibrium. Although we can't measure the latter with any precision, those estimates of equilibrium have to be substantially lower than normal because of what is happening in financial markets. The Greenbook and Bluebook presentations suggest that the real fed funds rate now is about at equilibrium. You can look at it through a number of prisms and see some accommodation--see the real fed funds rate somewhat below equilibrium now. We won't know the answer until this is long over. I think that we are probably now within the zone where we are providing some insurance against the risk of a very bad macroeconomic financial outcome without creating too much risk of an inflation spiral. We should try for an outcome tomorrow in our action and in our statement that is pretty close to market neutral. One final point about the future. What strikes me as most implausible in our forecast in New York, and I think in the average of our submissions, is the speed with which we expect to return to growth rates that are close to estimates of long-term potential. A more prudent assumption might be for a more protracted period of below-trend growth for a bunch of familiar reasons. I don't know if that is the most likely outcome, but it is a plausible and realistic outcome. I don't think we should be directing policy at trying to induce an unrealistically quick return to what might be considered more-normal growth rates over time. Thank you. " FOMC20060920meeting--87 85,MR. MISHKIN.," First, on this issue of persistence, I want to mention that I think we should have some caution about interpreting the results. I do not quite know what the word “persistence” means because this is really a very reduced form estimate. A key issue is what mean it is that inflation is reverting to, and that can very much depend on what we do in terms of managing expectations. It is completely reasonable for you to have done the simulation that you call “less inflation persistence,” but I might call it something different. So just I think that’s important to think about. What I would like you to do is to actually go a little beyond the forecast. I’d like to know what your thinking is on 2009, maybe 2010. I know you’re going to be a little uncomfortable about doing so because there is clearly a lot of uncertainty. However, when I think about what the state of the economy is and how we should do monetary policy, we need to look at longer periods. So I am not going to hold you to it and say, “Gee, you have to be able to give us a great forecast,” but I would actually like to know at least what your thinking may be on that issue." FOMC20080109confcall--22 20,MR. LACKER.," Thank you, Mr. Chairman. On the threshold question about acting today, I don't think we should act today. Intermeeting moves are relatively rare, they tend to be headline-grabbing, and in retrospect they turn out to mark--and are usually intended to signal-- dramatic breaks from previous practice or reaction functions. From that point of view, I think in the current context a move at this call would inevitably be interpreted as a reaction to the increase in the unemployment rate, just given the timing of when the data have come out and when the move is. I don't think that would be a good idea. I share the sense that recession is a definite risk now and that the risk has gone up. I think that is persuasive. We have gotten real growth numbers that are weaker now. I think the outlook has to be weaker now than it was several weeks ago. But I am worried about inflation, too, and I wonder what a more proactive approach means for our strategy for inflation. The staff forecast that David presented marked down the real GDP forecast for '08 by 0.3 and marked up the overall inflation forecast by 0.4. The usual Taylor rule puts a bigger weight on the inflation part than on the GDP part, and it doesn't suggest a knee-jerk aggressive move down. I'm not saying that's not what is required now, but it suggests some questions. Would a more proactive approach bring our expectations about our reaction closer to the market's view? Is that how you interpret what you are advocating here? Or is this to move us beyond what the market expects? Related to this, are you asking for some shift in our strategy on inflation? I mean, are you asking that we be willing to tolerate an increase in inflation or an increase in inflation expectations? In the current circumstances, and what looks likely for the next several months, it is hard to picture reversing course really rapidly. If things play out the way the staff forecasts, it is just hard to imagine us turning around and raising rates 50 or 100 basis points if inflation rises 1 or 2 percentage points. It is heartening that inflation expectations numbers haven't risen more than they have, and I take comfort from that. But they are around 2� percent on the CPI. It is not clear that what they reflect isn't that occasionally we get it down to 2 but most of the time it bounces around above that. Without our having a clear sense of what our strategy is about where we want to bring inflation, I just question what you are advocating means for inflation strategy. " FOMC20070131meeting--436 434,CHAIRMAN BERNANKE.," First, let me thank both the staff and all members. People clearly took this assignment very seriously, and it has been extremely useful. I won’t try to summarize. [Laughter] Fortunately, we have a tape recorder. I would like to make a few brief comments. I believe that we ought to increase our emphasis on the projections. I’ll talk a bit about some of the parameters of that, but I believe that I owe an answer to President Fisher about why. I don’t think the process is broken. I don’t think we have a serious problem. But I do think we could do better. Specifically, to give some examples, I think, first, that our statement is too influential in the sense that we argued today about a couple of phrases, a couple of words, knowing that the markets would seize on them and that they would move markets. If we had more-informative, more-complete descriptions of our views, the statement would become less of an issue. Second, I don’t want Governor Kohn moving the markets. [Laughter] I think that public comments are often overinterpreted. I know in my own case they have been. [Laughter] I recall the case in which a letter to a senator included the phrase “well-contained inflation expectations” rather than “contained inflation expectations.” That was a letter drafted by the staff, and I perhaps didn’t read it carefully enough. It was the subject of commentary in the markets for some weeks after that. We have a bit of space in which to improve our communication with the markets and the public. This way to do it would be fundamentally incremental. I’m not proposing, and I don’t think that anyone is proposing, a radical change. We can build on something that has worked and that we understand how to do, and of course we would approach it very cautiously. But I do think that this is, as President Yellen called it, low- hanging fruit in the sense that it’s something we could use to increase our communication and transparency in a fairly low risk way. Last spring there was a good bit of confusion in the markets about how quickly we wanted to bring inflation down. The forecasts essentially addressed that issue because they implicitly incorporate our policy preferences. So I think we could improve our communication by increasing information about our outlook and our policy preferences. Another issue is a bit hard to explain, but I will try. I think that our credibility is enhanced if we can depersonalize it and make the ownership of our policy more the Committee’s and the institution’s. It’s the credibility of the Federal Reserve that matters, not Ben Bernanke’s credibility. I assure you that we are better off with the Federal Reserve’s credibility. Making the credibility of policy part of a broader process, with more input and clearer Committee analysis, does to some extent increase the sense in which the institution, rather than the Chairman or any other individual, is responsible for the outcomes and the policies. Having said all of that, I don’t advocate any radical changes. I think we ought to consider three or four additional projections depending on the schedule and other factors. Governor Bies mentioned fine-tuning. Perhaps the way I would look at it is that information that we have about the outlook changes over time, and six months is a long time. Our views do change within a period of three to four months, and I think it would be informative to let people know that. I’m open, but I think we should have individual forecasts. The solution to the problem of consistent assumptions is the one that President Lacker mentioned—to have people make their unconditional forecast the same way a Blue Chip forecaster would do. That essentially includes the forecast of what the Committee is going to do, which is not necessarily the same for everyone but it is based on each person’s view about where they think the economy and policy are going. That’s one approach. There are probably others, but I want to suggest that as a possible solution. Many people have supported the narrative description. I think that’s important. I think being more timely would be useful. I don’t quite follow the idea of putting the narrative in the minutes. If we actually have this information, say, a week after the meeting, why would we want to wait until three weeks? It is more credible and more useful the sooner it comes out. The same is true for the minutes. When the minutes were released after the following meeting, it was a non-event. When they were brought out earlier, they became viewed as a very informative, useful piece of information. So, like Governor Kroszner, I don’t think we should deform our decisionmaking process or be overhasty, but if we can make such communication more timely than the minutes, we should probably try to do that. I agree with the many people who said that we should include some sense of uncertainty. There are ways to do that, for example, including historical numbers on the forecast errors of previous projections of the Greenbook, of the Blue Chip, or of somebody would give the public some sense of what the historical record is and perhaps lead them not to overvalue the individual forecasts. Again, I don’t think this is particularly risky. As I said, I hope we’ll approach this incrementally. Indeed, the history of the Federal Reserve since 1994, when we first began to announce the federal funds rate target, has been one of incremental change. This is a little unfair, but, President Fisher, you should go back and read the discussion in the FOMC before the decision to begin releasing the federal funds rate target. There was a lot of catastrophizing about what was going to happen and why what we’re doing now is the best possible approach, and so on. So I think this is really no more than a continuation of twelve or thirteen years of progress in terms of information. The other reason that this is not particularly risky, if it’s done carefully and slowly, is that we have a great deal of international experience. Obviously, we’re not Norway, but we’ve seen what works across a whole variety of central banks, and financial markets have become more accustomed to this kind of information being released. There are some important governance issues. Whether we have an approval process or a consultative process, I think we could get a forecast, together with some description, within a reasonable period—something on the order of a week or less after the meeting. Let me make just a suggestion along those lines. If we were to tie projections to two-day meetings and if we were to have, as we do now, projections submitted before the meeting, along with perhaps a paragraph of description about the major elements of the forecast and the major risks, I think the staff and I could present on the second day a draft of what we took both from the first day’s discussion and from the submissions of the projections. At that point, we could get feedback, or there would be opportunities for people to change their forecasts or their views based on the discussions at the meeting. We’d have to allow for diversity and dissent, and I think that’s perfectly fine. We’ve done that in many contexts, and I think we should continue to do that. I would just conclude by saying that many people have mentioned the importance of dry runs and a slow and careful process, and I think it would be very hard to disagree with that. We’ve done that in other cases, and I think we should do that here. So, to summarize, I think there is some basis for trying to increase our use of the projections. It would be consistent with our previous incremental movements toward greater transparency. It would provide more information and reduce the sensitivity of the markets to other types of communication, such as the statements and public comments. But we have heard an awful lot of interesting viewpoints today, and I don’t envy the subcommittee, which will have to go through all of this and come up with a set of proposals. Are there any further comments? President Minehan." CHRG-110hhrg46594--315 Mr. Wagoner," Many other countries are discussing whether automakers' funding support would be the first answer. It is happening in countries all around the world that are being affected. And virtually every manufacturer in the world has slashed their earnings forecast and cash generation forecasts in view of the plummeting demand in the auto sector globally. Frankly, we came into this with a very weak balance sheet because we had over the period of 75 years accumulated a huge retiree and health care benefit commitment that was part of the policy of this country at that time, not the policy of most of the countries that we compete against by the way. Those benefits are paid publicly. So we paid $103 billion over the last 15 years to fund health and pension benefits. Thus, our balance sheet is weaker than it would have been. People say well, why didn't you stiff the retirees? We didn't think it was the right thing to do. We thought we had an obligation. " FOMC20060920meeting--133 131,MR. GUYNN.," Thank you, Mr. Chairman. Since this is my last meeting, I want to say formally what an honor it has been to serve under your leadership, at least for a short while, and under Chairman Greenspan’s leadership before that. And to my colleagues around the table and around the room, I want to say what an extraordinary experience it has been to work with you not only on policymaking but also on the other System business for so many years. There is a lot that I will miss, and your friendship is at the top of the list. I will be mercifully short with my comments this morning. At our last meeting, I indicated that the data from around our District had finally begun to reflect the anecdotal reports of slowing that we’ve been getting for some months. The most recent data underscore that trend, but with some crosscurrents that suggest that some sectors continue to be reasonably solid. With a total of forty-four directors in the six offices in our Atlanta District, we have an unusually large complement of regular month-to-month contacts who can often signal a significant shift in sentiment about what may lie ahead. Sometime ago we began to ask our directors each month to give us not only their views on specific economic issues but also their overall sense of the economic outlook. Very simply, we asked them to indicate whether they think six months out that growth will be stronger, about the same, or weaker. Over the past six months we have watched the aggregation of those views deteriorate to the point that, in our tabulation last week, the only directors who expected things six months out to be better were from New Orleans, where economic conditions can only get better. Some of the uneasiness about the outlook in our region clearly reflects the sharp housing adjustment that we’ve seen, particularly in our once-hot coastal markets. That painful adjustment continues, with folks in the industry saying that they think the bottom may be as much as a year away. I talked just yesterday afternoon, before I left to come to Washington, with the CEO of one of the large national homebuilders headquartered in Atlanta. Mr. Chairman, I think he was in the group that came to see you and others just a few weeks ago. He emphasized that the adjustment that’s going on is broader and more significant than the data suggest. He said that sales cancellation rates, even in cities like Atlanta, now exceed 50 percent, whereas they had been running about 30 percent. He underscored something that we have talked about before, and it has been mentioned again this morning, that the fall in the real selling price is often masked by incentives and give-backs that have become very widespread. He said the only exception to the adjustment in housing that he could see was in the major Texas markets. The stories out of New Orleans continue to be depressing, with business leaders now saying it may be a decade, rather than a few years, before the housing crisis there can be substantially resolved. There are simply not enough habitable housing units to accommodate the workers, especially low-skilled hospitality industry workers who are needed by businesses that are trying desperately to reopen and to get back on their feet. As a consequence, more and more jobs are being moved out to other cities, and many of them are not expected to return. As I mentioned at the outset, there are also more-encouraging crosscurrents in our region. Manufacturing activity still looks reasonably solid; transportation and tourism do as well. We had some good employment gains in all our states last month, after some disappointing data the month before. We continue to get reports of shortages of skilled labor in a number of trades, including the construction industry. Despite continuing input price pressures, which others have talked about, we’re told that the ability to pass along those costs in final goods and services is still very limited for many businesses. As far as the national economy is concerned, it’s my view that we’re about where we expected to be at this point, with no huge surprises since our last meeting. Evidence of slowing is now more apparent, but many crosscurrents also exist at the national level. Corporate profits are high, investment spending still seems to be reasonably strong, and consumer spending remains supportive of growth. While many sectors continue to perform reasonably well, as my regional remarks suggest, considerable uncertainty does exist about housing, both in terms of how steep the slowdown will be and what the slowdown might mean for consumer spending. Although energy prices have clearly fallen back, inflation, as everyone has said, remains above our preferred range. We’ve had some encouraging monthly inflation data since our last meeting, but the hoped-for moderation in prices that we expected to see is still mostly a forecast. Still, I take some encouragement from the fact that the forecast for lower inflation readings over the period ahead is not only reflected in the Greenbook but also in the modeling work my own staff has done and in the projections of outside forecasters. Additionally, modest inflation expectations seem to be holding. And markets are not expecting us to deviate from our current policy stance, at least for the short run. Finally, Mr. Chairman, I want to say to you and others that I’m counting on all of you to protect the buying power of my hard-earned retirement savings. [Laughter] I’m going to have lots more time as a retiree to be a Fed watcher and a letter writer, and I promise to be in touch if you don’t do a good job. [Laughter] Thank you very much." FOMC20050503meeting--52 50,MR. STOCKTON.," It’s a level effect. We had a drop in long-term interest rates, which tended to cushion, through the cost of capital, some of the downward revision that we would have had otherwise. And we’ve allowed a little bit of the accelerator effect to show through. As we look at the situation, it is still the case, if one believes that underlying final sales are continuing to expand at a reasonable clip—and we recognize that that’s an open question but that’s the view that we have taken in the forecast—that the cost of capital is low. And corporations’ balance sheets still look pretty strong to us. Corporations are sitting on a very big pile of liquid assets, so we don’t think there’s going to be much difficulty financing this amount of investment spending. So, this is one of those areas where we have read the recent news as probably more noise than signal. We have given it some signal, though, and that’s why we have the level a bit lower by the end of this forecast than we did last time. May 3, 2005 20 of 116" FOMC20080805meeting--31 29,MR. WILCOX.," Thank you, Mr. Chairman. In putting together the economic outlook for the current Greenbook, we confronted three main changes in circumstances relative to the situation as it stood in June. First, the labor market looked distinctly weaker than we had anticipated. In the employment report that was released in early July, payroll employment declined by more in June than we had been expecting, and the unemployment rate held at 5� percent rather than dropping back as we had anticipated, following the increase of 0.5 percentage point in the previous month. The fraction of the labor force working part time for economic reasons had moved up sharply, and claims for unemployment insurance were trending up. The second major change in circumstance that we confronted was a secondquarter increase in real GDP that apparently continued to outpace our expectations. In last Wednesday's Greenbook, we projected growth at an annual rate of 2.7 percent in the second quarter, 1 percentage point stronger than in the June Greenbook. At that pace, GDP growth would have slightly exceeded our estimate of the rate of growth of potential output. The third major change was a financial sector that looked more hostile to economic activity, on balance, than at the time of the last meeting despite the improvement during the second half of the intermeeting period that Bill Dudley has just described. When we put the Greenbook to bed, the stock market was about 7 percent lower than we had expected as of June, a variety of spreads remained wide or had widened further since the previous Greenbook, and concerns had been heightened about some key institutions. In addition, the latest reading from the Senior Loan Officer Opinion Survey pointed to a remarkably widespread continued tightening of terms and standards for both households and businesses. These three factors--a weaker labor market, apparently stronger aggregate demand, and a more hostile financial environment--did not easily fit together. To resolve the situation, we began by ruling in favor of the profile presented by the labor market and heavily discounting the greater vigor being signaled by the spending indicators. In our judgment, the story being told by the labor market seemed by far the more credible one, what with housing prices continuing to decline at a rapid pace, consumer sentiment dropping into sub-basement levels, energy prices remaining high even after their recent partial reversal, loan officers reporting a pervasive tightening of credit terms and standards, and other measures of financial stress flashing at least amber. Moreover, while quarter-to-quarter discrepancies between GDP and IP are commonplace, the nearly 4 percent drop in manufacturing IP during the second quarter fueled our skepticism that the economy was on a fundamentally sound footing. As you know, for several Greenbooks our GDP projection has been substantially weaker than it would have been if we had kept in line with the advice from our forecasting models. We were motivated to impose this judgmental weakness partly in recognition of the possibility that we might be entering a recession, and recessions are times when spending tends to fall short of the level that would be indicated by the fundamentals. We also were motivated by the restraint that we think financial markets are imposing on real activity and which our models are ill-equipped to capture. In the current projection, we had to modify these assumptions in light of the changed circumstances. In effect, we interpreted the greater-than-expected strength of real GDP during the second quarter as reflecting an error of timing with respect to the judgmental weakness that we had built into the forecast but not a misjudgment about the overall magnitude of that weakness. Implementing that interpretation involved three steps. First, we responded to the unexpected strength in first-half GDP growth by shifting some judgmental weakness into the second half. Second, we deepened the overall amount of restraint that we imposed in light of the less favorable financial climate. Third, we stretched out the period of financial recuperation: Whereas previously we had financial market conditions essentially returning to normal by the middle of next year, in this projection we have the period of recuperation extending into 2010. These adjustments left our projection for real GDP growth 0.1 percentage point lower over the second half of this year and 0.2 lower next year, despite the offsets from lower oil prices and a slightly greater dose of fiscal stimulus, reflecting the introduction of extended unemployment insurance benefits. For the most part, the avalanche of information that we received since putting out the Greenbook last Wednesday has corroborated our projection. This year's revision of the national income and product accounts threw us no real curve balls. (Sorry for the baseball analogy.) [Laughter] The growth of real GDP was revised down by an average of 0.2 percentage point per year. The revisions to the PCE price indexes, both core and total, were very slight. While the BEA has given us some homework to do between now and the September meeting in folding these data into our thinking, any adjustments that we might be prompted to make, including to the supply side of our forecast, are likely to be slight. On the face of it, the advance estimate of real GDP growth in the second quarter of this year seemed to hold a bigger surprise. The BEA's estimate, at 1.9 percent, came in � percentage point below our estimate in the Greenbook. However, as best as we can tell--based on still-incomplete information--the miss was attributable to lower estimates by the BEA of farm inventory investment and of value added in the trading of used motor vehicles. Our preliminary reading is that neither of these errors carries any signal for the forward momentum of the economy moving into the second half of the year. Friday's employment report was likewise mercifully well behaved-- at least in the narrow sense of conforming to our expectation. Private payroll employment declined an estimated 76,000 in July; together with small downward revisions to May and June, that left the level of employment in July very close to our forecast. In addition, the unemployment rate came in only a few basis points higher than we had expected. The only real news since Greenbook publication came from the motor vehicle manufacturers. On Friday, they reported that sales of light vehicles in July were at an annual pace of 12.5 million units, much weaker than our already weak forecast of 13.3 million units. Moreover, they knocked their assembly schedules for the third quarter down from 9.4 million units to 8.9 million units. Taking their schedules on board would slice another � percentage point from our estimate of GDP growth in the third quarter. The manufacturers have already announced increases in incentives, but it remains to be seen how vigorously consumers will respond in the current environment and how great the financial wherewithal of the manufacturers will prove to be to sustain such moves. In any event, the drop in sales and production is certainly large enough to give renewed urgency to the question as to whether a broader retrenchment in spending might be in train. Turning to the inflation side of the projection, our forecast for core PCE prices over the remainder of this year is nearly unchanged from the June Greenbook. We still have core inflation stepping up from a little more than 2 percent during the first half of this year to a little more than 2� percent in the second half, as the surge in prices for imports, energy, and other commodities passes through to retail prices and as some components that saw unusually low readings earlier in the year accelerate to a more normal rate of increase. Next year, with the pressures from import, energy, and commodity prices diminishing and with slack in resource utilization becoming a little greater, we have core inflation dropping back to 2� percent. The projection for next year is also the same as in the June Greenbook, as the influences from lower energy prices and slightly greater economic slack are roughly offset by the passthrough of higher import prices. The more dramatic changes in our inflation outlook came in the noncore pieces. Not surprisingly, the plunge in oil prices since the June meeting caused us to whack our forecast for retail energy price inflation over the second half of this year. For next year, however, we marked up PCE energy price inflation a little, partly because natural gas futures prices have a more positive tilt than they did before and partly because gasoline margins will still have some recovering to do. At the same time, we have become more pessimistic about the outlook for food price inflation. The CPI for food in June came in at 0.8 percent, much higher than our forecast of 0.3 percent. Because we have mostly been surprised to the upside thus far this year, we decided to move closer to our food price model, which has been calling for larger increases than we were previously willing to write down. The net result, as you saw in the Greenbook, is an outlook with faster food price inflation despite the fact that futures curves for both livestock and crops have moved down since the last meeting. All told, we now have headline PCE inflation running at an average annual pace of 3� percent over the second half of this year, nearly 1 percentage point slower than in the June Greenbook. For next year, we have marked up total PCE inflation by a few tenths in light of our reassessment of the food price situation and the slightly greater rise in energy prices that we now see next year. With regard to the risks in the outlook, my sense is that the downside risks to economic activity have increased since the time of the June Greenbook. That view is informed by two main factors: First, while we have factored the more unsettled nature of the financial environment into our baseline outlook, the situation seems more fragile than before, and the implications for real activity of a sharp deterioration in financial conditions could be quite large. The first alternative scenario that we presented in the Greenbook--entitled ""severe financial stress""--updates our periodic attempt to assemble an integrated macroeconomic and financial scenario. Second, the deterioration in the motor vehicles sector now, to my eye, more convincingly takes on the profile of what we usually see in the course of a typical recession. During the intermeeting period, we will be on high alert for evidence suggesting that the weakness in vehicle sales is a harbinger of a broader shortfall in consumer spending. As for inflation, the upside risks have, in my view, diminished somewhat. Again, two factors inform this assessment. First, the downtick in the long-term inflation expectations measured in the Reuters/Michigan survey is somewhat reassuring. Second, the drop in oil prices is a welcome relief from the steady drumbeat of bad news from that sector and suggests a somewhat diminished probability that persistently high topline inflation will be reflected in a more serious erosion of household expectations, with all the adverse implications for monetary policy that would entail. To be sure, even with those favorable developments, upside risks remain. We illustrated one such risk in the scenario entitled ""inflationary spiral,"" in which we posited an initial shock to inflation expectations of 50 basis points followed by an adverse feedback loop that causes actual and expected inflation to chase each other up nearly 1 percentage point above baseline. Monetary policy eventually brings the process under control but only over a lengthy period of time, partly because the rule that we use in the simulations has policy responding to actual but not to expected inflation. Steve Kamin will now continue our presentation. " FOMC20070321meeting--73 71,MS. YELLEN.," Thank you, Mr. Chairman. Recent data on economic activity have been downbeat in many sectors, and I agree with the general tenor of the Greenbook that the near-term outlook is weaker than before. Indeed, we have cut expected growth this year almost ½ percentage point, to 2¼ percent. This pace of growth is substantially below potential, and we expect the unemployment rate to start to edge up fairly quickly. Even relative to this lower baseline, I think the downside risks to the prospects for output growth have sharpened in the intermeeting period. I’m especially concerned about two risks—broader retrenchment in financial markets along the lines that we’re seeing in the subprime mortgage market and a further hesitation and faltering of capital spending. As we discussed in detail two years ago, an asset price bubble inevitably leads to unsustainable imbalances in the economy and a misallocation of resources. The extraordinary run-up in house prices in recent years led to construction and sales booms that couldn’t last. So far the adjustments to more-sustainable levels of housing starts and sales have been relatively orderly. However, there is still an overhang of precarious financing from the past relaxed mortgage-lending standards that has to be eliminated. For example, in 2005 and 2006 something like 40 percent of first-time homebuyers put no money down with their purchase. The market is beginning to recognize the size of this overhang and, with the recent deterioration in the performance of subprime mortgages, is dramatically reassessing mortgage risk. Going forward, we will have to closely monitor increases in mortgage-risk compensation and tightening of credit standards. Such changes, especially if they go too fast or too far, could amplify the housing- sector decline as has been recognized, pushing housing prices and activity down, and with spillovers to consumer spending, they could prove to be a substantial drag on the overall economy. Despite the recent turmoil in equity and mortgage markets, a reassessment of overall risk has yet to occur. We are still in an environment of low long-term yields, ample liquidity, and what appears to be a generally low level of compensation for risk. For example, I recently talked with the principals of several major private-equity funds, who were not just amazed but also appalled about the amount of money their industry has attracted. [Laughter] One partner said that he would have no difficulty immediately raising $1 billion. Indeed, one of his biggest problems is would-be investors who get angry at him because he is unwilling to take their money. This unwillingness reflects his difficulty in identifying deals that are likely to yield adequate returns even though, for the buyout firms, debt also is available in what they depict as very attractive so-called covenant-lite terms—perhaps too attractive given the vulnerability of some of the highly leveraged yields. My contacts suggest that some private-equity firms with similar assessments of the shortage of profit opportunities are less restrained and do take additional money, partly because of the large upfront fees that are generated by these deals. So just as we have seen in mortgage markets, the bubble in private equity, as my sources characterize it, and the overabundance of liquidity more generally raise the risk of a sharp retrenchment in credit and higher risk spreads with associated risks to economic growth and, conceivably, even financial stability. A second, related risk concerns investment spending. It’s surprising that, despite the ample financing available, firms have still been reluctant to ramp up their capital spending. Certainly, any precipitous tightening of financing could curtail investment. However, as noted in one of the Greenbook alternative simulations, greater business pessimism about future returns to new capital is also a significant risk. The recent pullback in orders and shipments for capital goods has persisted and deepened more than any of us had anticipated. Even for high-tech spending, which continues to expand, my contacts on the manufacturing side are not very optimistic. Sales of PCs and related equipment were mildly disappointing in 2006, and our contacts don’t see the introduction of the Microsoft Vista operating system in January as having generated much enthusiasm among businesses. Turning to inflation, our outlook for core inflation, like that of the Greenbook, has changed little since January. I continue to anticipate gradually moderating inflation with core PCE price inflation edging down from 2¼ percent in 2006 to 2 percent this year. There are certainly clear upside risks to this forecast, especially given the resumption of increases in energy prices. These risks remain despite some weakening in the outlook for real activity. In principle, the anticipated subpar growth should help relieve inflationary pressures. However, we remain very uncertain about what par is. The continued low unemployment rate, coupled with recent sluggish output growth, suggests via Okun’s law that potential output could be growing in the vicinity of 2¼ percent. If, contrary to our assumption, that were the case, any labor market tightness now boosting inflation might not diminish this year. More-favorable news is found in recent survey evidence on inflation expectations. As many of you have commented in past meetings, inflation expectations are perhaps more influential to the inflation outlook than is the unemployment rate. Their relative stability over the past several years has probably been a key factor restraining the rise in inflation over the past two years. However, what has not generally been noted is the importance of near-term inflation expectations, those with a forecast horizon of a year or two. Both economic theory and empirical evidence suggest that these near-term inflation expectations are as important as long-run expectations for determining inflation dynamics. The latest Blue Chip and Professional Forecasters surveys both show expectations of core inflation edging down next year. For example, the SPF shows core PCE inflation dropping to 2 percent next year, exactly in line with our own forecast. I also see the general downward tilt in inflation expectations over the next couple of years as contributing to a favorable inflation prognosis." FOMC20071211meeting--104 102,MR. HOENIG.," Thank you, Mr. Chairman. I’ll start on the local level. Overall our District economy continues to perform generally well, with ongoing weakness in the housing sector being offset by strength in agriculture, energy, and manufacturing. We have seen some slowing in employment growth over the past few months, but this appears in part to be a supply consideration. Our directors and business contacts continue to report that the labor markets are, in fact, tight across much of the District with shortages of both skilled and unskilled labor and rising wage pressures. There is some reduction in employment, obviously in the housing sector, but that is being offset by these other considerations. I would also note that manufacturing activity remains basically solid, with manufacturers reporting strong export orders. The District’s manufacturing index moved upward in November and still points to moderate growth. In addition, District manufacturers’ capital spending plans actually rose but remained below most of last year’s readings on balance. Turning to spending, general retailers reported a rebound in sales in the latter part of October and early November. Automobile dealers, on the other hand, did report weaker sales and have also become more pessimistic on future sales. Travel and tourism continues to expand in our region, with District airline traffic figures solid, particularly in the Denver area. Likewise, hotel occupancy figures have continued to increase from already strong levels in the region. As has been true for some time, housing activity, as I said, remains soft. For example, the value of residential contracts dropped again in October, and the rate of decline in residential permits steepened again in the past few months in our region. Offsetting this weakness in housing, though, is considerable strength in agriculture and energy. District energy producers continue to expand their capital investments as they are relatively confident that oil and gas prices will remain firm over the longer term. In fact, their capital expenditures have been slowed by a continuing shortage of labor and access to some equipment. Our larger regional banks are still reporting fairly good conditions. The deal flows seem to be coming through, although they are looking at those carefully, just given the environment that they find themselves in on a national level. Finally, price pressures remain mixed. Most businesses report rising input costs, both labor and materials, but differ in their ability to pass those costs on at this point. In transportation, input costs are passed through one for one through customer surcharges. Other businesses continue to find it a little more difficult to pass through the higher costs, but they are beginning to push harder on that as we talk to them. Let me turn to the national outlook. Weakness in incoming data and continuing stress in financial markets obviously are noteworthy, and others have noted that here today. Compared with the Greenbook, however, I see stronger growth in both the short run and the longer run. I expect fourth-quarter growth to be closer to 1 percent, not the zero percent in the Greenbook, and the economy to strengthen slowly through a good part of 2008, starting out slowly obviously and then picking up as we go through the year. Comparing my views with those in Greenbook, the basic difference appears to be largely in some of the judgmental adjustments in the Greenbook concerning spillovers from the housing and financial stress to consumer spending. The current Greenbook forecast, as others have noted, is similar to the Blue Chip Bottom Ten forecast, which suggests to me that it might be better seen as the downside risk outlook not necessarily the most likely outlook at this point. The first half of 2008, as I said, is likely to be somewhat slower than I previously projected because of the high energy prices and continued drag from housing. However, I expect that growth will gradually strengthen as we move toward the end of 2008 and then remain there through the rest of the forecast period. Having said this, I realize that the downside risk to economic activity does remain elevated. The housing slowdown could be deeper and last longer, and continuing financial turmoil could further affect consumer and business spending. However, while financial factors remain a risk to the outlook, in my view the economy, though it will grow below its potential, can weather these forces and is being supported by the policy actions that we have taken in the past two meetings. Against this outlook for economic growth, let me turn now to the inflation outlook. Year- over-year overall and core inflation rates have risen. In addition, Greenbook’s 2008 forecast for overall and core PCE inflation has increased since our last meeting. While below-trend growth in the near term may exert some downward pressure on inflation, the combination of higher prices for oil, commodities, and some services and dollar depreciation should place upward pressure on both overall and core inflation going forward. Over the past several years, the pass-through of dollar depreciation and higher oil prices to inflation has been limited in part because of longer-term inflation expectations remaining, as we said, anchored. My concern is that, if we continue to lower the fed funds rate into a rising inflation environment and the dollar continues to depreciate, these expectations may become unhinged perhaps more quickly than we would like to think. In this environment, I think we should not lose sight of not just the downside risk to the real economy but also some very serious upside risk to inflation. Thank you." FOMC20060920meeting--95 93,MR. WILCOX.," The behavior of construction that we are projecting is unusual, but the predicate is also unusual in that we did go through a mild recession but with substantially no attenuation in the pace of construction. So it is an unusual path that we followed to get here, and in our baseline forecast, it is an unusual path that we follow going forward." FOMC20051213meeting--60 58,MR. STOCKTON.," We’d be happy to do that as well. In principle, the upward revision in our forecast for structural productivity growth this time was due to two factors. One was that productivity was a lot stronger than we thought. But it wasn’t just that productivity was stronger; so it’s not just this moving-average error term. It’s also the fact that we’re at a point in the business cycle, with labor markets having tightened as much as they have, when we would have thought productivity growth would be running a little below trend. So our previous estimate of the trend of 2¾ percent, with actual productivity growing 3 percent, implied that productivity was being driven even further above trend. And in our underlying model, in which there is a cyclical and a trend component to productivity, that didn’t really seem sensible to us at this point, given that we think labor markets are close to balance. We arrived at that view not just from looking at the employment rate but at plenty of other indicators of labor market activity, which suggested to us that the underlying structural trend in productivity probably has been faster than we thought. So we narrowed that tension by raising structural productivity rather than continuing to forecast that actual productivity was going to slow back toward our trend. I think that’s the principal source of that element in the forecast. Now, as far as the technical factors go—I’ll be very brief here—our analysis of structural December 13, 2005 25 of 100 Potential GDP is a measure of output measured using GDP—not output in the nonfarm business sector—and hours from the household survey—not the establishment survey. So there are two technical factors that tend to account for the wedge: the output growth in the nonfarm business sector versus GDP, and the growth in household hours versus establishment hours. And both of those factors have been significantly negative over the course of the last several years. That is, output, as measured by GDP, has been slower than nonfarm business output. And growth in hours, as measured by the household survey, has been considerably stronger than in the establishment survey. So you need both of those factors, in essence, to reconcile structural productivity and potential output. That is why you might be puzzled as you look at the forecast wondering: Gee, they’ve got 3 percent structural productivity but only 3¼ percent growth in potential GDP. But, in fact, that’s the way we do that element of the analysis. We’re more or less forced into that particular position." FOMC20070807meeting--69 67,MR. PLOSSER.," Thank you, Mr. Chairman. Since our last meeting, the news in the Third District has been generally positive. Economic activity continues to expand in the tri-state area but at a less rapid pace than at our previous meeting. Our Business Outlook Survey indicates that the District’s manufacturing output continued to expand in July, although at a somewhat slower pace than in June. The June measure, you may recall, was more than 18 in our Business Outlook Survey, the highest level that it had been since April 2005. In July the index dropped to a little over 9, although it was still significantly positive. Shipments of new orders increased in July, and the outlook for manufacturers’ own capital spending plans remains positive and is at a level typical of an expansion. Firms in our survey generally see improvements in their businesses coming in the second half of the year. Residential construction, however, continues to be very weak in the region, but we have not seen, at least according to OFHEO indexes, any absolute price declines in our area. This is confirmed by our business contacts, who report that they have not seen steep or broad-based declines in house prices, except for properties along the Jersey shore, where the boom was most prevalent. At our last meeting I characterized the nonresidential investment market as firm, and that characterization continues today. Office vacancy rates in the Philadelphia region remain very low and declining, and rents in office and warehouse spaces remain at a record high. Although reports on retail sales in our region have been mixed, sales appear to have improved somewhat in late June and early July, especially at higher-end retail establishments. Bank lending has continued to advance but at a more moderate pace than at the time of our last meeting. Our banking and other business contacts indicate that banks have money to lend to customers with good credit ratings, and so I don’t get the sense that area businesses are facing a credit crunch of the normal type. Banks are comfortable with their lending standards and do not expect to make any big changes along this dimension in the foreseeable future. For the most part our banks were not in the subprime business and obviously don’t intend to start now, [laughter] and thus they have not seen an appreciable deterioration in their balance sheets or in those of the businesses to which they lend—their customers. Clearly, there is nervousness, but as yet there seem to be few consequences for the real economy. June employment growth in the region was below trend, but the region’s unemployment rate remains relatively low. Our staff expects employment to continue to grow at a moderate pace going forward and expects the region’s unemployment rate perhaps to rise modestly by the second quarter of next year. Yet businesses continue to report tight labor markets. One very large builder, who is headquartered in our area and who builds mostly high-end homes, has actually reported that he cannot finish a number of homes that he has under contract and that buyers are waiting to move into. He cannot find labor. Because of the crackdown on illegal immigrants, who do a lot of the landscaping, a lot of roofing work, and all the labor that goes into finishing these homes, he cannot hire these workers, and so he actually has to put off closing deals because he cannot find workers to complete the homes. On the inflation front in the District, employment costs in the Northeast are increasing at about the same pace as in the nation. Area manufacturers continue to report higher production costs, but there is relatively little evidence of pass-through of those higher costs to customers as they see it. Consumer prices are growing more slowly in the region than in the nation. So in summary, the Third District economy continues to expand at a moderate pace. While there is nervousness caused by the recent volatility in the financial markets, businesses do not yet see that affecting their current growth or prospects for future growth. Business contacts as well as the Philadelphia staff expect this moderate pace of expansion to be continued in the coming months. At the national level, the news has been mixed. On the positive side, employment and income growth remain solid. Manufacturing output continues to improve, and core inflation and inflation expectations remain contained, although both remain higher than I would like to see in the long run. On the negative side, news on business fixed investment and housing has been disappointing. After encouraging signs of stabilization early in the year, the sales of both new and existing homes have continued to decline. Sales of homes declined 6.6 percent in June and almost 8 percent in the second quarter. At the time of our last meeting, I expressed the view that I was getting hopeful that economy was on track to return to near-trend growth later this year. Setting aside the issue that our perception of long-term trend growth in real GDP may need reassessment in light of the benchmark revisions, as we’ve been discussing—and I’ll return to this point in a moment—the recent data on housing are suggestive of a weaker third quarter and perhaps fourth quarter as well. Though I think the underlying steady-state demand for housing is lower than the pace of housing demand before we saw the downturn begin, which implies that much of the adjustment in housing supply is part of a healthy adjustment to a new equilibrium, the stock of unsold homes continues to cause a drag on residential investment. I also think that there is some risk of temporary weakness in business fixed investment going forward simply because of increased uncertainty. So the return to trend growth, which I think will happen within the forecast period, may be delayed by a few quarters and may not get under way solidly until late in the first half of next year. You know the old saying: “If you can’t forecast well, forecast often.” [Laughter] The biggest economic news headlines since our last meeting have focused on the volatility of the financial markets and the repricing of risk. I am inclined to put minimal weight on the current financial conditions for a slowdown in the pace of economic activity going forward. Although risk spreads have widened in the past three weeks or so, the cost of capital for high quality borrowers has hardly changed and remains relatively low by historical standards. This suggests to me that what we are seeing in the marketplace—at least right now but which could change, as we’ve all noted—is a change in the relative price of various measures of types of risk. The cost of capital for some borrowers is increased, but demand for business investments that originate from large corporations with good credit ratings has not changed and is not likely to be adversely affected very much in the repricing of risk, if that’s what this represents. This news was reinforced to me by my conversations with area bankers, as I mentioned earlier, who say that they have plenty of money to lend to good credit risks. There is no evidence of a general credit crunch from their point of view. My general view regarding the limited nature of the credit repricing is reinforced by the fact that default rates on auto loans, credit cards, and other types of consumer debt instruments have not changed much, suggesting that the spillover effects, at least to date, have not been very measurable. Thus, I think that the decline in the subprime market is primarily a result of lax underwriting. Those lenders are now paying the price, but we must be very careful not to act or appear to act in a way that supports bad bets or lax underwriting standards without more widespread evidence of systemic problems affecting the real economy. Let me now turn to what I think is a more fundamental factor for gauging the strength of the economy going forward and, therefore, the appropriate stance for monetary policy. In the most recent Greenbook, the Board staff revised down the rate of growth of structural productivity more or less in line with the reduction in real GDP growth, as we have been discussing. It is certainly reasonable to think that this new information about the pace of real GDP growth during the past three years contains information about the rate of growth of structural productivity going forward. But that is not an infallible signal. In my thinking about how monetary policy needs to be set, distinguishing temporary decreases in the rate of growth of productivity from permanent decreases is a critical piece of the puzzle. A transitory decrease would not affect the steady-state equilibrium real rate to my mind. But a permanent decrease would imply a lower steady-state equilibrium real rate and, thus, a lower natural rate for the federal funds rate. If the equilibrium real rate is lower, holding the fed funds rate constant, of course, would imply an implicit tightening of monetary policy. I am still grappling with the implications of these benchmark revisions for future productivity growth. At this point in my forecast, I’m assuming that the revisions imply a rebenchmarking of the growth rate of structural productivity, but that rebenchmarking or that lowering of the trend rate of growth of real GDP is not enough so that core inflation can decelerate toward price stability in the next two or three years or so under a constant fed funds rate. But the reduction in the growth rate of structural productivity does feed through to a somewhat looser required path of the fed funds rate through 2008 to 2009. In my forecast, appropriate policy has the fed funds rate rising to 5½ percent in the first quarter of ’08, holding steady there for two or three quarters, and then gradually drifting down toward a more neutral rate consistent with lower inflation expectations and lower trend output growth. With this path of the fed funds rate, I expect the economy to return to near potential real GDP growth in the first or the second quarter of 2008. I expect the housing correction to continue through the first half of 2008, but the drag lessens over the year. I expect the core inflation rate to be somewhat higher in the second half of the year than in the first half, but I expect the economy by 2009 to grow near its potential growth rate, which I now assume to be 2.8 percent, about 0.2 percent lower than I had last time, with the unemployment rate close to its natural rate of 5 percent and core inflation at about 1.5 percent. I have two other brief comments I’d like to make about our forecasting exercise and some information I think is relevant. We continue to focus on the PCE price index, and I have some objections to that. I continue to believe that the CPI is a better measure, if for no other reasons than that it is more familiar to the public and that it is not revised. We were lucky this time in the GDP revisions that the PCE price index was not revised very much, and I think we run the risk that focusing too heavily on a measure that does get revised can cause us some difficulty. I also have some concern about the empirical ability of core PCE to actually be a very good predictor of headline PCE inflation at the end of the day. So I am still struggling with our choice of the index there. The other item that I would like to emphasize—and it was driven home to me in a meeting with some reporters in the not-too-distant past—is that I do believe that moving toward measures of uncertainty that include some fan charts would be useful. I was hesitant at first about that in part because getting appropriate measures of uncertainty that are internally consistent across all our forecasts and all our models would be very difficult. Yet some, what I would view as very sophisticated, journalists continue to confuse the issue of the range of our forecasts and our central tendencies with the issue of uncertainty or certainty. They do not understand that our central tendency is an agreement about what our point forecast is but that it may reveal very little or nothing about the degree of uncertainty in our forecasts. So I think it is very important that we quantify that in some way to be clearer and to eliminate some of that confusion. I’ll stop there. Thank you, Mr. Chairman." CHRG-111shrg50814--113 Mr. Bernanke," We will start with the capital. If it turns out that the bank, because of good economic outcomes or because they are able to sell assets, doesn't need all the capital we gave them, then they can pay it back eventually. Senator Warner. I know my time is up. Can I ask one more quick question, though? I was happy to see yesterday your Web site and some of your comments this morning about more transparency, but one of the things, Dr. Elmendorf was in recently and did a pretty good outline of all of the various initiatives that have been started, and we realize you are fighting multiple fires on multiple fronts, but my count was there are eight new initiatives that the Fed has started since last fall. You have made investments or potential investments in four separate institutions, as some of my colleagues mentioned, increased the balance sheet by about a trillion dollars with the potential of going up to $4 trillion. Some of these are clearly purchasing of normal Treasury securities, but there is a whole series of new areas where you are taking on assets, AIG in particular and others, where the role of the Fed seems to be evolving into not only monetary policy and regulatory oversight, but more and more a holder of debt or equities in a series of institutions. Do you have the capabilities inside the institution to play this role, and looking back on the Bear Stearns when it looked like we had to bring in what at that point, now in retrospect $29 billion looks like a fairly minor challenge, but now with this potential of a trillion dollars added to your balance sheet, the potential of going to $4 trillion, how do you have the capabilities to manage all these assets inside the Fed? " FOMC20050503meeting--50 48,MR. STOCKTON.," Not just ordered. There were a couple of exceptions to that general rule, May 3, 2005 19 of 116 the pothole story. But that doesn’t necessarily mean, given how noisy those data are, that we couldn’t still be seeing some pothole effect now. To be honest, we took out most of our pothole effect at the time of the last forecast, but we didn’t take all of it out. So we certainly think there’s some consistency between what we’ve seen and our assumption that there would be a pothole effect. You’re right that we certainly didn’t view the March reading as indicating a huge turning point. We just basically fed those data through our near-term statistical filters, and then, beyond the near term, allowed our econometric model to “speak,” if you will. And the econometric models still revise down the level of investment spending over this forecast horizon. So it isn’t the case that we offset the weakness that we saw; we’ve actually carried that forward." CHRG-111shrg54789--168 PREPARED STATEMENT OF SENATOR TIM JOHNSON Thank you Mr. Chairman for holding today's hearing. This hearing could be one of the most important held this month as the Committee takes up legislation to modernize our financial regulatory system. The current economic crisis has exposed regulatory gaps that allowed institutions to offer products with minimal regulation and oversight. Many of these products were not just ill-suited for consumers, but were disastrous for American homeowners. There is a clear need to address the failures of our current system when it comes to protecting consumers. We need to find the correct balance between consumer protection, innovation, and sustainable economic growth. There is no doubt that the status quo is not acceptable. However, as Congress considers proposals to improve the protection of consumers from unfair, deceptive, and predatory practices, we must ask many important questions. We need to know if it is the right thing to do to separate consumer protection from functional regulation. We need to know if a separate, independent consumer protection agency is better than a consumer protection division within an existing regulatory agency. We need to know who should be writing rules for consumer products and who should be enforcing those rules. We need to know if national standards or 51 set of rules made by each State are better for consumers. Last, while the goal of any consumer protection agency is clearly better protection of consumers, we need to know if it will also preserve appropriate access to credit for the consumers it is designed to protect. The creation of a new agency is a daunting task under any circumstances; even more so in this case, considering the role a consumer protection agency would play in our Nation's economic recovery. It is important we get this right. I look forward to hearing from today's witnesses. ______ FOMC20050630meeting--368 366,MS. YELLEN.," Thank you, Mr. Chairman. At our last FOMC meeting, I worried about a slowdown in growth and a pickup in inflation. I hypothesized and hoped that both would prove transitory. On the whole, I consider recent data reassuring that the soft patch in the spring was just that—maybe not even that—and not a precursor of a more entrenched slowdown. While the Greenbook subscribes to the view that the slowdown in growth was transitory, the staff has made an upward revision, by a couple of tenths, to its forecast for core PCE inflation for this year and next year, now projecting inflation of about 2 percent in both years. I’m a bit less pessimistic on inflation than the staff. Recent data on core inflation have been pretty good of late. Moreover, I see the fundamentals—namely, the pressures on future inflation—as providing room on balance for some optimism. The most worrisome factor is that oil prices have risen further, although this should tend to boost core inflation more this year than next year. As David noted, the recent jump in compensation per hour should probably be discounted, since it appears to be due to one-time factors. On the encouraging side, I see a noticeable decline— about 17 basis points—in inflation compensation at both the 5- and 10-year horizons, high markups, an appreciation in the dollar, a leveling off of commodity prices, very modest increases in the ECI, June 29-30, 2005 132 of 234 The situation with regard to slack, as David noted and emphasized, is complicated because the unemployment rate is relatively low, near most estimates of NAIRU. But several other measures, as he pointed out and as we also routinely monitor—including the employment-to­ population ratio, capacity utilization, the output gap, and the other indicators that David showed us— do suggest that slack remains. One final point on the inflation outlook is that one of the best forecasters of future inflation is past inflation. And I’m told that this is a point that was emphasized at a special topic session a couple of years ago. On this score, things look fairly good, with core PCE price inflation at 1.7 percent over the past 12 months. While I guess I can and have quibbled a bit about the inflation outlook for the next year, overall I think the Greenbook forecast seems reasonable. Real GDP appears poised to grow just slightly above its potential rate, gradually eliminating remaining slack. And core inflation, while currently near the upper end of my comfort zone, at least to me seems likely to moderate a bit over the next few years. The Greenbook forecast depicts an almost textbook scenario of an economy continuing along the path toward a rather attractive steady state. Going forward, there are obviously some sizable risks, and I count the unwinding of possible house and bond market bubbles as one or two that are high on my list. But I think the most likely outcome is—as in the Greenbook projection— that we will continue to move in a positive direction over the next couple of years. And given what we now know, I think the funds rate path assumed in the Greenbook, which is very close to the market’s current view, is appropriate. That is, we are likely to need to raise rates a couple more times before slowing the pace of tightening rather substantially. And I want to emphasize that, in June 29-30, 2005 133 of 234 economy moving along this textbook path during a period characterized by some quite difficult circumstances. I know that Monday’s pre-FOMC briefing emphasized that economic activity has been burdened by some major drags over the past year or so. These include the oil shock, the deterioration in the trade balance, and the still low level of investment spending relative to GDP. The result is that we’ve had to keep interest rates exceptionally low for a long time, just to get respectable economic growth. In fact, respectable and not stellar growth is all we have gotten, even with exceptionally low long-term yields and unexpectedly rapid gains in house prices. And those are two factors that, on their own, would be working to push up the equilibrium real funds rate. So the merely respectable growth in the economy has really rested on the backs of just a few interest rate-sensitive sectors: business investment, consumer durables, and housing. From that perspective, it’s really not all that surprising that house prices have risen a great deal, and it’s not surprising to hear our directors and other contacts comment that liquidity is abundant and that lending is taking place for deals that one of our directors simply characterized as “stupid.” I think he meant by historical standards. [Laughter] My point is that to offset the drags, we’ve needed to give the economy a strong dose of stimulus, which inevitably boosted the housing sector—and that just to get reasonable economic growth. That is equivalent to saying that the equilibrium real fed funds rate is unusually low—1.4 percent in the Greenbook path. So, for me, the policy imperative that follows is that we need to be careful not to overdo the pace of policy tightening. I noted that in recent months several FOMC members have commented that we usually know we’ve come to the end of the tightening phase when we have tightened one or two times too many. I think we should be especially attentive to this concern this time around, June 29-30, 2005 134 of 234 John Williams’s analysis yesterday highlighted the fact that if house and/or bond prices fall, the zero bound could become an issue we would be discussing again. To conclude, I’m all for raising the funds rate by 25 basis points at this meeting, and I believe the language in the press release should seek to maintain the path for the expected fed funds rate that now exists in the market. My worry is that unless we’re careful in crafting the language as we raise the rate today—and likely again in August—markets will start to build in more increases in subsequent months than they have so far. I think we are nearing the point when we will need to start pausing, and I hope we can maintain that expectation in the market in the period ahead." FOMC20071211meeting--121 119,MR. MADIGAN.,"2 Thank you, Mr. Chairman. I will be referring to the draft announcement language in table 1, which is unchanged from the version distributed in the Bluebook and which is included in the package labeled “Material for FOMC Briefing on Monetary Policy Alternatives.” As shown in section 4 of the left-hand column, following the October meeting the Committee issued a statement that concluded that the upside risks to inflation roughly balanced the downside risks to growth, suggesting that the Committee saw reasonably good odds that, after 75 basis points of easing, the stance of policy would foster sustainable economic growth and price stability over time. As many of you have noted, however, events over the intermeeting period have undermined this view. The staff and the markets have interpreted incoming information as pointing to a distinctly weaker outlook for the economy. As Dave discussed, the staff has lowered its forecast for aggregate demand in light of deteriorating conditions in financial markets, incoming data on spending and output that were weaker than expected, and the higher path for energy prices suggested by futures markets. That weaker forecast for aggregate demand was reflected in a 70 basis point decline in the Greenbook-consistent measure of the equilibrium real federal funds rate, which placed it about 40 basis points below the current real federal funds rate. These developments have prompted the staff to tilt down its assumed trajectory for monetary policy, with a 25 basis point easing at this meeting and another ¼ point move in 2009. The assumed easing is not quite fast enough to offset the adverse shock to aggregate demand, and a small degree of economic slack consequently emerges over the next year or so that was not present in the October Greenbook. That slack can be seen as purposeful, as the staff has also interpreted incoming information as implying a modest adverse shock to aggregate supply: Recent inflation data and higher energy prices point to higher total and core inflation in the third and fourth quarters and, in the staff forecast, over the next few quarters as well. Given the restraint on inflation resulting from the projected emergence of modest slack, the staff judges that its assumed path for monetary policy will leave total inflation and core inflation, respectively, at the same 1.7 percent and 1.9 percent annual rates in 2009 that were projected in the October Greenbook. Should the Committee find the staff forecast persuasive as a modal forecast, view that outcome as satisfactory, and see the risks around that projection, while perhaps larger than previously, as not sharply skewed in either direction, it might be inclined to ease policy by the quarter point assumed in the staff forecast and adopt a statement along the lines shown as alternative B in table 1. Like the staff, members might see the incoming evidence as suggesting that the outlook for real activity has weakened and perhaps that the downside risks to growth have increased. The deterioration in financial markets, in particular, might be a source not only of a downward revision to your outlook but also of a greater sense of uncertainty about prospects for aggregate demand. The financial system is dealing with significant 2 Materials used by Mr. Madigan are appended to this transcript (appendix 2). credit losses and resulting capital erosion and constrictions on balance sheet capacity. The eventual effect of those problems on the availability of credit to households and firms is unknown. In particular, the potential interactions of financial stress with real economic developments, especially those in the housing sector, are difficult to assess. In view of these considerations, as shown in section 2 the suggested rationale language for alternative B would state that economic growth is slowing; would cite softening in recent spending data; and would indicate that financial strains have increased in recent weeks. While the Committee may see significant downside risks to spending, it might also remain worried about the potential for an increase in inflation pressures and might view inflation risks as having risen a bit over the past six weeks. The recent inflation picture looks slightly less benign than it did earlier. Moreover, the increase in oil futures prices suggests that energy prices could continue to boost overall and core inflation. Members may also view downward pressure on the dollar as likely to persist. The language shown in section 3 would continue to cite the same concerns about inflation that the Committee has recognized in recent statements. In circumstances of increased risks to growth and continued substantial inflation risks, the Committee might, as back in September, prefer not to express an overall assessment of the balance of risks. As shown in section 4, the Committee could say that “recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation.” However, if the Committee’s predilection is that further easing will probably be necessary but it still wishes to underscore its concern about inflation, you could insert a sentence after the first sentence in section 4 saying that “on balance, the Committee sees downside risks to growth as having increased, but it must also remain attentive to the upside pressures on inflation.” Most dealers expect you to couple a ¼ point easing today with an assessment that the risks are skewed to the downside. But even the version without an explicit risk assessment probably would be read as consistent with further policy easing going forward, particularly since you eased in October following a statement in September that was comparable to the one shown in section 4. It might be worth noting that many market participants expect the Federal Reserve to augment its monetary policy action today with some announcement regarding the discount window—for example, a reduction in the primary credit spread. As the Chairman noted earlier today, the absence of such a reference in today’s announcement could prompt some investor disappointment; but given your monetary policy action under alternative B, the effect on market interest rates seems likely to be limited, and presumably, any effect today will be reversed tomorrow. If the Committee is already persuaded that the economic outlook has weakened more sharply than in the Greenbook or if it has become significantly more concerned about the downside risks to growth, it might prefer the 50 basis point easing of alternative A. The Committee might see the larger move at this time as warranted particularly by risk-management considerations. The Greenbook presented two alternative scenarios—a “greater housing correction” and a “credit crunch”—that illustrate downside risks and suggest that the Committee may need to ease markedly further over coming quarters. In the case of the credit crunch scenario, for example, the estimated version of the Taylor rule calls for a funds rate that troughs at 2.6 percent, well below the low point currently built into market interest rates. As shown in the second column, the language suggested for alternative A explicitly cites both a weaker outlook and greater downside risks in explaining the relatively large policy move. As in alternative B, the language on inflation would be nearly unchanged from that employed in October. But in section 4 of alternative A, the Committee would indicate a judgment that—following the further reduction in interest rates—the upside risks to inflation roughly balance the downside risks to growth. Or the risk language shown in red in section 4 of alternative B could instead be employed under alternative A; this might be appropriate if the Committee felt that the same elevated risks that motivated it to ease 50 basis points also suggested that it was difficult to weigh the remaining risks after the action. In either case, short- and intermediate-term market interest rates would likely decline noticeably under alternative A. In contemplating the pros and cons of alternative A, one consideration might be whether the Committee views this combination of sharp easing and the associated language, particularly the version coupled with an inconclusive risk assessment, as likely to lead market participants to worry about what information the Committee might have that would lead it to take such a substantial step, and so undermine investor confidence. If, in contrast, the Committee saw the downside risks to growth as somewhat greater but was not yet convinced that the outlook had deteriorated substantially and remained concerned about inflation prospects, it might consider implementation of alternative C. As indicated in the right-hand column, under this alternative the Committee would maintain the stance of policy at this meeting but conclude that the downside risks to growth now are the predominant concern. With overall inflation on the high side and upward pressures stemming from energy prices and dollar depreciation, members might be concerned that policy easing could go too far. The stance of policy has already been eased 75 basis points despite only limited evidence to date that economic weakness is spreading to a significant degree beyond the housing sector. Indeed, as some of you suggested, the incoming indicators of slowing growth over the intermeeting period may be broadly in line with what you expected in October. If so, the Committee may feel that its monetary policy actions to date—and, at the margin, the establishment of the TAF as well as swap lines with foreign central banks—probably will provide sufficient insurance that financial problems will remain contained and will not greatly restrict the availability of credit to households and businesses. Thus members may believe that further easing is not and probably will not be necessary. Indeed, members may find worrisome the prescription of the optimal control simulation in the Bluebook that a slight degree of policy firming would be appropriate over coming quarters if the Committee were pursuing a 1½ percent long-run objective for inflation. Even with such unease about inflation prospects, though, the Committee may be sufficiently concerned about the current threat to growth to judge that, on balance, the risks are tilted to the downside with an unchanged stance of policy. I will conclude by responding belatedly to a question that President Evans posed at the last meeting. He asked what the experience has been with including an indication of downside risks in the policy statement. In particular, would markets likely see such a risk assessment as signaling a likelihood of an imminent policy easing? Answering the question on the basis of the historical record is not entirely straightforward, partly because the Committee’s practices have evolved over time; as President Evans noted, it has been only since 1999 that the Committee has released a risk assessment or some other form of a tilt along with its announcement. Despite some qualifications, the basic answer seems to be, not surprisingly, that the risk assessments have been predictive of future Committee action. The experience from December 2000 through January 2002 makes this point clearly. During that period, at fourteen meetings in a row the Committee indicated that “the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future.” In eleven of those fourteen instances, that indication was followed by a policy easing at the next meeting. Later, toward the end of 2002, one of two indications of downside risk was followed by an easing, and in June 2003, a different balance of risks—one concerned with disinflation—was followed by an easing. All in all, it seems reasonable to judge in current circumstances that maintaining the stance of policy while assessing that the risks are tilted to the downside, as under alternative C, would lead market participants to continue to put high odds on future policy easing. But the absence of policy action at this meeting despite nearly unanimous expectations of policy easing would mean that the expectation of a downtilt in rates would begin from a notably higher level and might be less steep, prompting a significant upward shift in short- and intermediate-term interest rates. That concludes my prepared remarks." FOMC20081029meeting--200 198,MR. STOCKTON.," The answer to that is ""yes""--it is certainly possible. Obviously, it is very difficult to separate things that might actually have changed the transmission channel of monetary policy from just big financial developments that have offset the beneficial effects of easing policy. We built an assumption into the baseline forecast that GDP responds close to the average response to a fed funds rate reduction, as would normally be the case. The one small technical area in which it seems as though the effect almost certainly would be smaller is that, with the equity premium so high right now, any given change in the funds rate is likely to result in a smaller change in the required return on equity and probably a smaller stock market response than you would normally get. So I think, basically, it is certainly possible, but in our forecast we have assumed that the additional reductions will have GDP consequences along the lines of the normal response. " CHRG-110shrg38109--30 STATEMENT OF SENATOR JOHN E. SUNUNU Senator Sununu. Thank you very much, Mr. Chairman. Senator Bennett, I thought, was somewhat eloquent in talking about the very positive trends we have seen in the economy: Record job creation and above average recovery period, record homeownership, rising income levels. It is fair to say, though, for any Member who has spent a little time back home, there is a sense of insecurity that can be felt even in what are relatively strong economic times. And I think that is an issue or a set of issues dealing with their insecurity or uncertainty that we should deal with as policymakers and perhaps that at some level can even be addressed by the Fed. But I think it is important to understand that the role of the Fed is not to redistribute wealth, not to raise taxes, not to establish protectionist trade measures. And I think that is a good thing. I suspect maybe Chairman Bernanke thinks that is a good thing, because he has a tall enough order as it is. The areas where the Fed can have a very positive impact within their mission are to deal with the uncertainties of inflation, the uncertainties of establishing a sustainable and steady record of economic growth, the security that comes from the establishment of safe and sound financial markets. And those are all responsibilities of the Fed, I think responsibilities that Chairman Bernanke takes very seriously. You have spoken very well to those issues in the past, and I look forward to hearing your comments on those and other issues this morning. Thank you Mr. Chairman. " CHRG-111shrg53176--79 Mr. Breeden," So this lender of last resort role has always given the Fed a stature and an importance in the system, and it is quite genuine; central banks do play a critical role. But their primary role is, of course, monetary policies, stability of the currency, and you will always pick Fed chairmen and Fed Governors to get good economists who will do that role well. Regulation is kind of off on the side. Who really runs regulation in the Fed, I am not sure anybody ever really knows. Senator Shelby. Maybe they did not have anybody running it. " FOMC20070131meeting--402 400,MR. FISHER.," Mr. Chairman, we talked briefly about the Norges Bank and Norway, which is a country of 4.6 million people, a constitutional monarchy, and my mother’s homeland. My mother taught me a wonderful phrase, which I want to repeat here as an antecedent to this discussion. It’s actually a quote from Santayana: Skepticism, like chastity, should not be relinquished too readily. [Laughter] I admit to being quite skeptical about this exercise, and I will reveal my cards up front in terms of being sensitive to the arguments that President Minehan and President Poole have made as to the predicate question, which is, Is there a compelling reason to do this? Not only is the discussion charming, but I am almost overwhelmed by the encyclopedic knowledge of some of my colleagues. I don’t possess that knowledge, and I listen to it very, very carefully. But I have not yet heard a satisfactory answer. Yes, we have had an evolutionary process over thirty years, but is there a compelling reason to change the way we do our business? If you go back to David’s exhibit 1, it says that we presumably would undertake this effort with an eye toward “advancing the goals of economic performance, public discourse, internal discourse, and efficient operations.” I think of this in a broader context, which is maintaining and building or, using President Lacker’s word, enhancing the public’s faith and confidence in the Federal Reserve, and I think the faith and confidence in the Federal Reserve right now is pretty high. Now, two words are being thrown around constantly in this discussion. One is the “public,” and the other is the “markets.” By the way, I’m not going to get to the eight questions—I want you to be relieved right up front. [Laughter] I can’t get there yet because I haven’t answered the predicate question. But I would ask the Committee to consider what “the public” is and what “the markets” are. Governor Kohn said something during our discussion of policy with regard to the market operators—I actually spent three-quarters of my life being one of them—that I thought was quite complimentary and summarized the current state. He said that nothing we have been saying is getting in the way of the stabilizing properties of the market. I really like that. So my question is, What is wrong with the way we’re doing things if we’re not getting in the way of the stabilizing properties of the market? I agree with Cathy’s point that, with regard to the market, our actions speak louder than our words. Day to day there may be variance, but in the long term that’s what counts. I believe that the markets may have had a difference of view, they may have been testing us, but they’ve come around, and our actions have spoken much louder than our words. If the definition of “public” is the academic community, I understand their insatiable appetites in the pursuit of knowledge. I respect that, but I think there may be other ways of assisting that pursuit of knowledge than by increasing the frequency of our forecasts or the complexity of our forecasts. I want to apologize to my friend from Philadelphia in advance, but are we talking about those who operate the economy—the women and men who run the businesses that create the microeconomy (and many micros make the macro), whether they are $2 million businesses or big businesses? I went back and counted. Since I had the good fortune of coming on this Committee, I have spoken on 236 occasions to managers of big and small operations—CEOs mostly, some CFOs. Not once have I been asked by them for more-frequent forecasts or for all the variables that we consider or anything that projects the kind of complexity that we’ve been talking about today at this table. I’m a former Rotarian. I may be one of the few here. I speak to Rotary Clubs all the time. The only question they want to know is where rates are going to go. [Laughter] I don’t think they care one whit about the complexity of our forecast models. But that’s not the group I’m worried about in terms of the public. President Poole raised an excellent point, which is that we do have to be mindful of the elected representatives of the people who created our charter and who in the end we all serve, and that’s the politicians. I would just ask you to consider the argument that we’re having against that background and the risks that it poses. This is a one-way street. We see this from the excellent work that the staff did. There’s no going back once you go down this path. Vince mentioned our semiannual schedule set by the Congress. Need we do more? Have they asked us to do more? Should we do more before they ask us to do more? Shouldn’t we think of this in terms of negotiating with the political class rather than giving them something for which they may not even be asking. If we give it to them, it may lead to still more questions that we cannot satisfactorily answer. So I would beg the Committee to consider what we’re talking about when we’re talking about the public and the markets and whether this is a compelling thing that needs to be done now. I’d like to emphasize a second thing. Obviously, being a Bank president, I do not wish to be party to anything that emasculates the Banks. Indeed, whatever we do and however we do it, if we do it—and I’m not convinced that we should—we need to respect the Banks not only for their research capacity and the diversity of views and, what Governor Mishkin and President Yellen correctly mentioned, their geographic diversity but also as vital links to the public, whether the public is the elected leaders, the Rotarians, the economic operators, the financial markets, or even the academics. A third point, and then I’ll stop, is that I ask that we be practical in the way that we do this. President Minehan mentioned that we do a lot. I have no doubt that we could do more, but we have constraints on our time. In being practical, we also have to be wary of what other questions we raise by providing more information. Some elements may not be interested in our preserving our independence or may be a threat to our independence—I won’t mention who those might be since I don’t want that on the record. Mr. Chairman, those are my three concerns, and I’ll spare you my answers to the eight questions, which I hope I’ll have a chance to give at a later date." CHRG-110hhrg46594--325 Mr. Perlmutter," This is an interesting way to negotiate a loan, wouldn't you say? You are asking us to be your lender. You are asking the United States of America to be your lender. And I am just saying, do you have a forecast based on--let me ask you this: How do your sales in November compare to your sales in October? " CHRG-111shrg62643--144 Mr. Bernanke," Our baseline analysis is that there will not be another large fiscal stimulus, and based on that, we have come up with the forecast which I reported today which is for moderate recovery. Senator Menendez. But you are also looking at monetary policy as a way, possibly, to see if you can further stimulate--my word--the economy, not? " FOMC20050630meeting--295 293,VICE CHAIRMAN GEITHNER.," I wanted to ask a different question on the international side. Karen, on the external forecast, how much of a change is this view of where the current account-GDP ratio goes relative to your expectation six months ago or thereabouts? It seems to me that it looks slightly darker." CHRG-109hhrg22160--102 Mr. Greenspan," All I can say to you, Congressman, is that in spite of the forecasts of the economists that you are citing, of which I can find a whole slew who will report exactly the opposite, we have nonetheless created the highest standard of living of the major industrial economy in this world. " CHRG-109shrg21981--145 Chairman Greenspan," Correct. What happened would be that the trust fund was essentially running down to zero, which statutorily required that we pay benefits only to the extent that revenues came in. Senator Sarbanes. So that is a situation comparable to what is now forecast to happen in 2050, correct? " FOMC20051101meeting--102 100,MS. JOHNSON.," Okay. We appreciate that. I recognize that the outcome in Mexico during the first half of this year certainly raises questions, because Mexico has not enjoyed the level of production that would have been consistent with previous relationships to U.S. GDP. So whether or not Mexico will, in fact, strengthen is certainly a risk in the forecast." FOMC20070131meeting--144 142,MR. PLOSSER.," Thank you, Mr. Chairman. Conditions in the Third District have continued to evolve much as they have for most of the past several months. Economic activity is still expanding. I think I can use the word “moderate”—I don’t think anybody else has used that yet, and our contacts expect the pace to be maintained in the coming months. There has been little change in the pattern of activity over the sectors. Retailers in our region indicated that their holiday sales were about as they expected or somewhat better. Housing continues to weaken at a somewhat orderly pace, but there are signs of stabilization of demand. Inventory has remained elevated, and construction continues to decline. However, the weakness in residential construction is being offset by continued strength in nonresidential construction. Office vacancy rates continue to decline in Philadelphia and in the near suburbs as well. The net absorption of office space has increased for the past twelve quarters. Manufacturing activity in the region hit a soft spot in the fall, as I indicated in previous meetings, but our most recent Business Outlook Survey, in January, presented somewhat positive but also somewhat mixed signals. The general activity index returned to positive territory with a reading of plus 8, indicating a slight increase in manufacturing activity, and there was a significant rebound in shipments. New orders, however, remained close to zero. That’s somewhat of an aberration because new orders and shipments tend to move very much together, and so there are some inconsistencies there, which is why I said the situation is a bit mixed. According to our survey, however, the firms expect a rebound of general manufacturing activity and orders over the coming six months. Indeed, most of our business contacts see moderate growth in the region continuing for the foreseeable future. Their positive attitudes are consistent with the recent positive news we’ve had about conditions in the nation. Firms remain concerned about their ability to hire both skilled and unskilled labor. Labor markets are tight for many of the reasons that President Minehan described in New England; we have some of the same things going on in the Third District. Regarding national conditions, the unusually warm weather in December may have temporarily buoyed some of our numbers; but based on incoming information, I’ve become increasingly confident that the national economy has a positive underlying momentum. At the time of our last meeting, there was a contrast between the mixed data on consumption and production and the relatively strong indications from the labor market. The picture that appears to be emerging from the latest economic information is one of stronger underlying growth that has been temporarily weakened by housing and autos. There is little, if any, evidence that the housing and auto corrections are spilling over into the other sectors of the economy. We’ve been looking for those spillovers for the past six months and have yet to see any significant evidence that they are occurring or are about to occur. Of course, spillovers may yet materialize with a long lag, but that likelihood to my mind is diminishing as we have begun to see some hopeful signs of stabilization in housing. Labor market conditions remain firm, and manufacturing indicators improved in December as did capital goods orders. Although I didn’t talk to the chairman of Disney, I did talk to a small manufacturing firm with total revenues that come to $2 million. He has been very positive about the outlook. His sales depend a lot on construction, and he said that, after the most miserable August and September he had ever seen in his twenty years of running the business, the pickup began in late November, continued through December, and has continued into January as well. Other contacts from banks, particularly credit card issuers to whom I’ve talked, suggest that banks are seeing numbers coming across their books on credit card purchases continuing to be strong even after Christmas. So that also is good news. All of this suggests that the downside risks to growth have receded since our last meeting. I believe this is the market’s assessment as well, as expectations of future policy firm. My outlook is that the economy will return to trend growth, which I put at about 3 percent this year, and will continue at that pace into 2008. Of course, as everybody has indicated, that’s a little stronger than the Greenbook’s outlook, and it is, again, based on my view that potential growth or trend growth is somewhat higher than the Greenbook has stated. I expect the unemployment rate to rise slightly, maybe to 4.8 percent by the fourth quarter of this year, and then to stabilize into next year. I think this is going to be accompanied by employment growth of nearly 1 percent, and again, that’s what accounts for the difference in the trend growth. I anticipate a decline in core PCE inflation of about 0.4 percent by 2008. I would like to underscore that this forecast is not driven by a lower pass-through of oil prices, which have declined. My reading of the empirical evidence, including work done by some people on the Philadelphia staff, is that it’s very difficult to attribute movements in core inflation of six months to twelve months or longer periods to changes in oil prices. In fact, there’s growing empirical evidence that neither movements in oil prices nor Phillips curve type factors significantly improve our root mean square error forecasts of core inflation two or more quarters ahead. I note that this refers to forecasts of six months or longer and not to short-run high-frequency movements. This suggests that we should be careful in the language we use describing the reasons for our projections of future inflation to avoid perpetuating views of inflation processes that we can’t empirically substantiate. In my view, core inflation will not come back down until monetary conditions, which I believe have been very accommodative over the past few years, have tightened sufficiently. The Greenbook forecast has a slightly smaller decline in core PCE inflation to about 2 percent in 2008, but incorporates a less restrictive monetary policy than I believe is likely to be appropriate given my view of the strength of the underlying economy and of the fundamentals that we are seeing. Indeed, over the past two meetings, my feeling was that the slowdown in economic activity that we might be seeing, combined with a constant fed funds rate, might have been enough to bring inflation back to a more acceptable level. Now I’m less convinced that price stability will be achieved without further action on our part some time later this year. But I will leave that discussion to the policy go- round. Thank you." CHRG-111shrg55278--131 RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM ALLAN H. MELTZERQ.1. Lessons of Fed History--Professor Meltzer, you are in the process of completing your book on the History of the Federal Reserve. I understand that you have been working on this project for more than a decade. This research gives you a unique perspective about the strengths and weaknesses of the Fed. In your examination of its history, has the Fed demonstrated that it is inherently better at identifying systemic risks than any other regulator?A.1. No. If anyone could forecast crises, they would either be very rich or they could prevent them. We need to choose policies that reduce the risk of crises. My answers to some of Senator Bunning's questions suggest some ways of reducing failures and the public's cost of failures.Q.2. What are the problems that are likely to occur if the Fed is given authority to regulate systemic risk?A.2. The Fed will not be able to do much because we do not know how to forecast systemic risks. The Fed will be more engaged in political decisions than is consistent with independence. ------ FOMC20050202meeting--160 158,MR. OLSON.," Thank you, Mr. Chairman. First, I would like to reflect briefly on one of the charts in the chart show—the chart on E&S [equipment and software] expenditures—and the possibility of the “no investment pothole” scenario. It strikes me that at this point in early February, if we are not yet certain as to the impact of the partial-expensing provisions, there’s a strong indication that there is no pothole. I say that for this reason: In my experience, incentives attract capital, and significant incentives—such as the kind that would generate this sort of behavioral change—attract capital noisily. That means that we would pick up, either from the E&S manufacturers or from the lenders, some indication of the impact of the partial-expensing incentives. The fact that we have not suggests that we may not see a deceleration in E&S spending as a result of the expiration of the partial-expensing provisions. That may be a risk to the forecast, but it is a risk only to the accuracy of the forecast; it would not be an unwelcome development. If you look at the February 1-2, 2005 113 of 177 unemployment are very positive, yet the impact on PCE prices is neutral. So it seems to me that that is a very realistic alternative. Second, in following the comments by bankers in January after the release of fourth-quarter earnings reports, two themes came through. One was that asset quality has peaked and can only decline, and the other was the highlighting of additional provisioning for loan losses both in the fourth quarter and potentially in 2005. So there was a suggestion of cyclicality to these developments that would at least merit a look at the relationship between asset quality and the impact it might have on the economy. The question is whether or not there is anything going on that would jeopardize our forecast of growth above potential through 2006. Bill Treacy pulled together some information for me, and I’ve handed it out in a set of three charts showing nonperforming assets, net charge-offs, and loan loss provisions as compared to real GDP growth since 1990.4 The loan data have been seasonally adjusted to comport with GDP data. For two of the three—nonperforming assets and net charge-offs—asset quality is a very reliable lagging indicator. The peaks of nonperforming assets and charge-offs followed the troughs of GDP by several months. The same is not necessarily true with loan loss provisions. However, the opposite is not true. Those data did not indicate that at an inflection point we had reached a time in the cycle that would suggest the economy was ready for a downturn. In fact, loan loss provisioning, in many cases, will increase at the start of the cycle of loan growth again, for reasons that are known only to auditors and the SEC [Securities and Exchange Commission]. [Laughter] So the question is: Is there anything in the current analysis of asset quality that would suggest a risk to our current forecast? It seems that there is not. A third point that I would like to make that has not been discussed yet is the longer-term fiscal policy issue called Social Security reform. In Washington, D.C., the decibel level on Social Security is strong. It’s about to get stronger, particularly after this evening when the President discusses it again in his State of the Union speech. The Washington Post this morning indicated that February 1-2, 2005 114 of 177 even though the Administration’s position is not yet out, the Democrats have already lined up sufficient votes in the Senate to keep the private accounts—or personal accounts, as they are now being called—from happening. The question would be whether the personal/private accounts will continue to be the focus or whether can we move to a more rational, thoughtful consideration of options such as those outlined in The Wall Street Journal article featuring Governor Gramlich earlier in the week. It is unlikely that we are going to get that latter scenario. The personal investment accounts will continue to be the focus for an important reason. The Republicans who are in favor see the personal accounts as transformational—transformational both in the role of government and in terms of what government can do for the wealth-building of individual private citizens. They see the adjustments that can be made as painful. And, as one of them told me recently, “We’re not in it just for the pain.” [Laughter] In other words, if the package of proposed changes has no personal/private accounts, there will be no Social Security reform. Also, there’s a very short window. If it doesn’t happen in 2005, it’s likely that it will not happen. So, I think the President is staking a significant part of his reputation on achieving Social Security reform, and the focus will be on that issue. So, I think we should expect that to be a very high profile issue for the next several months. In summary, there’s certainly nothing, even with the “no pothole” alternative, that would suggest to me that we in any way should alter our current path of removing accommodation in the measured manner we have been doing. Thank you." FOMC20070628meeting--138 136,MR. MISHKIN.," Thank you. My view of what has been happening in the economy is that we have been basically going through a rebalancing. We had a sector that was clearly bubble-like with excessive spending, and now we are getting the retrenchment, which is taking a bit longer than we expected. But the good news is that we are going through a rebalancing in which we are just moving resources to other sectors and that is actually going much along the lines that we want to see. The problem in a rebalancing episode is that you are always worried about the risk that is possible because these transitions don’t always occur smoothly. I think that we were much more worried about that—at least I was more worried—at the previous meeting. But we have been seeing that the rebalancing is actually going along pretty well. In particular, although the housing market is very weak, very much along the lines of the Greenbook forecast, it hasn’t surprised us this particular period. It’s just that it is pretty bad. But the risks are actually fairly balanced on housing because we do not see it as very strong and that is part of the process of undoing the previous excesses. Another very important thing is that we have not seen any surprising spillovers from the housing market. As time goes on and nothing really bad happens, we become more confident that, in fact, the downside risk isn’t there either. We have also seen that the investment sector has been looking a little stronger. Again, that really did concern me at the last FOMC meeting. Yet we have had some reasonable numbers; they are not spectacular, but I think the downside risks have dissipated. So the bottom line is that I see the economy as rebalancing and doing it in a fairly good way. In fact, from a long-run perspective, this is a good thing and not a bad thing. The downside risk has dissipated, and the risks are now quite balanced. So I am quite comfortable with the Greenbook forecast on this, which is that we have growth somewhat below trend but moving back toward trend, and I see that there has been a shift in a positive direction and the risks are not excessively on the downside but are much more balanced. When I look at the inflation picture, I am in a way pleased with the recent numbers because there is no strong indication that we are far from potential output and, in particular, there is a little indication that the tightness in the economy certainly will be unraveled. According to our forecast, not much is going on in that area, so what’s going on in inflation expectations will be dominant. I mean, given that inflation expectations have been pretty well anchored around 2 percent, although there is some uncertainty, I thought that we would have a return to 2 percent numbers a bit more quickly than the original Greenbook forecast showed. I was really pleased because the Greenbook has basically moved closer to the picture that I had all along; so now I’m very comfortable with the Greenbook forecast. In contrast to some other people, I think the risks are pretty balanced. Now, maybe that is not really different because of the people who have inflation going below 2 percent, and I don’t see that. So I believe it’s going to be 2 now and it’s going to be 2 for a while unless we make a concerted effort to change inflation expectations. Then there is the whole issue of how we might go about doing that. But given the current environment, my view is that risks are fairly balanced. Other people are saying that there is risk on the upside, but I think that’s because they just have slightly lower numbers regarding where they think inflation will be. But probably when we look at it from that perspective, it is about the same. So right now I think the economy is evolving in a pretty reasonable way, and I’m sure we will be surprised in one direction or another in the future. Thank you very much." FOMC20060510meeting--83 81,MS. YELLEN.," Thank you, Mr. Chairman. Incoming data on the pace of economic activity surprised me slightly to the upside, although the indications are that housing is continuing to cool. Such an upside surprise is of concern, given that we are probably in the neighborhood of full employment and inflation is already on the high side of a range I consider consistent with price stability. I have also been slightly surprised, and unpleasantly so, by incoming data on core inflation. Beginning on the real side, recent data might signal greater underlying momentum in aggregate demand, portending more of the same going forward. But other developments during the intermeeting period portend slower growth this year. In particular, energy prices and longer-term interest rates have risen surprisingly and substantially. Taking all these factors into account, we have marked down our forecast for real GDP growth a bit for the latter half of 2006 and for 2007. We see growth coming in slightly below trend starting in the second half of this year and the unemployment rate moving up toward 5 percent. This forecast assumes that policy is tightened at this meeting and once more over the next several meetings. One development on which I would like to comment briefly is the rise in long-term interest rates. Since the beginning of this year, the nominal ten-year Treasury rate is up about 75 basis points. About 50 basis points of this increase is accounted for by a rise in the real component, at least as measured by TIPS rates. It seems natural to assume that this increase in real long rates will restrain future growth, but the outcome for economic activity is not unambiguous: It depends on what caused real rates to rise in the first place, and the causation is far from obvious. For example, higher long-term rates could reflect rational market expectations of a significantly stronger domestic economy over the next few years. But such an explanation does not strike me as particularly plausible because, although recent data are slightly on the strong side, they are not dramatically strong. Moreover, the uptick in real rates appears to be especially pronounced in implied yields at the long end of the curve—in the distant future, in periods well beyond a plausible forecast horizon. A second possibility is that higher U.S. interest rates reflect a shift in global capital flows away from the United States, perhaps due to the unwinding of the carry trade or growing concern about the U.S. current account deficit. Such a shift might account for the sharp drop in the dollar over the same period. In simple models, such a shift in portfolio preferences has ambiguous effects on domestic demand because the depreciation in the dollar could stimulate aggregate demand by more than higher yields depress it. It’s not my intention to overemphasize the risk that growth will not slow. My point is simply that, although the rise in bond rates seems likely to help slow the economy, we should not take it for granted. Turning briefly to inflation, I’m uncertain whether the recent bulge reflects various special factors, as David mentioned, some pass-through of energy and commodity prices, or pressures from resource utilization. Parsing the CPI report, I found it difficult to discern evidence that the uptick does reflect pass-through of energy and commodity prices into core inflation. I would be quite concerned if the uptick reflects pressures from resource utilization and turns out to be persistent. However, half a dozen measures of slack that we monitor suggest no noticeable change in slack since late March. These measures also suggest that we are in the vicinity of full employment and not noticeably beyond it. Data on both productivity and labor compensation are largely reassuring. My final comment concerns the rise in inflation compensation since our last meeting. While the possibility of some loss of Fed credibility certainly can’t be dismissed, I believe we should not overreact. First, the rise we’ve seen is not out of line with the typical volatility in this series. Second, we must remember that inflation compensation includes not only expected inflation but also an inflation risk premium. Of course, both of these elements could be higher because of a lessening of credibility. But the inflation risk premium could also be higher because the world now strikes market participants as a riskier place, perhaps because of geopolitical concerns that have nothing to do with credibility. Indeed, a growing perception that the world is riskier could explain both the uptick in inflation compensation due to a rise in the inflation risk premium and some of the rise in TIPS yields due to higher real interest rate risk. Factor analysis performed by our staff suggests a strong correlation with the common factor for the term premium and longer-horizon, but not shorter-horizon, breakeven inflation rates and TIPS yields. My point is that determining what has caused inflation compensation to go up is not an easy matter, and concluding that it’s due to a lessening of credibility may be premature. So overall, while we have revised our core inflation forecast up slightly, we continue to be fairly optimistic that inflation will remain reasonably well contained going forward. Inflation in the core PCE price index of around 2 percent over the next year or so seems like the most likely outcome to us." CHRG-111shrg57320--276 Mr. Reich," They do have a back-up role. Senator Levin. So why say no role? Kind of over the top, isn't it? " CHRG-111shrg50564--32 Mr. Volcker," Yes, it is a non-traditional role. Senator Shelby. Non-traditional role. You are very---- " FOMC20081029meeting--203 201,MR. LOCKHART.," Thank you, Mr. Chairman. Most of the anecdotal information from the Sixth District is consistent with the downbeat picture that has been emerging in the national data. The sentiment of directors and their contacts has turned decidedly more pessimistic regarding current economic conditions and the near-term outlook. Banking contacts indicate a further tightening of credit standards, while stresses on household and small business finances have resulted in increased credit card usage. A state economic-development official noted that some banks have halted their 90/10 SBA lending. Bankers active in the VRDN (variable rate demand note) market noted that municipalities are under pressure with declining revenues and higher financing costs. Nonresidential building contractors noted a large increase in the number of canceled projects. Advisory council members described a substantial decline in domestic shipping and transport activity for most goods, other than energy products, and some slowing of export volumes through regional ports. Finally, retail contacts, in anticipation of the coming holiday season, noted that orders are down, and heavy price discounting has begun already. Thematically, Atlanta's forecast is consistent with the Greenbook, but we are projecting a slightly more severe and protracted downturn in business activity than the Greenbook baseline. My assumption is that the cascading dynamic at work in the financial markets may take longer than projected in the Greenbook to come to an end. As a consequence, I view the Greenbook's scenario entitled ""more financial fallout"" as the most plausible storyline among the likely range of outcomes. I should acknowledge that we're in an interval between the announcement of the TARP and its full implementation. The encouraging improvement in credit spreads and term funding we have seen in recent days may accelerate once the TARP is operational. With inflation abating more or less as expected and with such uncertainty surrounding the playing out of continuing and recently worsening turmoil in the financial markets, I have to view the balance of risks as more negative for growth than upside for inflation. Thank you, Mr. Chairman. " FOMC20051213meeting--64 62,MR. MOSKOW.," We’re a resilient group, Mr. Chairman. [Laughter] We don’t get discouraged easily. Developments in the Seventh District have been mixed. The data released since our last meeting indicate that manufacturing expanded at a moderate pace, while housing slowed and employment continued to be weaker than the national economy. That said, our contacts seem to be more upbeat. We continue to hear reports of labor markets becoming tighter, leading to potential wage pressure. One of the national temporary help firms in our District mentioned that they are increasingly unwilling to guarantee their clients an hourly wage rate for the entire year. Another indicated that entry-level wages are going up 3 to 4 percent but that at the mid- to upper-skill level wages are rising 5 to 7 percent. So I want to discuss two notable restructuring stories that point to the flexibility of the U.S. economy, albeit with government presence, notably on the pension front. One is United, which is at the end game, and the other involves GM and Delphi, which is just beginning. United’s CEO is optimistic about their prospects, as they expect to exit from bankruptcy in February. Their business has continued to improve, and forward bookings suggest that strength should persist in the coming months. United is gaining market share, while the industry overall is reducing capacity. Having unloaded their pension liabilities on the PBGC and restructured their labor contracts and other December 13, 2005 27 of 100 Incidentally, the CEO of United admitted to me that Ned Gramlich was right. He said that Ned’s position on federal loans forced United to do it the right way and to get the needed concessions from workers, suppliers, and creditors, and assistance from the PBGC. Turning to the auto industry, as I mentioned last time, Delphi’s bankruptcy could result in some meaningful restructuring of labor contracts. But there is a significant risk of a strike that could seriously disrupt the auto industry, particularly General Motors. The negotiations are at a delicate point with three key players—Delphi, the UAW, and GM. Approximately 15 to 20 percent of GM’s parts come from Delphi, and GM has provided some guarantees to the Delphi workers for their pensions and health care benefits. Clearly, the UAW is in a difficult position. A strike could well cause Delphi to close its U.S. operations and reemerge as an international firm with a far smaller union workforce. A prolonged strike at Delphi could also hobble GM. In a worst-case scenario, this could force GM into bankruptcy, which would hurt the UAW workers at both GM and at Delphi. As a result, all three parties have a strong incentive to avoid a strike. There have been some positive signs. Delphi has postponed the deadline for an agreement from December 16th to at least January 20th, and GM has given some concessions to Delphi on prices. In my conversations with Rick Wagoner, the CEO of GM, he felt that while a lot of antagonistic public statements have been made, the most likely outcome was that sanity would prevail and a strike would be averted. But to avoid a strike, all three parties must throw something into the pot. And he could not rule out some wildcat strikes at individual Delphi plants. Of course, a settlement here does not solve GM’s longer-term problem, which is loss of market share. And, as Dino mentioned, S&P downgraded GM’s corporate debt—not GMAC, but their corporate debt— December 13, 2005 28 of 100 In terms of the near-term outlook for auto sales, the consensus of 28 forecasters at our recent annual economic outlook symposium was for a small decline in sales in 2006 from this year’s expected pace of 16.9 million units. GM and DaimlerChrysler’s forecasts were in line with this expectation, but Ford’s internal forecast is considerably lower, at 16½ million units. Turning to the national outlook, economic activity continues to grow at a solid pace. Like the Greenbook, we see growth at or slightly above trend over the next two years, and this is also roughly in line with the consensus from our outlook symposium. The prospects for inflation present greater risks. There are two plausible scenarios going forward. In the first one, the increased energy costs in 2005 lead to a transitory increase in core inflation in ’06, but in ’07 core inflation comes back down. This is the Greenbook baseline scenario. In the second scenario, the increase in core inflation is more persistent, in part because there is less slack in the economy in 2006. Furthermore, monetary policy has been accommodative for a long time and there has been an accumulation of liquidity which ultimately could show through to higher nominal spending. For these reasons, both inflationary pressures and inflationary expectations could remain elevated for longer than envisioned in the first scenario. Our statistical forecasts, based on the Stock-Watson methodology, are more in line with the second, less optimistic scenario. Both scenarios are plausible, but the costs of the second one are higher. So from a risk management perspective, we need to put adequate weight on the second scenario. This may require more tightening next year than assumed in the Greenbook. But at this point, we just don’t know. Consequently, we should make sure that the statement does not give a premature signal that we’re near the end of the tightening cycle. But, as you requested, Mr. Chairman, I’ll hold off further comments on the statement until the second round. December 13, 2005 29 of 100" FOMC20061025meeting--12 10,MR. STOCKTON.," Thank you, Mr. Chairman. About a week ago, as we were closing the forecast, I was marveling at how little it had changed over the intermeeting period—both the broad strokes and the details. But the warm glow of accomplishment had barely been kindled when a glance at my desk calendar revealed the source of our success. The last FOMC meeting had been only five weeks ago, so we simply had not had time to accumulate our usual backlog of forecasting errors. [Laughter] I recognize that even this assertion is open to some challenge. Because of the incoming data, we have revised down our estimate of third-quarter growth of real GDP about ¾ percentage point, to an annual pace of just 1 percent. However, we don’t think this downward revision carries with it much, if any, macroeconomic signal about greater weakness going forward. Importantly, consumption, housing, and business fixed investment all came in very close to our September forecast. The downside surprises that we experienced last quarter were concentrated in motor vehicle production, defense spending, and net exports. In each case, we believe some good reasons exist for anticipating that these sources of restraint will abate or reverse in the fourth quarter. With regard to motor vehicles, the production cuts needed to deal with the inventory overhang that developed last spring have been larger and have come more quickly than we had expected. As a consequence, the drop in motor vehicle output took a bigger bite out of growth in the third quarter and is now expected to be a roughly neutral factor for growth in the current quarter, rather than being a small drag on growth in both quarters. Defense spending also fell far short of our expectations last quarter, but we expect these outlays to rebound in the fourth quarter to a level more in line with defense appropriations. Finally, imports are estimated to have surged in the third quarter more than seems warranted by the fundamentals and, as best we can tell, without a full offset in other components of spending. Karen and her team expect some of that import surprise to be unwound in the fourth quarter, providing a small plus to estimated growth. All told, we are projecting the growth of real GDP to rebound to a pace of 2¼ percent in the fourth quarter. For the second half, output is anticipated to grow at an annual rate of 1½ percent, a forecast not much different from the one in September. We also have made only minor adjustments to our longer-term GDP forecast. By our assessment, lower oil prices and a stronger stock market more than offset the effects of a slightly higher dollar and a bit weaker trajectory for house prices. All told, we revised up our forecast for the growth of real GDP 0.1 percent in both 2007 and 2008, to 2.2 and 2.5 percent respectively. Basically, the general contour of the forecast is the same as in September. As before, the very subdued pace of the expansion that is projected for the second half of this year results principally from a sharp contraction in residential investment that directly subtracts more than 1¼ percentage points from the growth of real GDP. Residential investment continues to contract next year, though that contraction gradually diminishes. In addition, the drag on spending and activity from the run-up in energy prices that has occurred, on net, over the past three years is expected to lessen considerably from this year to the next. The attenuation of the drags from housing and energy alone would result in a prompter return of growth to potential. However, we expect the housing slump to restrain the growth of real output this year and next through wealth effects and multiplier-accelerator influences. Most notably, house prices are projected to about flatten out; and as the impetus from past house appreciation wanes, consumption growth should slow, and the saving rate should begin to edge up. With its usual lag, the overall deceleration in output, income, and sales further damps consumption and business investment. As a consequence, growth remains slightly below potential in 2007, and the output gap edges up to roughly ½ percent of GDP by the end of the year. With the bulk of the direct and indirect effects of the housing slump expected to have largely played out by then, real GDP growth is expected to expand in line with its potential in 2008. Meanwhile, core PCE price inflation, which is currently running a bit less than 2½ percent, edges down to about 2 percent in 2008. The opening up of a small output gap helps to head off an intensification of inflation pressures. But by far the most potent influences are the diminishing upward pressures from prices for energy, non-energy imports, and other commodities. Because this basic story is virtually unchanged from the September Greenbook and because we had relatively few surprises to deal with in the forecast, I thought that I would dispense with a further explication of the contours of the forecast. Instead, I=ll offer you a scorecard of sorts to help you audit the plausibility of the forecast story in light of data that we will be receiving in coming months. Let me start with housing, because as I noted a moment ago, the recent and projected contraction in residential investment is the principal source of the below-trend growth that we are projecting over the next year. For that story to be on track, housing starts will need to drop sharply further by the end of the year. Single-family starts averaged about 1.4 million units in the third quarter, and in our forecast, we are anticipating a further 12 percent decline, to a pace of 1¼ million units this quarter. We read the incoming data as being consistent with that outlook. Although starts bounced up in September, permits—a less noisy indicator of housing activity—continued to plunge. Moreover, inventories of unsold homes remain at a very high level, and sales cancellations have continued to increase. But after a long period of what seemed to be unrelentingly bad news, the housing data received over the intermeeting period could be fairly characterized as more mixed. Sales of new and existing homes firmed a bit in late summer, the index of pending home sales moved up in August, and homebuying attitudes as measured in the Michigan survey jumped up in September and October. Although it is far too early to conclude that these indicators are pointing to stabilization in housing markets, they provide at least some encouragement to the view that the bottom may now be closer than the top. We will also be scrutinizing the information on house prices. Another reading on the OFHEO (Office of Federal Housing Enterprise Oversight) price index will become available in early December before the next meeting. Here we will be looking for another noticeable step-down in the rate of house-price appreciation, from the 5 percent pace posted in the second quarter to a projected 1¾ percent pace in the third. That forecast is roughly consistent with our near-term forecasting models that make use of the information in the Case-Shiller price indexes and other high-frequency measures of home prices. As you know, we are not forecasting the national average of house prices to drop, but our very low projected rate of house-price appreciation implies that a substantial fraction of households will be experiencing outright declines. Consumption will be the second major area that should be monitored, in part because we are expecting the slowing in house prices to show through here. In brief, we will be looking for a continuation in coming months of the moderate increases in consumer spending that we have observed since the spring. Over the past half year, consumer spending excluding motor vehicles has been increasing at a pace of roughly 2¾ to 3 percent, and we are expecting more of the same in coming months. That relatively steady expected growth reflects some crosscurrents that seem likely to be at work. Real income gains should be bolstered by the recent fall in energy prices and continuing, albeit modest, gains in employment. But the lagged effects of higher borrowing costs and an ebbing of positive wealth effects from housing are expected to hold spending below the gains in income and result in a slight upward tilt to the saving rate. Obviously, given the importance of consumption in overall aggregate demand, developments here will have a critical bearing on the probability of achieving our projected soft landing. A snap-back in consumer spending in coming months—an outcome that seems to underlie some of the outside forecasts that are stronger than ours—might lead to no landing rather than a soft landing. In contrast, any serious faltering of consumer spending is “buckle the seat belts and assume the crash position.” The third major development that we will be looking for is another sustained step- down in the pace of employment growth. Slower employment growth is a key link in the multiplier mechanism through which the housing-induced slowdown in aggregate output and spending propagates forward into below-trend growth next year. We correctly anticipated the first leg of that slowing earlier this year, when average gains in nonfarm payrolls dropped from the 200,000 per month pace of the preceding several years to the roughly 120,000 per month pace observed since the spring. But our projection anticipates a further slowing in the fourth quarter to an average pace of about 75,000 per month. To be sure, the increase in September was just 51,000, but that came on the heels of a gain in August of 188,000, so we wouldn’t want to lean too heavily on the September observation for support. Moreover, if asked to present just one piece of evidence that casts the greatest doubt on the staff projection at present, I would point to initial claims for unemployment insurance. Claims have basically been moving sideways in recent months and provide no indication that a further softening in labor markets is under way. Given the looseness of the relationship, our forecast of payroll employment is not inconsistent with the current level of initial claims, but right now this important piece of our forecast seems to have more upside risk than downside risk. The fourth element of our forecast that we will be looking for in coming months is some signs of slowing in business fixed investment. Of course, the accelerator consequences for equipment spending of the slowing we now think is under way in aggregate demand is really a story for 2007, and given the volatility in the data, it will take some time to detect that slowing when, or if, it occurs. But more immediately, we are expecting to see some slowing in nonresidential construction from the 20 percent pace that we’ve experienced over the past half year to something closer to a 10 percent pace in coming quarters, thus providing less offset to the weakness in residential construction than has been the case thus far this year. With energy prices leveling out, the upward impetus from drilling and mining activity seems likely to gradually abate. Outside drilling and mining, smaller employment gains, slower growth of manufacturing output, and still-high vacancy rates suggest to us that this sector will cool somewhat going forward. The final item on the scorecard is inflation. We are going to be looking for core PCE prices to continue to increase an average of about 0.2 percent per month for the remainder of the year, with core CPI running between 0.2 and 0.3 percent per month. Those increases would be higher than in most recent years but lower than the pace observed last spring. Moreover, some of the key factors that underlie our projection of a gradual slowing of core inflation over the projection period now seem to be falling into place. After nearly three years of persistent upside surprise, oil and other energy prices have dropped noticeably from the levels of late summer. If these recent developments hold, the cost pressures from rising energy prices should ease over time. Moreover, the sharp increases in residential rent that occurred in the spring appear to have simmered down of late, and we are expecting that pattern to continue in coming months. Meanwhile, most of the major measures of inflation expectations that we monitor have continued to fluctuate in a reasonably narrow range, and we expect that to remain the case going forward. I am tempted to say that, armed with this scorecard, you will arrive at the December meeting with a clear idea of how the staff forecast has stood up to the incoming data. But of course, we all know how the story goes. Much like the cliffhanger serial movies of the 1930s, the promise appears to be that, if you come back next time, all the current problems will be resolved. However, given rational expectations, you know that, to the extent any problems are resolved over the intermeeting period, they will simply be replaced by a new set of puzzles and perils. Karen will continue our presentation." FOMC20060808meeting--8 6,MS. JOHNSON.," From the perspective of the global economy, one of the important revisions in this forecast from last time is the projected path for crude oil prices. We have incorporated into the baseline forecast a path for both West Texas intermediate (WTI) prices and the U.S. oil import price that is more than $5 per barrel higher in the fourth quarter of this year and nearly $7 higher by the fourth quarter of next year than was the case in the June Greenbook. It is still true, however, that the projected path, based as usual on market futures prices at the time the forecast was made final, is quite flat. The sizable jump in oil prices this time reflects the volatility that we have seen in market prices for oil since late June, when the previous Greenbook was being finalized. Spot prices for WTI moved from below $70 per barrel at that time to a recent peak of $77 in mid-July and again yesterday, following BP’s announcement that pipeline repair in Alaska will shut in about 400,000 barrels per day of crude oil. Price fluctuations during the intermeeting period reflected market concerns about the potential effect on supply of ongoing events in the Middle East, some disruptions to production in Nigeria, and a slight reduction in output by Saudi Arabia, as well as an awareness that hurricane season has arrived. No doubt the underlying strength of the global economy is contributing by maintaining overall demand as well. As of close of business yesterday, the futures path for WTI oil prices during the remainder of this year and next year was about $2 per barrel above the Greenbook baseline path. Clearly, further moves in oil prices are a risk to the forecast. Another important element in the foreign outlook is the continued elevated level of nonfuel commodity prices, especially the industrial metals. Metals prices are down from their highs in May, but they are also up from their near-term lows in June. During the intermeeting period, spot prices for copper and zinc rose through mid-July and then partially reversed their recent increases but since have moved up again. On balance, metals prices are modestly higher since the time of the June Greenbook, but prices of other primary commodities are somewhat lower. As a result, our projected path for nonfuel commodity prices in this forecast is very similar to that of last time. The elevated level of these prices means that they will continue to have lagged effects on U.S. import and export price inflation for a time. The flatness of the path going forward means that we anticipate that the implications for import price inflation will abate noticeably in 2007, contributing to a sharp drop in the rate of inflation for core imports. Further fluctuation in the prices for these global commodities is also a risk to our baseline forecast. These developments in global commodity prices, both fuel and nonfuel, along with other data released over the intermeeting period, led us to revise up some our forecast for inflation abroad through mid-2007. We expect that the upward pressures on inflation in the industrial countries will be felt in the near term, particularly this quarter, whereas those in the emerging market economies will be evident later this year and into next. The revisions are small, in part because foreign industrial countries have to date been very successful at containing the inflation consequences of higher crude oil prices and several have tightened monetary policy and in part because emerging market economies have continued to suppress domestic energy prices, delaying their effects in the process. Some monetary policy tightening has also been implemented by a number of Asian central banks. We continue to read the evidence for foreign real GDP growth as indicating a solid pace of expansion, with the possible exception of Canada, where output growth slowed in the second quarter. We have fine-tuned our outlook for expansion abroad a bit—strengthening last quarter and this quarter and lessening the pace just a little next year; but the overall path for foreign real GDP is about the same as in June. Indicators from most of our important trading partners—for example, from Japan, the euro area, and China—suggest considerable momentum in foreign economic expansion at the present time. Global financial markets confirm a generally favorable climate for continued strong growth, and many of the signs of increased risk concerns and heightened volatility from earlier in the year have faded. Over the intermeeting period, stock prices in many of our trading partners have risen. Equity price indexes in emerging market countries, in particular, have rebounded from the lows of mid-June but generally have not returned to the levels reached in early May. Other than in the United Kingdom and Japan, yields on ten-year sovereign bonds have moved down 10 or more basis points in the major foreign industrial countries since your June meeting, and spreads on dollar-denominated emerging market sovereign debt have partially retraced previous increases and are not far above the lows observed in early May, with the exception of spreads for Turkish debt. On balance, the dollar is down just a little over the period. The bottom line is that the staff’s picture of the global economy implies an essentially neutral effect of the external sector on U.S. GDP growth over the forecast period, although one must remember that there are risks on both sides to that picture. The arithmetic contribution of real net exports to GDP growth for the rest of this year and next year is essentially zero—with a small positive contribution over the second half of this year, unusual for us, followed by a small negative contribution in 2007 as a whole. Exports of both goods and services are expected to grow strongly, supported by steady expansion of real GDP growth abroad. The step-down in U.S. real GDP growth should restrain import growth somewhat over the next six quarters. The nominal trade deficit on goods and services is projected to widen about $75 billion from the estimated figure for the second quarter to that for the fourth quarter of 2007. The change in the non-oil nominal trade balance accounts for only one-third of that $75 billion. This change in the overall trade balance is sufficiently small that the projected ratio of the trade deficit to GDP is steady at about 6 percent. Nevertheless, the current account deficit is projected to exceed $1 trillion at the end of 2007, and the ratio of the current account deficit to GDP rises from 6.5 percent to 7 percent next year. A growing net deficit in investment income flows largely explains the further deterioration in the current account balance. That change, in turn, is accounted for by a substantial widening of the deficit on portfolio income that more than offsets a gain in the balance of direct investment income. The financing requirements of our external deficit remain large and will continue to grow as long as the level of the trade balance remains far from zero. David and I will be happy to answer any questions." FOMC20070509meeting--15 13,MR. STOCKTON.," Thank you, Mr. Chairman. In this forecast round, you, as policymakers, were faced with an identification problem similar to that which we, as econometricians, so often confront. Although the Greenbook forecast is essentially the same as it was in March, several observationally equivalent hypotheses could explain this outcome. First, abject laziness on the part of the staff; second, brilliant prescience on our part; or third, what I assume is your working null hypothesis— dumb luck. [Laughter] Well, I can assure you that abject laziness can be ruled out. It took much agonizing, endless meetings, and a lot of hard work to do nothing. We are, after all, still part of the federal government. [Laughter] As for prescience and luck, they did combine to leave the outlook pretty much as it was at the time of the last Greenbook. We still believe that the economy has been growing at a pace less than its potential, held down by the ongoing slump in housing activity. As the drag from residential investment abates, growth of real output is expected to pick up. But that reacceleration of activity is limited by a diminishing impetus to consumer spending from housing wealth and a reasonably restrictive monetary policy. Let me begin by citing a few areas of the forecast in which developments have unfolded much as we had anticipated. I’ll then move on to some of the areas of notable surprise that luckily had offsetting effects on the outlook. First, the BEA’s advance estimate of real GDP in the first quarter showed an increase of 1¼ percent that was close to our forecast both on the total and in the particulars. As expected, the decline in residential investment took a significant bite out of first-quarter growth, as did net exports and defense spending. Outlays for equipment were also quite soft. We view the meager gain in real GDP posted in the first quarter as exaggerating the weakness early this year. In particular, we are anticipating defense spending to bounce back in the second quarter to a level more consistent with appropriations, and we expect net exports to largely reverse their first-quarter drop. As a consequence, we are projecting real GDP to advance at a pace of a bit more than 2½ percent in the second quarter. Smoothing through the temporary ups and downs, we believe that the economy probably has been expanding at a pace of about 2 percent in the first half of this year, the same rate that we had projected in the March Greenbook. A second major piece of our story that appears to be receiving support from the incoming data is our forecast that consumption growth would slow noticeably. A projected step-down in the growth of consumption is an important reason that in our forecast, even as the housing contraction eventually wanes, growth in real GDP remains below the pace of its potential. Although it is far too early to claim victory, consumer spending on goods has flattened out in recent months after sharp increases at the turn of the year. The shallow trajectory of spending as we move into the second quarter, a lower level of real disposable income, and sluggish chain store sales suggest that our forecast of 2 percent growth of real PCE in the current quarter is within comfortable reach. However, I would like it noted for the record that I am not characterizing this as a “slam dunk.” [Laughter] A third key element of our story in the last Greenbook was that, even though equipment outlays had weakened over the past few quarters, we did not believe that this weakness was the front edge of a more serious retrenchment in capital spending. In that regard, we received a bit of reassurance from an upturn in the shipments of nondefense capital goods in March and an even larger jump in new orders for these goods. Those data suggest that high-tech investment remains on a solid uptrend, whereas investment outside high tech and transportation seems poised for a modest upturn in the second quarter after sizable declines over the preceding six months. As expected, purchases of heavy trucks remain the area of most notable weakness. Needless to say, the data for investment are so volatile that we remain cautious about concluding that the downside risk to capital spending has abated much. But given our recent track record in this area, you might consider it good news when the staff reports no news. A fourth element of our story that, at least for now, seems to be panning out is that the inventory overhangs that emerged in the second half of last year would be worked off relatively smoothly, rather than cumulating into something more serious. In the motor vehicle sector, steep production cuts in the second half of last year and early this year, coupled with a moderate pace of sales, have brought days’ supply of light vehicles down to comfortable levels. Indeed, the automakers have scheduled some increases in production in the current quarter. Outside motor vehicles, manufacturers appear to have adjusted production reasonably promptly to the unintended buildup of stocks. Indeed, manufacturing IP excluding motor vehicles declined at an annual rate of 1½ percent in the fourth quarter and increased only a paltry 2 percent in the first quarter. Some book-value measures of inventory-sales ratios remain elevated, but measures of days’ supply from our flow-of-goods system have shown an improvement that parallels reports from purchasing managers of fewer inventory problems among their customers. Moreover, factory output increased sharply in March, and the available physical product data and the readings from the labor market report point to another sizable increase in April. So the evidence seems to suggest that the inventory correction is abating. I should note that yesterday’s figures on wholesale inventories in March came in below what was assumed by the BEA in the advance estimate of GDP. All else being equal, those data suggest a downward revision in first-quarter real GDP growth of about ¼ percentage point. In response, we’d probably add a similar amount to our second-quarter estimate of real GDP. Finally, another central element of our forecast has been that labor demand would slow in lagged response to the downshift in the growth of overall activity. We have been counseling patience in the face of data in this area that persistently surprised us to the upside. Last week’s labor market report provides at least a shred of evidence in support of our story. Private payrolls increased 63,000 in April, and there was a downward revision of 24,000 in February—leaving the level of employment below that incorporated in the May Greenbook. Gains in private payrolls have averaged about 90,000 per month over the past three months, and we expect that pace to be maintained over the remainder of the quarter. The unemployment rate increased to 4.5 percent last month, also in line with our projection. Putting these pieces together, we are feeling a bit more confident of our story that activity is increasing at a subpar 2 percent pace in the first half of the year. We are also a bit less worried about the upside risks posed by labor demand and consumption and about the downside risks posed by investment spending and inventories—but just a bit less worried. Our longer-term outlook has changed little as well. We have revised down our forecast for the growth of real GDP this year by 0.1 percentage point, to 2 percent, and revised up our forecast for 2008 by a similar amount, to 2.4 percent. I would like to argue that these very small adjustments are a testament to our prescience, but I’ll have to admit that we seem to have benefited more from dumb luck. In brief, the negative consequences of a weaker outlook for housing activity and higher projected oil prices were just about offset by the positive effects of higher equity prices and a lower foreign exchange value of the dollar. Turning first to the housing market, the surprise has not been in actual construction activity, where starts have exceeded our expectations a bit. Rather, the real news has been on home sales—in particular, the sales of new homes. Not only did new-home sales drop in March to a level below our expectations, sales were revised down in the preceding months as well. As a consequence, the months’ supply of unsold new homes has moved up sharply further in recent months instead of tipping down as we had earlier expected. Moreover, sales cancellations, which had appeared to be heading down, turned back up in March. Some of this further weakening may reflect the continuing fallout from the pullback in subprime lending. But we also think that housing demand more generally has continued to soften. With sales now projected to flatten out a lower level than we had previously thought and with the months’ supply of unsold homes at a higher level, we anticipate that the production adjustment will be deeper and longer than was incorporated in our March forecast. Moreover, these developments also led us to trim a bit from our house-price forecast. Another source of downward revision in our outlook for real activity was a $6 per barrel increase in the price of imported oil over the intermeeting period. As Karen will discuss shortly, oil prices have backed off some since the completion of the Greenbook, but they are still running above our March forecast. The effect of higher crude prices has been amplified by a jump in gasoline margins. Those margins have soared as both planned and unplanned refinery outages have resulted in a substantial drop in gasoline inventories. All else being equal, higher consumer energy prices will likely put a noticeable dent in household incomes and consumer spending in coming months. Of course, not all else has been equal. Stock prices are about 7 percent above the March Greenbook assumption, and in our forecast, the associated higher level of household net worth provides greater support to consumer spending and largely offsets the effects of lower real incomes. Another positive offset to weaker housing and higher oil prices is the lower projected path for the dollar. The dollar dropped about 2 percent over the intermeeting period and is expected to remain below our previous projection by about that amount. A lower dollar and the accompanying higher prices for imports provide added impetus to domestic production as foreign and domestic demands are shifted toward domestic producers. With near-term developments unfolding about as we had expected and our longer-term projection benefiting from some powerful crosscurrents, we continue to present you with a reasonably benign outlook. Growth slows but doesn’t falter as actual output moves into alignment with potential. In contrast to our forecast of real activity, we have made some notable changes to our projection of overall price inflation in the near term. In particular, the recent run- up in gasoline prices is leaving a clear imprint on headline inflation. A steep jump in consumer energy prices is projected to boost overall PCE price inflation, which ran at a 3¼ percent pace in the first quarter, to a rate of 4¼ percent in the current quarter— an upward revision of 1½ percentage points from our March forecast. Meanwhile, core inflation has, on net, come in right in line with our expectations. The core measure for February was 0.1 percentage point higher than we had expected and for March was 0.1 percentage point lower. For the first quarter as a whole, core PCE prices increased at a pace of 2¼ percent, the same pace that we had projected in the last Greenbook. We are anticipating a similar-sized increase in the current quarter. Looking ahead, I guess our luck with offsetting errors ran out when it came to the inflation forecast. We accumulated a number of small changes in the key determinants of our inflation projection, and for the most part, they pointed in the same direction. Higher energy costs, higher import prices, a bit tighter labor and product markets, and a slightly lower estimate of the growth of structural productivity suggest somewhat greater upward pressure on price inflation. Each of these influences was small, but taken together, they caused us to revise up our forecast for core PCE inflation by 0.1 percent in both 2007 and 2008. Despite these revisions, we continue to expect core price inflation to edge down next year, from 2.3 percent this year to 2.1 percent next year, as the effects of higher energy and import prices wane, as resource utilization eases a bit, and as inflation expectations hold roughly steady. Karen will continue our presentation." FOMC20070131meeting--127 125,CHAIRMAN BERNANKE.," Thank you. President Minehan, just to clarify, I think that the forecast of consumption is not based on the idea that the saving rate has to rise. Rather, consumption is modeled using underlying determinants, like income and wealth, and an endogenous indication of that is that saving rises." FOMC20080625meeting--64 62,MR. STOCKTON.," That's correct--and the timing. So there are two aspects. One is that we have interpreted some of the surprise as a persistent strengthening in aggregate demand that we had not anticipated. The other is that the economy is not as weak now, and therefore the bounceback in activity next year won't be as strong. As Larry said, there are a lot of moving parts, but both of those considerations are built into this forecast. " FOMC20060920meeting--72 70,MR. STOCKTON.," I completely agree. As I indicated, this piece of our forecast does make me nervous because we are far out of the consensus, especially in our expectation for the decline in labor force participation. I’m actually a little less nervous than I was a year and a half ago, when we first moved to this change in our forecast, because at the time a very big question was whether there was going to be a large pool of underutilized and unutilized workers who would come back into the labor force as the unemployment rate came down. When the unemployment rate came down, the labor force participation rate—pretty much as we had expected—moved sideways. So I feel a little more comfortable than I did earlier about this piece of our forecast. But any time you are this different from everybody else, you need to be reasonably humble. As far as your observation about the market-based funds rate simulation, I think you are absolutely right. A different way to interpret it is to try to understand what the markets are telling us about the economy. I would also point to another alternative simulation that I think goes a bit in the direction that you’re suggesting—the “less inflation persistence” simulation, in which inflation comes down more rapidly and, in essence, allows the Fed to lower the fed funds rate more significantly than we’re assuming in the baseline in a way that’s not that different from the market’s expectation for the funds rate. Now, that’s one possibility, or it could be some combination. The market could be looking at some combination of a little less persistence of inflation and maybe a little weaker outlook for activity, although I would wonder about the weaker market interpretation. Looking at the full financial configuration, I don’t see indications from financial markets that there’s an expectation of a lot of financial stress on our doorstep. So I’m inclined to the view that they may be more in that “less inflation persistence” camp than in a “much weaker economy” camp." FOMC20070321meeting--119 117,MR. MISHKIN.," Thank you, Mr. Chairman. One way I think about the situation is to compare what’s happening now, not to the last meeting, but to two meetings before. From December to January we had positive news. Now we have gone from January to March, and we’ve had negative news. When you look at the overall picture, we’re not in a very different place from where we were in December, although I do think that there’s actually more uncertainty around the forecast. So let me go into a little more detail on this. I’m much less worried about the housing market as a serious downside risk. First of all, I do see signs of stabilization of demand, and I really agree very much with what Randy just discussed. First of all, this market is a fairly small part of the overall mortgage market. Also, there are ways for people to work out their situations. So the subprime market has really been overplayed in the media, and I do not see it as that big a downside risk. I am comfortable with the fact that we have lowered our forecast on housing a bit, but the numbers that just came in recently were actually ones that indicate some stabilization there—in terms of housing demand, in particular. When I worry about the risk to the forecast, I’m really much more worried about capital expenditure in terms of investment. The problem here is that the fundamentals look fairly strong and yet we haven’t seen strong business fixed investment. I ask myself, “Well, what’s going on?” One possibility is that, in fact, there will be a bounceback—that these strong fundamentals in terms of balance sheets and so forth will produce actually stronger investment in the future, and I think that is a significant possibility. However, I’m really a bit more worried that the weak capital expenditures may indicate that something deeper is wrong in terms of the fundamentals. In particular, I’m a bit worried about the issue of what could be happening to productivity in the future. We’ve seen some weaker numbers in terms of productivity, and we think that is just sort of cyclical and not a change in structural productivity. But maybe the business sector is seeing something that we’re not seeing, and in that context, businesses may not be investing as much because they don’t see that productivity will be that strong in the future. They don’t see the returns in the future, and so they’re not investing as much. That’s actually bad news in several dimensions. One dimension would be that it would actually indicate a serious downside risk in terms of aggregate demand. Also if productivity is lower, that’s not a good thing for inflation. So the situation here is one about which I’m not super worried; but the environment is more complicated, and it makes our jobs more interesting. [Laughter] There is, of course, the Chinese curse that you should live through interesting times, but we’ll have more-interesting FOMC meetings. On the inflation front, I am comfortable with the view that the Greenbook and others have expressed that we should expect some moderate decrease in inflation. In fact, the latest data don’t really get me that nervous on this. However, we must recognize that, when we have more-anchored inflation expectations, it’s actually harder to forecast the little blips in inflation because what’s really going on is what’s left—it is no longer the trend but just the transitory movements, and those are particularly hard to forecast. So there is a bad side to the overall better news, but I think the key is that inflation expectations seem to be very solidly grounded. It’s hard to know exactly what the numbers are, but they seem to be around 2 percent. So it’s realistic to think that, in fact, inflation is going to move toward the 2 percent level, although there may be some blips up and down. However, it is also important to recognize that I don’t see any reason for its dropping much below that. Thank you, Mr. Chairman." FOMC20061025meeting--274 272,MR. KOHN.," Thank you, Mr. Chairman. I’ll start at the top of the sheet but then jump around. So the answer to the first question is “yes”—I do think that an explicit numerical specification of price stability would be helpful and that the FOMC should move toward such a specification. I always thought this step was a close call in terms of its costs and benefits. There have been a couple of developments since January ’05, when we last discussed the topic, that have led me to change my position to favor this step. First, we’ve been through two more episodes—in the spring of ’05 and the spring of ’06—when a surge in actual inflation raised questions in financial markets about our intentions and expectations. In both cases, higher inflation expectations did not persist. But making our long-term intentions clearer should reduce the risk that temporarily heightened inflation pressures result in increases in expectations that become more permanent and more costly to reverse. A couple of studies in the past two years have tended to support the hypothesis that a numerical specification might help tie down expectations at least a little within the financial markets. Second, I think a lack of clarity on this question has increasingly muddied discussions in this Committee and communication with the public. Within the Committee, it has sometimes been difficult to discern whether differing viewpoints reflect diverse perceptions of the course of inflation and economic growth or of the desirable end point or path for inflation. The public does not know whether the comfort zones enunciated by various Committee members reflect the views of the Committee or only those of the individuals. Coming to an agreement on an end point and on the role that end point should play in policy and announcing that agreement should help our discussions and enhance the public’s understanding of our intentions. Having said that, I think we need to recognize that any explicit inflation specification is likely to exert some pull on policy. It will not simply institutionalize the Volcker or Greenspan policy regimes, as is sometimes said. It cannot help but to increase the Committee’s focus on particular numerical outcomes and projections for inflation. That’s good to the extent that it reduces the odds on a repeat of the cumulative errors of the 1970s, but it also may make it more difficult for the Committee to take actions that might be perceived at the time as inconsistent with achieving price stability in the next few years but that were still in the public interest—say, by countering financial distress, as in 1998, or by moving very, very aggressively against economic weakness, as in 2001, when core inflation was actually rising. A risk-management approach to policy may well call for aiming away from the price stability objective from time to time. I continue to believe that monetary policy over the past twenty-five years has been exemplary. We should be very cautious in tinkering with its design. Whatever we do must be clearly consistent with the dual mandate and be perceived as such. This is important for democratic legitimacy. The Federal Reserve Act includes maximum employment equally with price stability. I recognize and have often used the principle that price stability enhances maximum employment. But I also note that proposals introduced in the Congress over the past two decades to make price stability our primary objective have not had support, and they’ve gotten nowhere. I’m encouraged by the fact that Chairman Bernanke in his hearings didn’t meet too much opposition [laughter] but I think we need to recognize that there have been attempts to change our mandate and there has been no congressional support for those attempts. I think the last attempt was about ten years ago. The dual mandate is also good economics. Fluctuations around potential impede planning and long-term saving and investment decisions, just as do fluctuations around price stability. We need to take explicit account of these costs as we pursue our price stability objective, and this implies that we should tolerate deviations from price stability on occasion and that the time path to price stability should depend on the circumstances, including the likely costs in lost output along with the deviations from price stability. Support for the Federal Reserve in the population and among its elected representatives has never been higher, certainly never higher in my thirty-seven years at this institution. That support flows from the results of the past twenty-five years and from confidence that we know what we’re doing and will behave sensibly. This was the second type of credibility that Chairman Bernanke talked about at the last meeting. We should not depend on any announcement to have a substantial immediate effect on inflation expectations, where they count most for economic performance. Professional economic forecasters would have a number to coordinate on, and they probably will. It may help tie down expectations in financial markets, but even in financial markets, the effects are likely to be small. Long-run inflation expectations are already well anchored in the United States. Spreads over indexed debt move around quite a bit, even in inflation-targeting countries. For example, as we saw in the briefing on Monday, inflation compensation has fallen since July the same amount in Canada that it has in the United States. As the staff memo on price dynamics noted, the data do not support an inference that such an announcement per se would affect wage-setting and price- setting behavior. Such influences would come because our behavior and the economic results would change. These caveats and concerns lead me to favor a numerical definition of price stability without an explicit time dimension rather than an inflation target that we would expect to achieve in a defined time frame. I have in mind something along the lines of Chairman Bernanke’s suggestion in St. Louis three years ago—the long-run average inflation rate we will be seeking in order to meet the price stability mandate in our act. We would not expect to achieve this objective year by year or even necessarily on a two-year-ahead projection. That would depend on the circumstances. My expectation, or maybe it’s a hope, would be that the benefits of such a formulation would exceed its costs—that without greatly impeding the type of flexible policymaking that has so benefited the economic performance since 1980, it would help a little to tie down expectations, aid the public in making its plans, clarify internal and external communication, and make it more difficult for future FOMCs, when all of us have retired, to allow inflation to drift higher. I don’t have well-defined views on the exact specification of this definition—the index, its level, point or range, whether it should be expressed in terms of total or core—but these specifications will be critical in judging the eventual likely balance of costs and benefits. If we go down this route, we’ll have a lot of work to do. Besides the details of the specification, it’s vitally important that the Committee think through very carefully the role that any definition of price stability would play in policy formulation and that we convey our expectations to the public. It would have implications for all our modes of communication as well as for the inputs to policymaking and would call for considerable communication to the Congress and the public to prepare the way. Understanding what we’re doing and explaining it to the public in turn requires that the Committee come to a decision on the definition and the way it will be treated in policymaking. So I favor the “jointly” arm of Vincent’s chart. I can see some of the suggestions of aggregating the views of individual policymakers as a possible way station, but I’m concerned that such aggregation will raise as many questions as it answers. If we go to a numerical definition of price stability, we should be prepared to explain and justify it fully, and that requires the Committee to consider those implications explicitly. Thank you, Mr. Chairman." CHRG-109shrg30354--42 Chairman Bernanke," Mr. Chairman, that is a difficult question. As you point out, we have excluded it from one of our basic measures, the core measure, because in the past it has been a very volatile price. Of course, more recently, instead of going up and down, it has just gone up. So the question is what is the purpose of our measure? If we are trying to forecast inflation over the next couple of years, we can still look at the futures markets for energy. And although they have not been very reliable, I have to admit, they do say that energy prices are likely to be relatively flat over that period. If that is true, then the core inflation measure is a better forecast of what total inflation will be a year or two from now. On the other hand, the inflation rate that people see is the overall inflation rate. They see the gasoline price at the pump. That affects their behavior. That affects their expectations. If those high inflation rates, including energy, cause people to develop an inflationary psychology, that would be a concern that would effect, perhaps, the future course of inflation. So depending on the purpose, we do have to look at different combinations of measures. " CHRG-111shrg54675--77 PREPARED STATEMENT OF CHAIRMAN TIM JOHNSON It is no exaggeration to say that our economy is currently experiencing extraordinary stress and volatility. As Congress and the Administration look at corrective policy changes, I am pleased to hold this hearing today to take a closer look at the role smaller financial institutions, specifically community banks and credit unions, play in our economy, especially in many rural communities. Throughout our Nation's economic crisis there has often been too little distinction made between troubled banks and the many banks that have been responsible lenders. There are many community banks and credit unions that did not contribute to the current crisis--many rural housing markets that didn't experience the boom that other parts of the country did, and community lending institutions didn't sell as many exotic loan products as other lenders sold. Nonetheless, small lending institutions in rural communities and their customers are feeling the effects of the subprime mortgage crisis and the subsequent crisis in credit markets. Jobs are disappearing, ag loans are being called, small businesses can't get the lines of credit they need to continue operation, and homeowners are struggling to refinance. Smaller banks play a crucial role in our economy and in communities throughout our Nation; we need to be mindful that some institutions are now paying the price for the risky strategies employed by some larger financial institutions. In coming weeks, the Banking Committee will continue its review of the current structure of our financial system and develop legislation to create the kind of transparency, accountability, and consumer protection that is now lacking. As this process moves forward, it will be important to consider the unique needs of smaller financial institutions and to preserve their viability as we come up with good, effective regulations that balance consumer protection and allow for sustainable economic growth. I would like to welcome our panel of witnesses, and thank them for their time and for their thoughtful testimony on how small lending institutions in rural communities have been affected by our troubled economy. I would also like to thank Senator Kohl for his interest in today's hearing topic. I will now turn to Senator Crapo, the Subcommittee's Ranking Member, for his opening statement. ______ FOMC20080625meeting--77 75,MR. PLOSSER.," Thank you, Mr. Chairman. In the Third District, as anticipated, manufacturing activity, residential construction, and employment have remained weak. Nonresidential construction has now softened, although vacancy rates in Philadelphia and around the District remain relatively low. Retail sales remain sluggish. Bank lending has been restrained. The outlook among our business contacts, however, varies significantly by sector. Manufacturers expect a rebound in activity over the coming six months, and residential real estate contacts report that they believe market conditions may be near bottom, although they expect any recovery to be slow. Interestingly enough, it is the same sort of anecdotal evidence that President Lockhart referred to. Now, it is hard to know whether it is just mostly wishful thinking or whether there is something real there--although his saying it and my saying it sort of reinforces it a little. But it is the first time that I have heard such news in a very, very long time. Retailers are quite pessimistic, however, because they are expecting the increase in energy prices to limit sales, especially among lower-income customers, despite the tax rebates. Despite the soft economic conditions, the most prominent concern that we have heard from our business contacts across a variety of industries is the run-up in commodity prices and other prices. Thus far, firms have resisted passing along their rising costs to customers, to the extent that they could, but many firms tell us that they have gone as far as they can on holding the line on their own prices and plan to raise prices further in the next few months. Some firms are including general cost-increase clauses in their new contracts. Earlier we saw various sorts of fuel surcharges added onto prices, but now contracts are being written in a way that includes broad cost-adjustment increases. This is still only anecdotal evidence although it has been referred to--I think President Fisher made a couple of comments in this regard. But it may be yet another early warning sign that inflation expectations cannot remain in check indefinitely in this current environment. In June, the prices-paid index in our business outlook survey of manufacturers rose to the highest level it has been since 1980. Manufacturers and firm contacts across a wide range of industries say that they expect their input prices and the prices of their own goods to increase further over the next six months. They see no abatement of price pressures in the near term or medium term and are very pessimistic about inflation. The national economic situation is similar to what I see in my own District, and it is an uncomfortable situation for all of us. The data we have received on economic activity over the intermeeting period have come in slightly better than I expected, but the continued price increases, particularly in oil and commodities, have been a very unpleasant development. Certainly, economic conditions remain weak, and the recent positive news may prove to be transitory. From the financial side, credit spreads have fallen, bond issuance has risen, and it appears that financial market functioning has at least improved. In my view, although downside risks to growth remain, the tail risk of a very bad outcome has clearly been diminished. I expect GDP growth to come in around 1.7 percent this year--only marginally higher than my April projection--before picking back up to trend of around 2.7 percent in 2009-10. Despite the upward revisions in the Greenbook baseline, my forecast remains somewhat more optimistic for growth in 2008 and 2009 than the Greenbook. In fact, my forecast is similar to the Board staff's ""upside risk"" alternative scenario, which essentially removed the downward adjustment factors the staff added to build in more recession-like features caused by the financial turmoil and other factors not captured in their baseline model, which is what Dave was mentioning earlier. My concerns about the inflation outlook have increased since our last meeting. I am not alone. Inflation has become a predominant concern for many businesses and consumers, and you only have to read the newspapers to see that. Obviously, monetary policy cannot control the price of energy, but we do have a responsibility to act to keep broad-based inflation under control. Contributing to the increase in inflation risk is not only the surge in energy and other commodity prices; it is supported also by our own accommodative stance of monetary policy. Short-term inflation expectations and headline inflation measures are up significantly since our last meeting. So far, core inflation increases have been modest, and long-term inflation expectations remain, although volatile, within a tolerable range. But if we continue to maintain the real funds rate well below zero, despite inflation that is well above acceptable levels, can we really expect inflation expectations to remain anchored? We must remember that longer-term inflation expectations tend to lag inflation not to lead it. If we wait until these measures rise, we will be too late. Apropos of President Evans's question about wages, I have been troubled by stories in the press suggesting that we can be less concerned about inflation than we were in the 1970s because wages haven't risen and labor unions are less prominent. These stories suggest that the wage�price spiral caused the unanchoring of inflation expectations in the '70s. But I think this gets the direction of causation backwards. In my view, the story of the '70s was that the public lacked confidence in the central bank's commitment to price stability--it didn't believe the central bank would take the necessary steps to bring inflation under control. As a consequence, inflation expectations rose and wages rose. It was the higher inflation and the lack of credibility that led to higher wage demands. The key to avoiding such a situation, in my view, is maintaining the credibility that the Fed has worked so hard to achieve. The Board staff memo on optimal monetary policy in the context of higher oil prices illustrates the importance of maintaining credibility, and I want to thank the staff for their efforts in this regard. I think it was an excellent piece of work. As they clearly say, the critical factor in containing inflation through an expectations channel is the belief that policymakers will always adhere to a full-commitment rule. When the central bank is unable or unwilling to commit in a credible manner to future policy actions or to a long-run inflation goal, the result is both higher inflation and lower output. In the real world, of course, full commitment can never absolutely be achieved. But beliefs about which regime better approximates reality are informed by the actions taken by the central bank to maintain its commitment to price stability. I believe that the FOMC has done a good job with our words--including FOMC statements, minutes, and speeches--in helping to anchor longer-term expectations. I believe the Chairman's speech at the Boston Fed conference earlier this month delivered a well-articulated and important message about the importance of keeping longer-term inflation expectations anchored. But our credibility rests on more than just words. We must act in a way that is consistent with our hard-earned reputation, or our credibility could soon vanish. To underscore our words, we should take actions and take back some of the insurance we have put on in the context of elevated downside tail risks. Given recent economic developments and the improvement in financial market functioning, coupled with our accommodative stance of policy, it seems pretty clear to me that, if the economy continues to evolve as it has over the past couple of months, we should move to raise the funds rate. This is also the view of market participants, whose expectations for policy have steepened considerably over the intermeeting period. My forecast, therefore, incorporates a monetary policy path that is steeper than the one in the Greenbook. I assume that the funds rate will reach 2.75 percent by the end of 2008 and move up to 4.5 percent by the end of 2009. This steeper funds rate path is necessary, in my view, to deliver inflation that is declining back toward our goal. Regarding the suggestion by the Subcommittee on Communications on lengthening the forecast period, I think it can be a very useful device, and I support it. My preference, however, is for option 2, although I think option 1 could work just as well. I'm for option 2 partly because I, too, am less confident about forecasting whatever the dynamic adjustment process happens to be, and so just going to year 5 I think would be useful. Omitting year 4 is not omitting any information that is terribly informative, as far as I am concerned. I am a little reluctant to go to some longer-term average like five-to-ten years because I think that muddles the communication picture and may signal a weakening of our commitment about the timeframe over which we think we can really achieve some objective. So I am most comfortable with option 2, or I could be happy with option 1 as well. Thank you, Mr. Chairman. " CHRG-111shrg54675--79 PREPARED STATEMENT OF SENATOR MIKE CRAPO Many community banks and credit unions have tried to fill the lending gap in rural communities caused by the credit crisis. Even with these efforts, it is apparent that many consumers and businesses are not receiving the lending they need to refinance their home loan, extend their business line of credit, or receive capital for new business opportunities. Today's hearing will assist us in identifying these obstacles. As we began to explore options to modernize our financial regulatory structure, we need to make sure our new structure allows financial institutions to play an essential role in the U.S. economy by providing a means for consumers and businesses to save for the future, to protect and hedge against risk, and promote lending opportunities. These institutions and the markets in which they act support economic activity through the intermediation of funds between providers and users of capital. One of the more difficult challenges will be to find the right balance between protecting consumers from abusive products and practices while promoting responsible lending to spur economic growth and help get our economy moving again. Although it is clear that more must be done to protect consumers, it is not clear that bifurcating consumer protection from the safety and soundness oversight is the best option. If that is not the best option, what is and why? It is my intention to explore this topic in more detail with our witnesses. Again, I thank the Chairman for holding this hearing and I look forward to working with him on these and other issues. ______ CHRG-110shrg46629--2 Chairman Dodd," The hearing will come to order. The Committee is very pleased this morning to welcome the Chairman of the Federal Reserve, Ben Bernanke. We thank you for being with us to present your outlook for the Nation's economy, the Fed's conduct of monetary policy, and the status of important consumer protection regulations that are under the Federal Reserve's jurisdiction. Mr. Chairman, we once again welcome you to the Senate Banking Committee. Before I begin my opening statement, I wanted to recognize several special guests we have with us here this morning, Dick, the members of the European Parliament's Committee on Economic and Monetary Affairs led by Chairwoman Pervenche Beres, and we thank you very much, Madam Chairwoman, for being here, and your colleagues as well. We are honored to have you here at the Senate Banking Committee and to have you participate. The Chairwoman mentioned to me that the last time you came here and visited us was at the last testimony of Chairman Greenspan. So this is kind of a beginning again, so we start with the first testimony here of Mr. Bernanke. So welcome and thank you for joining us here. This hearing is being conducted pursuant to the statute and according to practice. It is an occasion to consider not just monetary policy in a narrow or limit sense but also the overall health of our economy and what the Fed, as an agency, and we, as policymakers, should do to increase prosperity and opportunity in our country. The role of the Fed is critical not just to setting monetary policy but it also serves as a regulator for the safety and soundness of the largest lending institutions, and very significantly, as a regulator and enforcer of the laws passed by the Congress to protect consumers and ensure that they have an opportunity to participate and succeed in the American economy. Mr. Chairman, I know I do not need to tell you that the Fed stands at the center of some of the most critical economic and public policy matters of our time. In the 17 months as Fed Chairman, your steadiness at the helm of our Nation's monetary policy seems to have earned you the confidence of the markets, which is the initial step toward a successful tenure as Fed Chairman. And I congratulate you on that. The confidence has been reflected, in part, by some of the positive economic news that we have experienced, including an official unemployment rate that is low by historical standards, by gains in the stock market, and the economy's overall stability in the face of serious problems in both the housing and automotive sectors of our economy. Those positive factors aside, and notwithstanding the positive impact of your leadership, there are some facts that are cause for deep concern for many of us here about our Nation's economic future, in particular the future of tens of millions of hard-working Americans. Despite some increases in income, working families are facing some unprecedented economic burdens. Gas prices reached another record high of an average of almost $3.25 a gallon across the country this past Memorial Day weekend. Health care costs have increased by 25 percent over the last 5 years. And the cost of sending a young person to college has risen at more than double the rate of inflation over the past 20 years. And default and foreclosure rates, as you well know, for homeowners are an all-time high. Mr. Chairman, there is a persistent if not growing sense among many of our fellow countrymen that their future is less secure and less hopeful today than it has been and should be. It is in that respect that the Fed's role comes into play not just as a monetary policymaker but also as a safety and soundness regulator and as an agency charged with protecting consumers. The Fed can and, in my view, should take additional steps that can make a real difference in improving our overall economic growth as well as an opportunity for all Americans to contribute and to participate in the success and prosperity of the economy. In that regard, let me say that I am pleased that you, as chairman, have accepted the Fed's duty to act under the Home Ownership Equity Protection Act. I consider this a significant statement by you and I trust and expect that it will result in significant action by the Fed to ensure that every American who seeks to buy a home will receive a fair, reasonable, and responsible treatment by his or her lender. Similarly, with respect to credit cards, I commend the Fed for undertaking the effort to update Regulation Z which in my view is long overdue. It is vital that consumers have the clearest and most complete information possible about credit cards so they can make the most informed decision about how to use them. However, improved disclosure is not, in and of itself, sufficient to address abusive practices. I believe the Fed can and should play a more active role not just in improving disclosure for consumers but also in prohibiting policies and practices that are harmful to consumers. In my view, credit cards can and should be a tool for economic achievement and advancement rather than an instrument of perpetual indebtedness. Last, Mr. Chairman, let me raise the issue of Basel II, of the bank capital standards, with you. History has taught us that well-capitalized banks are in the best interest of our Nation when they are better positioned to weather unexpected economic shocks, thereby protecting American taxpayers from costly bank bailouts. And they enhance the competitiveness of U.S. banks by instilling confidence in the strength of these vital institutions. As Senator Shelby and I have written to you and your fellow banking regulators, the stakes are very high for our economy in this debate. We believe that it is imperative that the four regulatory agencies together agree upon the standards that will strike the vital balance between the remarkable safety and soundness of our federally insured lending institutions and their competitiveness in the global economy. Mr. Chairman, the challenges you face, of course, are daunting. I think I speak for all of our Committee Members here in saying that we are committed to seeing the Fed succeed at each of these three vital missions: As a center of monetary policy, a consumer protector, and a bank regulator. What is at stake here is not just the success of your agency, obviously, and your tenure as Fed Chairman, as important as those are, but rather the success of our entire economy and in particular for the tens of millions of Americans whose hard work is the foundation of our economy's success and who deserve every opportunity to maximize the fruits of their labor. With that, let me turn to my colleague from Alabama, the Ranking Member of the Committee, Senator Shelby. CHRG-111shrg382--35 Mr. Sobel," The role of the IMF with the FSB? Senator Bayh. Well, what role they might play ultimately in overseeing the recommendations that are--the FSB and the other recommendations that are made. " FOMC20060920meeting--161 159,MR. MOSKOW.," Thank you, Mr. Chairman. I appreciate your passing out this sheet and talking about it. I think the lesson here is that these things do not always go as gradually as forecast, and once things get going in one direction, there is more momentum than is built into our longer-term forecasts. In terms of policy, as you know I would have preferred raising rates at our last meeting, and I think the overall contours of the resource gap and the inflation forecast are pretty much the same as they were last time. I still think that policy will need to be tightened further to bring inflation back into my comfort zone within a reasonable period of time. But given our decision to pause last month, I do not feel that we should move today. We told the public that we paused to assess incoming data, and I think it requires more than one meeting’s worth of data to assess that. In fact, if we did move today, it would be a signal that we are just reacting to little snippets of information, and we are trying to dissuade people from thinking that. But I am concerned about how markets viewed our last meeting. We talked last time about a hawkish pause. Generally the markets didn’t interpret it that way. They may be more optimistic about inflation, but as we know, the futures market is expecting us to cut rates. I share a sense of what President Poole talked about—that market analysts and others are saying that we are not really serious about this 1 to 2 percent that many of us have talked about; they think our zone is somewhere higher. So when you look at these options from A to Z—A to C [laughter], there are lots of options—that Vince has distributed, I am in the B+ category. But I think we should not put that phrase “policy is more likely to firm than ease going forward” in the statement. However, I think that it is the sense of this Committee, and I think it should be reflected in the minutes." FOMC20080625meeting--102 100,MR. MADIGAN.," 4 Thank you, Mr. Chairman. I will begin by referring to the draft announcement language in table 1, included in the package labeled ""Material for FOMC Briefing on Monetary Policy Alternatives."" As Chairman Bernanke noted yesterday, this version is only slightly revised from the version discussed in the Bluebook. Rather than keep you in suspense, I will note now that the revision is simply to strike the phrase ""near-term"" from alternative B, paragraph 4. Turning first to alternative A, the Committee would ease policy 25 basis points at this meeting and would issue a statement similar to the one published after the April FOMC meeting. The second paragraph would indicate that economic activity has remained weak in recent months. It would recognize that consumer spending appears to have firmed but would go on to mention other aspects of economic performance that remain weak. The paragraph on inflation would cite the recent further increase in energy prices but would also note the stability of core inflation. It would again express the Committee's expectation for inflation to moderate, partly reflecting a leveling-off of energy prices, but would acknowledge that uncertainty about the inflation outlook remains high. As in April, the final paragraph would be silent on the balance of risks and on the likely path of policy. For most of you, your baseline outlook would seem to provide little support for selection of alternative A at this meeting. As was noted yesterday, most of you conditioned your projections on a path for policy that begins to tilt up either immediately or sometime in the next few quarters. With such a policy path, the central tendency of your projections points to a gradual pickup in economic growth and a fairly prompt drop in total inflation as energy and other commodity prices level out but only a gradual decline in core inflation, which reflects the moderate amount of economic slack that you foresee over the next few years. As was illustrated in one of 4 The materials used by Mr. Madigan are appended to this transcript (appendix 4). the optimal control simulations presented in the Bluebook, a case can be made for alternative A if you agree with the staff baseline outlook and favor aiming for 2 percent inflation over the longer term. One of the estimated policy rules presented in the Bluebook also suggests modest further easing, but again that prescription relies on the staff's forecast rather than on your generally stronger near-term outlook. But given the modal outlooks of most members of the Committee, any case for easing at this meeting would seem to be best motivated by persisting concern about the downside risks to growth that many of you again cited in your forecast submissions. The ""recession"" simulation in the Greenbook provided one plausible scenario for the realization of such risks and suggested that the funds rate might need to be lowered to 1� percent. Under alternative B, the Committee would leave the stance of policy unchanged at this meeting. The statement would note that economic activity continues to expand and, as in alternative A, would mention the firming of consumer spending. It would cite the same factors that could restrain economic growth that were referenced in April and would add the rise in energy prices to the list. The inflation paragraph would again convey the Committee's anticipation that inflation will moderate but would elide the explanation for that expectation and would reference high uncertainty about inflation prospects. The final paragraph would indicate that the downside risks to growth appear to have diminished somewhat and that the upside risks to inflation and inflation expectations have increased. As I noted previously, we have suggested that the phrase ""near-term"" be struck as the Committee's focus presumably is on longer-term inflation. The references to risks to both growth and inflation would be consistent with the concerns that you expressed in your forecast submissions. The statement proposed for alternative B seems generally in line with market expectations, and an announcement along these lines is unlikely to provoke much market reaction. By pointing to reduced risks to growth and increased risks to inflation while not explicitly stating that the inflation risks predominate, the Committee would likely be seen as suggesting that its next policy move could be toward firming but also that such a move probably was not imminent. A policy approach along the lines of alternative B seems generally consistent with the projections that many of you provided for this round. Although most participants conditioned their projections on a steeper policy path than the one in the Greenbook, many also appeared to assume that the firming process would not commence until later this year or in 2009. A decision to stand pat at this meeting might be motivated importantly by your sense that the risks in both directions around your baseline projections are substantial. While staying your hand today might risk a further upcreep in inflation expectations, you might also be concerned that a policy firming now, given that financial markets are still fragile, would risk having outsized market effects with adverse implications for an economy that remains weak. As a result, you may see benefits to allowing more time for financial markets to recuperate and more time for information on the outlook to accumulate before taking policy action. Holding the funds rate at 2 percent at this meeting would be consistent with the Committee's past behavior as captured by the estimated outcome-based rule presented in the Bluebook. Under alternative C, the final column, the Committee would firm policy 25 basis points at this meeting. In the statement, the paragraph on real activity would be identical to that for alternative B. However, the third paragraph would provide the motivation for the action by emphasizing that overall inflation has been elevated, that energy prices have risen further, and that inflation expectations have risen further. No assessment of the balance of risks would be provided in the final paragraph, thus avoiding a suggestion that the firming signaled a sequence of further rate increases. Nonetheless, with market participants currently seeing only a small chance of a rate increase at this meeting, an announcement along the lines of alternative C would likely prompt a considerable jump in short- and intermediate-term market interest rates. Although most of your forecasts appeared to assume that policy firming would begin later this year or early next year, some of you explicitly assumed an earlier start to policy tightening. Members might believe that firming at this meeting is warranted partly by evidence of some reduction in downside risks to growth. Recent spending data suggest that economic activity has a bit more forward momentum than previously perceived, reducing the odds on recession; the modest improvement in financial market conditions points to some reduction in downside risks; and the Federal Reserve's special liquidity facilities appear to have been successful in reducing the odds of negative tail events and severe adverse feedback loops. Thus members might see it as appropriate now to begin to reverse some of the Committee's past policy actions to the extent that those actions were seen as motivated by downside risks that have now diminished. Also, near-term firming might be motivated by the further increases in inflation pressures and risks resulting from the continued upward march of energy and some other commodity prices. Finally, with inflation expectations continuing to show some signs of moving up, a firming of policy at this time might be viewed as a timely shot across the bow that could be helpful in restraining such expectations. I thought that it might be helpful to conclude by reviewing two exhibits from the medium-term strategies section of the Bluebook, starting with the optimal policy simulations that are reproduced in exhibit 2. The simulations underlying these exhibits are based on the FRB/US model after adjusting it to line up with the Greenbook forecast and extension. As usual, these simulations assume that you aim to minimize the sum of squared deviations of inflation from target, squared deviations of the unemployment rate from the NAIRU, and squared changes in the nominal funds rate. Two key points can be drawn from these simulations. First, whether policy firming should begin sooner or later may depend partly on your longer-run inflation objective. As shown by the black line in the top right-hand panel, if your objective for the longer run is to get back to a 2 percent inflation rate, these simulations suggest that you can hold the funds rate steady or even ease slightly further before beginning to firm in 2010. This policy path produces a somewhat faster decline in the output gap and thus somewhat slower disinflation than in the Greenbook and extension. In contrast, the simulations shown in the left-hand column suggest that pursuit of a 1� percent inflation objective would involve policy firming beginning quite soon. In general, the policy paths described by many of you in your forecast submissions seem to fall between these two scenarios, apparently reflecting your sense that aggregate demand growth could be a bit stronger and inflation pressures a bit more intense than projected by the staff as well as your dissatisfaction with a path for inflation that is as shallow as that for the scenario with a 2 percent inflation objective. The second point underscored by these simulations is that, even though the nearterm path for the unemployment rate is a bit lower than in April, reflecting the recent indications of somewhat greater strength in aggregate demand, the medium-term outlook involves larger and more persistent slack than foreseen in April under either inflation goal. Despite that greater slack, as shown in the bottom two panels, core inflation under both inflation objectives runs 0.1 to 0.3 percentage point higher over the next four years than in the April simulations. That, of course, is the fundamental nature of a negative supply shock: Policymakers are forced to accept some combination of greater economic slack and higher inflation during a period of transition to a lower output path and, presumably, to an unchanged long-run inflation rate. That same point was made in a Bluebook box and in a staff paper on this subject. Turning to your final exhibit, I would like to note that, in response to the comments of some members at recent FOMC meetings, the r* exhibit in the Bluebook has been augmented to include two additional measures of the real federal funds rate. Line 11 in the table at the bottom shows a measure of the real federal funds rate that uses lagged headline inflation as a proxy for expected inflation. By contrast, our standard measure, shown on line 10, employs lagged core inflation as the proxy. Line 12 shows a measure based on the staff's projection of headline inflation. Both of these new measures, at minus 1.3 percent, are considerably lower than the current value of the standard measure, minus 0.2 percent. I want to emphasize, first, that these additional measures should not be compared directly with the r* measures shown in lines 1 through 9 of the table because the values of those measures are in part a function of the proxy used for expected inflation. For example, the r* value that would be consistent with the Greenbook projection and the actual real funds rate based on the lagged four-quarter average of headline inflation is minus 0.7 percent. Moreover, even if we redefined the Greenbook-consistent measure of r* to use lagged headline inflation, the implied 0.6 percentage point gap between the actual and the estimated equilibrium real rates would not necessarily imply that you should quickly raise the nominal funds rate by more than � percentage point. If, like the staff, you think it likely that headline inflation will moderate substantially later this year, then it follows that a gradual firming of policy in nominal terms would be consistent with a substantial rise in the real funds rate on this measure over time. Indeed, in the staff's view, the average value of the real federal funds rate over the next few years on any measure is a bit above the corresponding value of r*, and consequently the trajectory of the real funds rate on any measure would be consistent with protracted slack and declining inflation over the next several years. Of course, you may not agree with the staff about underlying trends for prices and real activity and, hence, about the value of r*. Even if you do agree, you may be dissatisfied with the projected trajectories for key variables such as output, employment, and inflation. Such considerations illustrate why no estimate of r* can be a complete guide to policy. That completes my prepared remarks. " FOMC20050920meeting--31 29,MR. STOCKTON.," Core PCE goes up to 2¼ percent next year and then comes back September 20, 2005 20 of 117 then we’d probably see some beneficial effects in alleviating inflation concerns—this would be beyond the forecast period—which would help push inflation down a bit further." CHRG-111hhrg51592--18 Mr. Scott," Thank you very much, Mr. Chairman. This is a very important and timely hearing. As we continue to monitor the current economic climate we're in, and look towards solutions and improvements that can be made, I believe that this hearing is very, very timely, as the credit rating agencies did in fact play a considerable role in what has transpired, what will also impact, what transpires in the near future. Once our financial institutions achieve the desired quality grade on a product, it pays the agency for the rating. This process, as some claim, is rife with conflict, as they believe the agencies are acting as the market regulators, the investment bankers, and as a sales force, all the while claiming to be providing independent opinions. That's it, the problem in a nutshell. As these organizations are extremely important to the financial world, we should realize they did have a role to play in where we are now, but I also want to more intently focus on finding some consensus on how to move forward. These organizations determine corporate and government lending risk, and are an integral part of our financial services sector, and as such, I want to ensure we take all issues into account, including conflicts of interest, as well as the international finance world, in reforming just how we rate financial products. More examination of these agencies is indeed in order, to evaluate the need for improvement, as many have complained that the rating agencies did not adequately assess the risky nature of mortgage-backed securities. The credit rating agencies have grown more powerful over the years, maybe more powerful than anyone had really intended. However, I do look forward to the witnesses' testimony and how their review of and opinions on this subject will shape the committee's further review of this issue. Thank you, Mr. Chairman. " FOMC20070918meeting--107 105,MR. LOCKHART.," Thank you, Mr. Chairman. In the Sixth District, we indulge ourselves with the conceit that our District looks a lot like the nation as a whole. We have 45 million consumers and an industrial composition that does resemble the country, so you can process my regional remarks with that conceit in mind. Housing markets continued to deteriorate in August in the Sixth District. Housing market weakness was most pronounced in Florida, as you might expect, followed by Atlanta and middle Tennessee. The consensus view is that the recent tightening in mortgage credit availability will exacerbate the region’s housing market problems, and most regional contacts believe that housing markets will continue to weaken, bottoming out no earlier than mid-2008, and some see a much longer adjustment period. Aside from housing, real economic readings in the Sixth District were mixed. Anecdotal feedback across a number of industries suggested that business spending has not yet slowed markedly, but the majority of contacts indicated that they are now approaching new capital spending more cautiously. That said, most contacts acknowledge that tighter credit standards have not significantly affected business capital investment outlays. Reports of factory activity were mixed, with defense and export industries doing well, while industries linked to housing were predictably weak. Transportation contacts indicated ongoing weak domestic demand. Consumer activity in the District was flat to slightly up in August compared with a year ago. Housing-related home product sales were especially weak, as were auto sales. Perhaps the most notable change from previous months was a turn to pessimism on the part of directors, reflecting their soundings of business contacts in their communities. I will mention that we have five Branches, so we actually get director feedback from more than forty directors across the District. Sixty percent believe that economic activity will be slower six months out, twice the percentage recorded in July. Even factoring out idiosyncratic conditions in localities such as south Florida and the Gulf Coast, the outlook, based on these anecdotal reports, has turned to the negative. To summarize my regional comments—current fundamentals are mixed, and the outlook is pessimistic. In our view, the economic outlook has changed since the last meeting, and the balance of risk has clearly shifted to the downside. We do not see a near-term recession as a high likelihood, but we do anticipate that growth will approach trend much more slowly with employment edging up as a consequence. So in direction and tone, if not magnitude, we are in agreement with the Greenbook, but our forecast differs from the Greenbook baseline forecast in the depth of the below-trend growth, ours being somewhat milder because we condition our forecast on deeper cumulative cuts in the fed funds rate over the coming months. Turning to capital markets, my recent conversations with a number of capital market participants suggest that the adjustment process in financial markets is far from complete. Their anecdotal feedback reflects a range of views about the severity of the current problems and the outlook for stabilization. Here is the overall picture I gleaned from these conversations. Some debt markets have firmed a bit. The leveraged-loan market, for example, is likely to renew trading in the coming weeks, but structured-debt security markets are not yet clearing. The principal reason—and this has been mentioned earlier by Bill and others—that debt markets remain illiquid is weak counterparty transparency and, therefore, uncertain counterparty risk, as well as uncertainty regarding the performance of collateral pools that back securities. The process of achieving adequate clarity and stabilization of the markets will likely take many more weeks. Markets will remain volatile while the condition of heightened uncertainty persists. There has been some spillover into markets that are unrelated to structured debt and subprime, but creditworthy borrowers are getting credit. There is sufficient buyer liquidity currently on the sidelines awaiting greater clarity regarding counterparties, market pricing of securities, and the depth and scope of the difficulties. Widespread deleveraging, particularly by SIVs and hedge funds and nonbank entities, is occurring and is likely to continue. One party argued, however, that all the news of financial distress has not pushed risk spreads to the extremes of historical bands. This party argued, “We are experiencing a painful adjustment from excessively high leverage to more-rational or more-realistic pricing in line with historical averages.” But all contacts believe—and this is perhaps not unexpected—that prolonged credit market problems will affect the broad economy, mostly through the consumer credit channel. So I believe our decision today boils down to whether we cut ¼ percentage point or ½ percentage point, obviously in combination with careful wording of the statement that conveys a rationale focused on economic fundamentals while signaling some recognition that the problems in the capital markets have the potential to deliver a credit shock to the broad economy. I consider it appropriate to adjust the federal funds rate to the now-weaker economic outlook, and I support a 50 basis point move with the rationale that at least 25 basis points of that represents recognition of a lower equilibrium rate and the remainder is a preemptive, preventive measure designed to renew confidence, facilitate conditions that resolve uncertainty, and shorten the necessary adjustment timeline in a deleveraging financial sector. It is a fair question whether the process of information revelation—that is, removing uncertainty—will be accelerated by an aggressive rate cut. My view is that this action, along with other liquidity actions, removes the psychological barrier—that being the concern that the Fed might fail to ensure enough upfront liquidity and might be pursuing an inadvertently tight policy, compounding problems by putting undue stress on the real economy. I think a distinction can be drawn between trying to influence the psychology around dangerous financial sector circumstances and bailing out the markets, and care should be taken to reflect this in the minutes. Let me add that I agree with the earlier comments of President Fisher that we perhaps should be looking at any policy move in the context of a total package that includes the auction credit facility. So I do have, let’s say, some sympathy for the view that the total package must be discussed. Thank you, Mr. Chairman." CHRG-111hhrg56766--197 Mr. Bernanke," I don't know the exact numbers, as I said, and obviously forecasting is difficult, so I don't want to put too much weight on any single number. But I think you and I would agree, I think most people would agree, that a big increase in marginal tax rates is going to be counterproductive from a growth perspective. " CHRG-110hhrg38392--69 Mr. Bernanke," Well, I do not think it is very surprising to say that would be a fairly disruptive event if it happened very quickly. As I said in February, I do think it is important for Congress to think through how many immigrants they would like to have and under what conditions, because it is important to try to create some certainty and some ability to forecast what workforces are going to look like. " FOMC20071031meeting--224 222,CHAIRMAN BERNANKE.," Well, let me say first on the mode and the median, you make a good point on the first issue about risks. The question to ask yourself is, Given your most likely forecast, on which side are the largest and most costly deviations most likely to occur. In which direction are the risks skewed? That is the way to think about it." FOMC20060808meeting--62 60,MR. PLOSSER.," Good morning. Thank you, Mr. Chairman. It’s a pleasure to be here today at my first meeting. Many people around the table I’ve known for many, many years. Others I don’t know so well, but I’m looking forward to getting to know you better. I realize that as the new kid on the block, so to speak, I have a lot to learn. I’ve been on the job one week today, and that realization has been driven home to me in the past week quite amply by the fact that I’ve struggled to prepare for this meeting. I have to confess that it did occur to me at a couple of points that maybe my start date should have been moved to August 15. [Laughter] Maybe that was a failure of rational expectations or maybe just a simple forecast error—I’m not sure yet. Nonetheless, I really am honored to be here and to be a part of this group, and I’m looking forward to working with all of you. Economic activity in the Third District continues to expand at a moderate pace, albeit somewhat more slowly than earlier in the year. Of course, this was in line with expectations in previous reports by Bill Stone to you. Regional manufacturing activity expanded in July. Our business outlook survey’s index of general activity fell to 6 in July, down from 13 in June, and the indexes of new orders and shipments also softened. But the levels of these indicators continue to point to expansion in terms of manufacturing in the region and manufacturers’ expectations of future activity. Conditions in our construction sector are similar to what other people have been reporting. Nonresidential construction continues to strengthen in our District. Bankers are reporting increased strength in commercial real estate lending. Office vacancy rates have been edging down, and rents have been moving up. Our business contacts expect those trends to continue. In contrast, as in much of the nation, residential construction and home sales are down. Residential mortgage lending has slowed considerably, although home equity lending has been quite strong. Realtors report that the inventory of homes for sale is at the highest level they’ve seen in a number of years; they also report that prices are higher than they were last year, but the rate of appreciation tends to be softening. Thus far the slowing in the region’s residential housing sector seems to have been an orderly one. Retailers report a firming of sales in general merchandise in June and July, with sales at stores specializing in high-end merchandise being stronger than those at the lower end. Manufacturers’ incentives have helped boost auto sales in July in the region, but dealers tell us that inventories remain above their desired levels. Payroll employment in our three states has been expanding at a somewhat slower pace than in the nation as a whole, but that’s not atypical of the region. The unemployment rate has edged down. In June, it was 4.7 percent. In most of the District’s labor markets, unemployment is lower now than it was a year ago. Our business contacts continue to report difficulty in filling positions. There has been some relief this summer with the influx of college students, but that cushion is about to end. It has been particularly hard in the District for firms to fill professional and managerial positions. Firms have received a good number of applications, but many of the applicants are unqualified. Consequently, salaries for these positions have risen more than others. Our manufacturers report that recent wage increases in the region are higher than they were last year. This is consistent with the employment cost index, which shows stronger compensation growth in the Northeast than in other parts of the nation. On balance, the regional conditions and outlook continue to be positive. The rate of expansion in the second half of the year is likely to be somewhat slower than in the first half; but, again, that was expected. I’m more concerned about signs of continued and growing price pressures in the District. Consumer prices appear to be rising at a faster pace in the Philadelphia region than in the nation as a whole. One factor contributing to the faster pace has been the increase in housing costs in metropolitan Philadelphia, but that may prove to be temporary as housing prices stabilize. Nonetheless, broad-based cost pressures persist in most sectors of the region. The indexes of both prices paid and prices received in our manufacturing survey have increased in July, and both are at very high levels. Business contacts say that price pressures continue to be one of their major concerns. I would characterize the national economy in a somewhat similar way. That is, right now I tend to be more concerned about inflation than I am about growth. I don’t view the second-quarter slowdown as necessarily a precursor to a significant weakening of the economy going forward. The below-trend growth in the second quarter was widely anticipated, and averaging over the first two quarters, as several people have done, output still grew at over 4 percent in the first two quarters. The slowdown in residential investment was expected, and much of the slowdown in consumer spending was due to auto sales, which are volatile and which had grown very strongly in the first quarter and considerably less in the second. One surprise, however, did occur in the second-quarter numbers. We expected business investment in equipment and software to slow last quarter from its very robust pace in the first quarter, but we didn’t expect an outright decline. About half that swing, it turns out, reflects the timing of business purchases, particularly of transportation and autos, so the weakness in investment may be more about timing than it is about trend. Indeed, as has been pointed out, corporate profits remain high, and capacity utilization rates remain high, and these data continue to point to the underlying strength in business investment. The July employment numbers released on Friday did little to change my view of the economy. Employment continues to grow at a reasonable pace, although somewhat slower than earlier in the year. In July, employment in the private sector expanded at its fastest pace since March. Although the number was not large, the trend was at least mildly encouraging. Employment based on the household survey fell. The unemployment rate increased 0.2 percent, but household employment has been volatile. The decline of 34,000 jobs in July followed a gain of 387,000 jobs in the household survey in June. If we abstract from the month-to-month volatility in these numbers, the unemployment rate remains low for the first half of the year at about 4.7 percent. At this point, I believe the economic indicators are consistent with sustained real growth near trend, as many people have suggested. The benchmark GDP revisions suggest that trend might be a tad lower than we thought, but nonetheless I think the risks to growth seem at least roughly balanced. The inflation picture, however, has not improved. Despite a slowing economy, price increases have been accelerating. The increases have been broadly based, as has been pointed out by Bill Poole and others. They are no longer confined to energy and other commodities. Indeed, in June the CPI rose less than did the CPI excluding energy. Core inflation is above the range I consider to be consistent with price stability, and to my mind, inflation risks remain tilted to the upside. The Greenbook’s baseline forecast has core inflation decelerating over the next year, but the staff has been marking up its forecasted path of inflation over time as the acceleration in inflation has persisted. Even with the projected deceleration, the baseline forecast has core PCE inflation remaining above 2 percent through 2007. Given this persistence in inflation, unacceptably high inflation seems likely to be around for a while. A year ago I wouldn’t have said that. In fact, I was in the camp that thought it was mostly a relative price phenomenon, but that position has become less compelling to me over the past year. The benchmark revisions to the GDP report show that both compensation per hour and unit labor costs have been trending up, not down as earlier data suggested. Energy-price increases have not abated, suggesting that we are likely to see continued pass-through to core inflation, perhaps for some time. Although the Committee has brought the fed funds rate up appreciably from historically low levels, real interest rates to my mind are not high. I don’t view monetary policy as particularly restrictive at this point. Thus, I have to put some weight on the Greenbook’s alternative scenario of persistently high inflation, and that leads to particularly poor outcomes. Even if I accept the baseline forecast as my point forecast, the fact that inflation remains at a level above the range consistent with price stability for a considerable period is troubling. I am comforted by the fact that medium- and longer-term inflation expectations have remained relatively stable despite the acceleration in inflation. That’s a testament to the credibility of the Fed in the marketplace—that it will keep inflation low. But how reasonable is it to think that inflation expectations will remain unchanged? By allowing inflation to remain at a high level for a time—we are, after all, as several people have pointed out, in the third year of core inflation running above 2 percent—do we risk sending the message that we are willing to tolerate higher inflation? If so, will expectations adjust accordingly? As the model simulations of optimal policy paths and outcomes in chart 7 of the Bluebook indicate, it’s very costly to get inflation back down once it has been above our objective, particularly if expectations are allowed to increase. I believe that monetary policy has an important role to play in ensuring that the recent high inflation readings do not raise longer-term inflation expectations. Thank you." FOMC20060328meeting--264 262,VICE CHAIRMAN GEITHNER.," Thank you, Mr. Chairman. I think we really do have a remarkable degree of consensus around the table about the forecast, and you did a very nice job of capturing that consensus. The consensus is really quite close to the Greenbook, closer than it has been perhaps in recent meetings. The Greenbook forecast is conditioned on a monetary policy assumption that has us essentially stopping at 5 with the path pretty flat from 5 on. The question, of course, for us today is whether we want to alter current market expectations about the path of policy, and I think it is hard to find a compelling case to do so, either from what we discussed around the table or from what the Greenbook provided. The Bluebook provided alternative prisms to look at the implications of past policy. The presumption is that we don’t want to change expectations substantially because we don’t see a case for changing the current stance of monetary policy as embodied in those expectations. The question is how best to do it, and I think B is probably the closest we’re going to get to that. I agree with the concern that Sandy began with and which I think Dino echoed—that there is some possibility, maybe even a likelihood, that B is interpreted as raising the probability of not just a move in May but a move beyond May. Again, I don’t see any need to do that. I don’t think it should be our objective to try to raise the probability around June. The question really is how to avoid that. I do think that adding the sustainable growth reference in the second row and adding “possible,” as Vince explained, helps against that risk, but it probably doesn’t take away all of that risk. The problem with doing things that create the risk of pushing down the curve is that people would react to that by saying, “Well, what does that mean about how confident they are about the strength of underlying demand growth?” One consequence of an alternative that would be designed to push down that curve would be, in some sense, questions raised about how confident we are in our forecast about the underlying strength of demand growth, which I don’t think that we have a basis for signaling at this point. Is there some risk we are going to go too far? Of course there is. What are the best tools we have to assess that risk? Again, I think the Greenbook and the Bluebook give us a number of tools to assess that risk; and if the Greenbook forecast, with a monetary policy path close to what’s priced in the markets, showed a different trajectory of output growth and a different trajectory of inflation, then there would be more substantial reason for us to be concerned that the path that’s roughly priced in now creates too much risk that we would be pushing demand growth below potential over the period. And, again, I think it is hard to say that. It has been said that the output-based policy rules we use aren’t a particularly good reason to be concerned about that because of the way they are constructed. Are we too hostage to the markets in our current approach? I think that is always something to be worried about. Again, the best check against that risk is to look at the implications of these alternative policy paths for the forecast. I think it’s hard to find in the range of paths that the staff has given us significant justification for concern against that risk today. So I would support moving 25 today; and for the reasons discussed, I think B does a pretty good job of capturing the basic objective of a signal that’s fairly neutral to expectations. I’d rather take the risk at the margin that we’re pushing it up a bit than the risk that we end up pushing it down." FOMC20070918meeting--56 54,MR. EVANS.," Dave, your presentation seemed to hit on all the right points with regard to the forecast. I am reminded, though, that Chicago is no longer the hog butcher capital of the world. [Laughter] Still, I have a forecasting question. In the briefing yesterday, you quantified the financial stress effects on GDP growth that you talked about this morning as about ½ percentage point in the second half of this year and about ½ percentage point in 2008. Having read the alternative simulations for a number of years, I know it is not uncommon for an alternative that starts off with financial difficulties to have a small effect on the outlook, then there is a layering on of the consumer sentiment and it drops off a little more. So I am curious about sorting out these components with an idea toward, if the policy action were taken as a form of insurance against these risks, what the early warning signs that those insurance reasons are really no longer critical would be. Would we quickly see objective measures of the turnaround? Is consumer sentiment the key? Presumably, financial conditions would be a little more evident in their improvement." FOMC20071031meeting--54 52,MS. PIANALTO.," Thank you, Mr. Chairman. Like many others around the table, my report to this Committee in September indicated a sharp deterioration in business confidence. My business contacts were concerned about what may happen. During the intermeeting period I heard less about what may happen and more about what is actually happening. My contacts who are linked to residential real estate have seen a further and, in some cases, sharp drop-off in business activity. My banking supervision and regulation staff told me just a few days ago that they’re now seeing a sudden and sizable percentage increase in nonperforming loans at a number of large banking companies in my District. To be sure, nonperforming loans had been at extremely low levels, and most of the sharp rise can be traced to mortgage and construction development lending. But I’m now beginning to hear reports that bankers are experiencing some loan performance problems outside their real estate portfolio. The CEO of a large, major bank in my District has also reported difficulty in securitizing the student loans that they’re making, forcing them to keep those loans on their books and to make adjustments elsewhere in their balance sheets. To what extent these banking conditions are affecting overall bank lending is not obvious, but clearly there has been some disruption to the channels of intermediation, and I am now beginning to hear reports of some spillover to other sectors of the economy. A growing number of retailers tell me that they have seen a noticeable decline in spending since mid-September in items ranging from autos to apparel. While my reports from the business community reflect a falloff in business conditions from what we submitted to the Beige Book just a few weeks ago, they don’t necessarily indicate a significant deviation from the slowdown that was already built into the economic projections that I submitted in September. In preparing for this meeting, I found it difficult to judge whether the reports of weakness that I am hearing represent an unfolding of the September projection or additional deterioration in the outlook. In the end, I have only minor differences with the Greenbook projection in the near term and, like the Greenbook, made only minor revisions to my forecast. I see economic activity a bit softer than the Greenbook for the remainder of 2007, but I project slightly better growth in 2008. Like the Greenbook, I have assumed an unchanged path for the fed funds rate over the forecast period. The recent rise in oil prices has caused me to push up my near-term PCE projection, but inflation expectation projections remain anchored around 2 percent. I see a small upside risk to the near-term inflation projection as a result of the continuing dollar depreciation; but on the whole, I continue to judge our inflation risks as reasonably balanced. I would like to conclude by echoing the sentiments of others around the table. Considerable strains in the financial sector remain, and further turmoil in markets is a distinct possibility. I think that, in this environment, households and businesses can easily be spooked—excuse the Halloween pun—and I don’t think it would take much additional tightness in credit markets to push my fragile near-term growth outlook even lower. So this concern continues to be the predominant risk to my outlook. Thank you, Mr. Chairman." FOMC20060808meeting--100 98,MR. PLOSSER.," Gee, what can I say? [Laughter] It’s a very difficult call, and indeed, I consider myself really fortunate that I happen to be in on this discussion in my first time. Maybe there are some advantages and disadvantages to that. Maybe I don’t carry some of the baggage of what I’ve said in past meetings because I haven’t said anything in past meetings. I certainly understand and respect the view expressed by those who think we should pause. I think that most people around this table recognize that reasonable people at this stage doing sound economic analysis could come down one way or the other on this. But at this point, my inclination is to favor a 25 basis point increase. Economic growth has slowed from the rapid pace that we’ve all been talking about. This was expected. I see little reason to think, at least based on what I’ve heard around the table today, that growth will be considerably below trend in the second half of this year or into ’07. I don’t think that holding rates steady at this time will add much to real growth in the near term, nor do I think it’s really buying us much insurance against possible future weakness. By the same token, I don’t think raising rates 25 basis points is going to have a significant effect on the real economy in the near term either, but it can help reinforce the public’s perception of our commitment to price stability. I believe that the Committee has done an outstanding job in maintaining credibility thus far, as evidenced by the fact that we’ve all noted that longer-term inflationary expectations seem to be well anchored. But longer-term expectations remain contained because the markets and people expect the FOMC to contain actual inflation. Thus, we have to be very careful not to presume that expectations will remain stable independent of our actions today or in subsequent meetings. If the Committee chooses not to raise rates, does it risk sending the message that we are willing to tolerate inflation above an acceptable level for a significant period of time? If we take the Greenbook’s forecast as our point forecast, as has been repeatedly said, it will basically say that we’re prepared to tolerate PCE core inflation in excess of 2 percent for four years or perhaps more. Sending that message may generate increased uncertainty about our commitment to low inflation; and if inflation expectations become unhinged as a result, that would lead to some very bad outcomes given the costs imposed on the economy as we strive to regain our credibility. I recognize that a rate increase may come as a surprise to the markets, but I’m less sure that, over a slightly longer period, it won’t indeed be good news for the markets and for the economy as a whole. Thus, as I see it, the argument for favoring another move today is based on a comparison of the potential costs and benefits. Pausing is not free. In my view, pausing today would do little for growth in the near term, nor does it help us on our credibility side. I believe the potential costs of tightening a bit more in terms of bad outcomes for growth and employment are outweighed by the potential costs of not doing so, given where inflation is and where we think it’s going. If the economy’s growth prospects deteriorate significantly in the coming weeks and months, we clearly have the opportunity to pause or even reduce rates if we think doing so is necessary. In contrast, I ask myself, “How difficult will it be, if we pause today, to resume rate increases if we need to do so?” This question leads to thinking about the language of the statement. If we choose to pause today, it’s important that we send a clear and very strong signal with our statement language that we are committed to price stability. Pointing out that inflation pressures are likely to moderate over time is important if we believe that to be the case because we need to explain why, despite inflation above our comfort zone, we aren’t acting. Pointing out that some inflation risks remain would help convey the idea that we may need to act in the future to bring inflation down if our forecasts turn out to be wrong. So I’d like to close by suggesting that each of us needs to ask ourselves the following questions: What information are we likely to see in the next six weeks that would cause us, if we pause today, to initiate another rate increase in September? What might cause us to cut rates in September? And in the event that data on the real economy are once again a bit muddled, as they were in the past six weeks, and inflation continues unabated, will we find ourselves in the position of inertia that would lead us to continue pausing and then would possibly put us further behind the curve? Thank you, Mr. Chairman." FOMC20070628meeting--318 316,MS. MINEHAN.," Thank you very much, Mr. Chairman. I, too, would like to thank you very much for presenting your thoughts at the beginning of this discussion. It was extremely helpful to my thinking through what comments I wanted to make at this meeting. I have also found Governor Kohn, Vice Chairman Geithner, and everybody else who has talked very helpful in thinking through some of these issues. I am very much in favor of the forecast process that we are working on. I don’t think we have it totally right yet, but I think we’re headed in the right direction. It’s a great balance because, as opposed to establishing right now an inflation objective that would sit out there for all time—maybe that’s the direction in which you want to head in the future—it characterizes over a longish term—and I am attracted more to three years than to three to five years—how we see the balance of things working out in the economy and what we think it is possible to do with our inflation objective over that period, given the other factors that we need to think about in the economy and that are important, both to us and to everybody within our economy. So using these forecasts and putting a third year out there that describes what the balance of things would be given an appropriate policy path is something with which I could be very comfortable. I like the way that Vice Chairman Geithner talked about beginnings and ends. One thing that I’ve been struck by in this whole communication process is how hard it is to move backward once one starts to do something. It is nearly impossible to take it away. So as we think about beginnings and ends, we need to be very careful about taking a step at a time. Even though it might seem reasonable to take five steps, we should try one, see how it works, and then move on from there. Giving a forecast four times a year; going to three years, not three to five; and showing the balance of things and the range in which the Committee would see those things turning out would be, I would say in harmony with Vice Chairman Geithner, “a good step.” I agree with four times a year—that’s a good frequency. I was kind of drawn to some of Vice Chairman Geithner’s thoughts about whether or not to integrate this with the minutes. I came into the meeting thinking that it would be better as a separate document appended to the minutes that, if the timing worked out well, could be put into the Monetary Policy Report or could stand on its own. I tend to think of the minutes as a discussion of what happens at the meeting, focused on what we used to think of as the foreseeable future, which never was three years. It was always two or three meetings ahead, shaping the stance of policy over the near term. So I was on the same wavelength as President Moskow. The minutes describe a set of circumstances around which one is shaping current policy. Of course, they are related to the longer run, but that is a story that can be told somewhat independently and might be told better independently than woven into the minutes. But I think there is a need to think more about that—Vice Chairman Geithner had some interesting thoughts. I think anonymity is useful at this time—again, I am thinking that, once one takes a step forward, it’s hard to go back. I like the histograms myself. They are personally informative. However, I think if we accompany at least the first round of these forecasts with histograms, it will be somewhat like throwing red meat at a tiger. We have had those boring tables in the Monetary Policy Report for thirty years. [Laughter] You know, the variance in the range, the outliers—they have been there the whole time. The market could have made a lot out of that, but it never did, not too much anyway. I think that we might be better off with a more boring approach as a first step into this four times a year—say we did it, write what it was about, give the table, but don’t give all these red histograms that seem to beg everybody to worry about the outliers. I don’t think that is going to be helpful to us in terms of discussing things. I know we are probably running short of time, and I can’t go through all these questions in the same amount of detail. Let’s see, on that basis, I think that we should go forward four times a year and forecast a three-year time horizon. I like the idea of total inflation. Every time we have talked about this I thought that, if we are going to set a target, it should be in terms of a longish term in total inflation. I would be more inclined to the CPI. I should mention that I heard your comment that, if we focus on PCE, sooner or later everybody else will. That’s what we thought about ten years ago when we started talking about PCE, and over time people haven’t. PCE is there, but the CPI still is very, very common in terms of how people talk about inflation and the economy, and things are still linked to the CPI. I do think that we need to give a little more thought to either the CPI or PCE, and looking at the total as well as the core is very valuable. I don’t think that we should update our forecasts on anything other than what we heard at the meeting. There haven’t been many updates in the past. I wouldn’t expect there to be that many in the future, so I would think either the same day of the meeting, the next day, or the following Friday, depending on when the day of the meeting is. Fine, give people time to update their forecasts based on what they heard at the meeting but not on new data that are out there. Okay. Let me see if there’s anything else. In terms of the benefits and costs of further expediting the minutes, I agree that there would definitely be costs to doing so. There may, however, be a benefit in that we might be able to get to the objective that we initially had of trying to make the statement after the meeting more streamlined. To me, that would be a significant benefit of expediting the minutes. We could focus the statement on what we did and why we did it and not try to make that a vehicle for some longer-term reference, but rather leave that to the minutes and then four times a year to the forecast. So I think there is a benefit to expediting the minutes. From a process point of view, people have to be able to get encrypted information on their Blackberrys and not be forced to carry their laptops with them every single place they go. If we expedite the minutes, that will become even more of a burden, I think. In a memo, Vince talked about delegating approval. I would not do that. The principals have to be the ones to approve the minutes. If we decide to expedite them, we have to facilitate that process so that the principals can weigh in in a timely way on the minutes. Did I miss something that somebody wants to hear about?" FOMC20080805meeting--32 30,MR. KAMIN.," For the next couple of weeks, millions of people around the world will be watching the Olympic games in Beijing. For those of us charged with forecasting the global economy, of course, China-watching is a year-round task. But notably, the most salient developments since your last meeting have arisen outside of China. Chief among them, of course, have been the precipitous fluctuations in the price of oil. When the last FOMC meeting concluded on June 25, the spot price of WTI crude oil was running at $134 per barrel. It soared to over $145 by mid-July before plunging to about $119 as of this morning. The $26 per barrel drop over a three-week period was the largest on record in nominal dollar terms, although in percent terms, the 18 percent decline we've seen has been exceeded on a couple of occasions in recent years. Notably, many other commodity prices, especially those for natural gas and many food crops, also declined sharply. It has been heartening, and a welcome change, to see oil prices undershoot rather than overshoot our previous forecast. But it would be premature to pop open the champagne. We've seen several other steep declines in oil prices in recent years that gave way to renewed upward surges, and it remains to be seen whether an important shift in the supply�demand balance has occurred. Saudi Arabia added a total of 400,000 barrels a day to its production of oil in May and June, and there are indications that its production rose in July, too. However, these increases bring total OPEC production up only to their level in early 2006, and the world economy has grown considerably larger since then. Analysts have cited gloomier forecasts of global economic growth, and thus global oil demand, as contributing to the weaker oil prices; but those forecasts have been coming down for the past year with little apparent effect. Although oil consumption in the industrial economies clearly has slowed over the past year, we have yet to see either a concerted buildup in U.S. oil inventories or any indications that oil demand among developing countries is slowing. Therefore, a further lurch upward in oil prices is a distinct possibility. Moreover, with spot and futures prices having first soared and then plunged since your last meeting, the relatively flat path of oil prices that we are projecting is only about $12 per barrel lower, on balance, than in the previous forecast. In the meantime, indicators of foreign growth have come in a bit weaker than we expected, and inflation readings have been on the high side. These gloomier aspects of the international outlook counterbalance, to some extent, the improved tone of oil and other commodity markets. Clearly, prospects appear weakest in the advanced economies. Consistent with our earlier forecasts of a sharp deceleration in activity, we estimate that growth in all four of our largest industrial country trading partners--Canada, the euro area, the United Kingdom, and Japan--came in below 1 percent in the second quarter. In the United Kingdom, a sharp contraction in the housing sector appears set to drag the economy into a mild recession in the second half of this year. The remaining major economies should skirt recession but remain quite weak in the near term amid slackening export performance, continued stresses in financial markets, tightening credit standards, and very sharp erosions in business and consumer confidence. Why are the foreign industrial economies slowing about as much as in the United States, when the subprime crisis originated in this country and the major drag on the U.S. economy is the slump in a nontradables sector, housing? Clearly, part of the story involves the international financial linkages that have led foreign markets and institutions to share in the stresses and losses induced by the U.S. subprime crisis. Another part of the story involves a common shock--the global boom in oil and food prices--that has cut into real household income and spending around the globe. Third, even as the persistent decline in the dollar since 2002 has buoyed U.S. exports and growth, this has come at the cost of trade performance and economic activity in our trading partners. Finally, the foreign industrial countries have enjoyed little or none of the substantial monetary and fiscal stimulus we've seen in the United States over the past year. We estimate that growth in the emerging market economies also slowed further in the second quarter, to a pace of roughly 4 percent, where we have it staying for the remainder of the year. Obviously, this is well above the growth rate of roughly 1 percent that we've penciled in for the industrial economies, but it is still below their likely potential rate as many developing countries struggle with softening export demand and rising food and energy prices. Notably, however, even after slowing in the second quarter, estimated Chinese growth powered on at about 10 percent. By 2009, we see both foreign advanced and emerging market economies accelerating as financial stresses ease, the U.S. economy picks up, and commodity prices stop restraining the growth of real household incomes. This recovery scenario depends crucially on our projection that headline inflation starts moving down within the next quarter or two, so that substantial monetary tightening is not needed. The recent decline in oil and other commodities prices provides some comfort that this scenario will materialize. However, we saw some surprisingly sharp increases in consumer prices in June, bringing 12-month headline inflation to around 4 percent in the euro area and the United Kingdom, 5� percent in Mexico, and 6 percent in Brazil. In most of our major trading partners, inflation excluding energy and food prices has remained better contained; and in China, headline inflation has actually moved down from its February peak of 8.7 percent, registering 7.1 percent in June. Even so, until we see several quarters in a row of declines in aggregate measures of inflation, we will not be out of the woods. So far, the imprint of slowing foreign growth and rising foreign inflation on the U.S. external sector has been limited but not negligible. Turning first to prices, core import price inflation has moved up sharply, from about 3 percent last year to 11 percent in the second quarter; this was the fastest quarterly increase since 1987. Most of this acceleration was concentrated in material-intensive goods, such as food and industrial supplies, and was likely due to rising commodity prices rather than to more-generalized pricing pressures abroad. However, inflation in imported finished goods also increased this year. As we noted in a special box in the Greenbook, prices of imports from China have been moving up briskly as a result of increases in domestic costs and in the value of the renminbi. This step-up in the so-called China price explains less than one-fifth of the overall acceleration of core import prices but about one-third of the run-up in inflation for finished goods imports. Even so, assuming commodity prices stabilize going forward, we expect changes in overall core import prices to slow quite substantially in coming quarters. So far, U.S. external sector performance has held up well in spite of the slowing global economy. Net exports added 2� percentage points to real GDP growth in the second quarter, the largest quarterly positive contribution since 1980. Admittedly, much of this reflected a 6 percent decline in imports, which were dragged down both by weak U.S. demand and the quirky seasonal pattern in the data on oil imports. Even so, exports expanded at a very healthy 9� percent, supported both by the depreciation of the dollar and by continued robust demand for commodities. Going forward, we anticipate export growth holding up at a still healthy 7 percent or so, as foreign economic growth picks up right around the time that the boost from previous dollar depreciation starts wearing off. The contribution of net exports to U.S. GDP growth should move down, but this will chiefly reflect a recovery in imports as the U.S. economy picks up. Thank you. David and I will now be happy to address your questions. " FOMC20061212meeting--96 94,MS. BIES.," Thank you, Mr. Chairman. I thought I’d start today talking a bit about housing markets and the condition of banks right now. As many of you have noticed, some of us are optimistic that we may be approaching a bottom in the housing market. I think we’ll see that bottom in housing sales long before we see it on the construction side because there’s a large amount of inventory still to work through. But as we’ve noted, the applications for purchasing mortgages have been level since midyear. The growth in mortgage credit has slowed significantly from where it was in the past two years, dropping to only 10 percent growth this past quarter, a growth rate that is significantly above the growth of personal income and that most of us in the past would have considered to be alarming. Part of what’s amazing in all of this is that in 2004 and 2006, particularly toward the end of that period, purchase money seconds, by which people borrowed the downpayments for homes, were a big part of mortgage financing. Banks are still getting some of this business and putting it on their balance sheets, and it is part of the growth of what you’re seeing the banks funding. But it is at a pace that I think needs to be adjusted. I’m saying that, although the number of applications may have bottomed out, the amount of leverage in each housing deal may still need some correction going forward, and so we may see some slowdown in the volume of dollars that are funded through mortgage lending. Delinquency rates are really, really low by historical standards. The one sector that has had a jump in delinquencies is subprime ARMs, and clearly the jump is related to rates that have already reset. We’ve got more to come. Even though these have jumped, they’re still not at alarming levels. But it’s something that I think the banks are watching very, very carefully. One thing I’m hearing more from some folks who have been investing in mortgage- backed securities and maybe in some CDOs (collateralized debt obligations), where they’ve been tranched into riskier positions through economic leverage, is the realization that a lot of the private mortgages that have been securitized during the past few years really do have much more risk than the investors have been focusing on. I’m hearing this from folks who understand that the quality of what goes into those pools varies tremendously when you don’t have the Fannie Mae and Freddie Mac framework for the underwriting. When a mortgage is originated through a bank, we do a lot through safety and soundness supervision to make sure, if a bank is buying loans from brokers, that the loans are underwritten in a sound manner and are therefore affordable to the borrower when they’re undertaken. We’re seeing that some of the private-label mortgage-backed securities are having very high early default rates or delinquencies in the mortgages, which usually means that the originator has to buy them back out of the pools. There isn’t a whole lot of transparency in the disclosures around some of these bonds, and some of the brokers are underwriting products that have very high early default rates, which is something that investors are starting to focus on. As more products are generated outside the banking sector, they get funneled to pools through broker-dealers as opposed to the banks. I think that we’re missing a level of due diligence regarding brokers, who may not be doing a good job. As you all know, the fraud rate on mortgages has tripled in the past two years. So I think we could see noise in some of the mortgage-backed private deals and some of the riskier CDO economic leverage positions. Bank earnings are really, really strong overall, especially by historical standards. Banks are making a lot of layoffs connected with the mortgage business. They are taking steps to get costs—whether related to originations, post-loan closings, or payoff administration—under control. Net interest margins, however, continue to be under significant pressure. I’m hearing more from banks that, since we’ve stopped raising rates, they’ve lost the nice little lag effect— the ability to wait for us to move before lagging along. In other words, they have lost that lagniappe in their liability cost that has helped them with their margin pressures. So those pressures are going to be more of a challenge for them, especially with a flat or inverted yield curve, depending on where they’re funding and lending. Loan-loss provision continues to be the best in many, many years. No one really expects it to jump, but clearly it can’t get a whole lot better than it is, and so that will also present challenges going forward. As for the economy as a whole, I, too, want to compliment President Yellen because I think she did a fantastic job of helping us think about the different signals we’re getting. When I looked again at the graph that I love in the Greenbook that shows where our forecast has been, I was struck that we’ve seen the forecast of GDP growth continuing to moderate in the past several months but our expectations of inflation are actually flat to up a bit. To me that raises questions about the tradeoff that we really have when we are running below capacity and below potential growth rates. The bit of softness that I’m hearing about from some of my contacts in sectors outside housing and mortgages warns me that we need to be a little more vigilant than I had been expecting about growth maybe softening in a broader sense. But the fact that inflation continues to be above 2 percent in the forecast period is something that does concern me, and I think part of my concern relates to the tremendous amount of liquidity that sits out there in the banking sector, in the U.S. financial markets, and clearly globally. The presence of this liquidity is something that we really need to think about. It’s not back to where it was in my money supply days, when I started my career at the St. Louis Fed; but I do worry that liquidity is, as some of you have said, causing a lot of transactions to occur that economically perhaps wouldn’t otherwise occur. That is also something we need to watch very carefully." FOMC20071211meeting--77 75,MR. STOCKTON.," Obviously in our baseline forecast we don’t really have a pickup of inflation, even headline inflation, beyond the very near term. So we do think that, in the next quarter or two, we’re going to be looking at some pretty large headline numbers that will be reflecting the jump in energy prices and some lingering increases in food prices." FOMC20061025meeting--282 280,MS. YELLEN.," Thank you, Mr. Chairman. I’ll address the major questions posed in Vincent’s memo in the order presented. First, I support the enunciation of a long-run numerical inflation objective. My views on the benefits and costs of enunciating publicly such an objective have changed very little since we discussed this topic in January 2005. Beginning with the benefits, I believe a numerical objective would focus our internal policy deliberations and improve their coherence, particularly if the Committee does agree on a common objective. A numerical objective appropriately communicated could also improve the public’s understanding of our goals and the strategies for attaining them, thereby helping to align market perceptions with those of the Committee. Solid anchoring of the public’s inflation expectations could aid us in avoiding deflation in the vicinity of the zero bound on interest rates and could reduce the potential for destabilizing inflation scares following adverse supply shocks, thus enhancing the scope for monetary policy to respond to their real effects. Finally, the public enunciation of the long-run inflation objective would enhance accountability and transparency in a way that I think is appropriate. It’s a desirable goal in a democracy. Although I do perceive there to be net benefits from enunciating a numerical objective, I do not think these gains are enormous relative to the status quo. The public already has a reasonably good idea of the Committee’s inflation preferences, and inflation expectations are now pretty well, if not perfectly, anchored. Moreover, the evidence, as I read it, suggests that a central bank’s credibility on inflation depends more on its actual record of performance than on its utterances about its objectives. So no dramatic improvement in the sacrifice ratio seems likely. Interestingly, a recent survey that several of you have referred to, and I’m assuming most people have seen, by our former colleague Larry Meyer finds that only a minority of the respondents favored the Committee’s adoption of a numerical inflation objective. Market participants appear far more interested in improved communication concerning our assessment of the near-term outlook and prospects for monetary policy, and that suggests that as we go forward we should place considerable emphasis, as Governor Mishkin emphasized, on enhancing our forecasts in the context of the Monetary Policy Report. The enunciation of a numerical inflation objective could have costs as well as benefits. My main worry is the potential for de-emphasis on the other part of our mandate, namely maximum sustainable employment. Such a de-emphasis could occur in the minds of the public, and I could easily see how it could affect our own deliberations. I think the current situation provides a case in point. If the structural Phillips curve has indeed become as flat as FRB/US estimates, an optimal policy for lowering inflation to target brings it down exceptionally slowly when equal weights are placed on the inflation and the output gaps in the loss function. You can see that in the Bluebook simulations. With the public focused on a numerical inflation objective, however, it is naturally tempting to seek more rapid convergence to a target. I think we feel uncomfortable with the paths that we see in the Bluebook, and it would be easy to effectively down-weight our emphasis on the employment objective. Interestingly, almost half of the respondents to Meyer’s survey believe that the enunciation of a numerical inflation objective would impair the FOMC’s ability to meet its maximum employment objective. Therefore, enunciation of a numerical inflation goal, in my view, must occur in the context of a clear statement concerning our commitment to the dual objectives. In this regard, I remain attracted to our Chairman’s 2003 suggestion that we state the target inflation rate as a long-run objective only and emphasize—again, to paraphrase our Chairman—that in deciding how quickly to move toward the long-run inflation objective, the FOMC will always take into account the implications for near-term economic and financial stability. Consideration of the horizon issue is mentioned in the other question section of Vincent’s memo, and I, for one, take this issue to be crucial and would be unable to support a numerical objective unless the horizon can be long enough and flexible enough to respond appropriately to employment considerations. Now, I’d like to turn to the second major question, which deals with governance in essence. Will the inflation objective be chosen by the Committee members or by the meeting participants, and will it be chosen as a group decision or by summarizing our individual views? I think there are enormous advantages to reaching a joint Committee decision. This approach would provide the clearest focus in our policy deliberations and Committee communications, and it would probably work best in anchoring inflation expectations. It would also provide a well-defined standard against which we could be held accountable. However, I, too, recognize that it is probably wise to move in this direction cautiously. I would certainly support, as a first step, Governor Mishkin’s proposal to report a consensus of responses to an annual survey concerning long-run numerical inflation objectives of the participants. This approach would be a measured stance, more measured than a Committee vote, and I think it would be less likely to be divisive within the Committee and vis-à-vis the Congress. Such a survey respects the possible diversity within the Committee, and the Congress might be less likely to object to the Committee participants’ stating their individual interpretations of the monetary policy mandate than to the formal adoption of an inflation objective. Of course, choosing to use a survey now would not preclude us from voting as a Committee on a single objective later on. We could, as an alternative, communicate the Committee’s long-run inflation objective through lengthening the horizon of our inflation forecasts. Such an approach, however, has significant disadvantages in my view relative to a straightforward survey of opinions. Consider the current situation. If the extended Greenbook forecast is accurate, adding just a year or two to the forecast we prepare for the semiannual Monetary Policy Report would not work. In fact, to convey our implicit inflation objectives, if we accept the optimal policy path in the Bluebook, we might have to add five years or more to those forecasts. Moreover, if we extend the inflation forecast, we will also need to extend forecasts, as Governor Mishkin noted, of real GDP and the unemployment rate, and some members of the public and the Congress could misinterpret these estimates as the Committee’s goals for these variables; at a minimum, such estimates could lead to unproductive discussions about what the correct estimates of those key concepts are. That is an exercise I would not relish. Finally, on the question of whether policy settings will be affected by a long-run inflation objective. In some sense, the answer has to be “yes.” For example, I argued that the benefit of having an inflation objective is that it would help to anchor public expectations of policy, and if it did, it would affect bond rates and other financial variables and their responses, presumably in constructive ways, and would therefore feed back onto policy. But the real issue is this: Will a publicly announced inflation objective affect the weights that we put on the elements of our dual mandate? Will it cause us to respond more strongly to inflation and less strongly to employment? As I said before, I am concerned that this could happen, if only inadvertently. If we go this route, I myself would make every effort to prevent such a distortion to the weights that I use in analyzing policy decisions." FOMC20061212meeting--205 203,MR. KOHN.," Getting back to other communication issues, I have, first, a bit on the January meeting. Our January meeting will be another two-day meeting, and part of it will be on communication issues. This one will be on forecasts. What can we do to improve the way we communicate our outlook about the economy—really the medium-term outlook—and how it fits into our explanations of monetary policy actions. The focus is not so much on how we would use this to signal our price stability objective, which we will come back to in March. Obviously, the two considerations are closely related, but the focus will really be on the forecasting process and how we can do it better and communicate about it better. Three sets of background materials are in preparation: (1) a memorandum from International Finance on foreign experience with forecasts; (2) a memo from Research and Statistics on some of the choices available to us—the variables, conditioning assumptions, periodicity, and things like that; and (3) a memo from Monetary Affairs on the interaction of these various choices with the governance of the Committee—that is, who owns the forecast and the explanation. Moving on to the memo that you received from the subcommittee on communications—as you know from that memo, several Committee members thought it would be useful at this meeting to have at least a brief discussion about how we as individuals talk in public about the subjects of ongoing deliberations on communication issues. I include myself in that list of people who thought that this discussion would be useful, without necessarily implicating the other members of the subcommittee. We are concerned that our individual public statements could impede our ability to reach internal consensus and to control how whatever that consensus turns out to be is communicated to the public. I think that finding consensus on some of these issues is going to take considerable flexibility and give and take among Committee members. One concern is that the more individuals sort of pre-announce their positions, particularly in public, the harder it’s going to be to find that consensus around the table. We are in this process. There’s no need to push the Committee toward doing something. The Committee is doing something, and I think we need to keep all our individual options open as we go forward. Another problem is communication with the public. One of my concerns is that statements by individuals about their particular positions risk confusing the public about where we might come out, setting up inaccurate expectations of where we’re coming out, and provoking reactions in the public about something that the Committee might not be doing. Whatever we come up with, the Committee and the Chairman are going to have to keep close control on how we roll it out to the public and how we tell people what we’re doing and why. No one should be or can be expected to repudiate his or her past positions—say, on comfort zones—but we can think about not elevating the topic, not bringing it up so much ourselves, not pushing it further in public while the Committee is deliberating. We sent this memo really to get Committee reactions. To be effective, we need a consensus on this issue among the Committee members—and I would include the staff sitting around the edge of the room—to control our public statements on this issue. If some of us do it and others don’t, it isn’t going to work. So I would be interested in your reactions. Thank you, Mr. Chairman." FOMC20081216meeting--224 222,MR. EVANS.," Thank you, Mr. Chairman. As gloomy as our last meeting was, conditions have deteriorated substantially further since then. Practically all of my contacts reported that economic events had turned sharply lower once again in the last three to five weeks. This goes well beyond the auto sector and other parts of the District that have been struggling for some time. The most optimistic comment from my directors was this, ""At least Iowa is going to hell slower than everywhere else."" [Laughter] It is tough to follow that accounting joke, you know--that was good. More seriously, the most optimistic theme I heard from a number of business contacts went something like this, ""We are conserving cash and furiously cutting costs by year-end. But we hope to pause in the first quarter and take stock of where conditions appear to be heading. Then, we will act accordingly."" Frankly, I doubt such a wait-and-see pause in cost-cutting will occur that soon. For the purposes of this meeting and our actions over the next few months, I agree with the main thrust of the Greenbook projection. We are facing large contractions in the next two quarters, and I don't expect to see meaningfully positive growth before the fourth quarter. I think we need substantial further accommodation after today's meeting. I see the timing and the size of those actions for the most part being shaped by the large recessionary forces in train and the enormous financial headwinds. The disinflationary forces in play clearly are strong, but currently I do not expect that they will prove large enough to generate outright deflation. In terms of my earlier question about the Greenbook forecast--as I understand the way it was put together--if the quantitative easing helps, monetary policy would be somewhere between the funds rate at zero and the optimal control. So, in fact, it would be a little better than I first suspected. Inflation would be somewhat above that path. That might be a useful benchmark to watch for if we are fortunate enough for the forecast to be that stable, but time will tell. Quantitative easing should also lead to an increase in the monetary base. I don't know if there was any lasting conflict between your comments and President Lacker's, but I think that what we have contemplated will lead to the base increasing and that will generate expectations about inflation beyond just Taylor-rule dynamics, I would guess. In fact, there is certainly a lot of discussion and criticism out there that our balance sheet is going to lead to large inflationary risks. I don't share that, given how I think we will unwind the programs. But that certainly would help, and it would move us in that direction. So I will keep an open mind on deflationary risk. Thank you, Mr. Chairman. " FOMC20060808meeting--188 186,CHAIRMAN BERNANKE.," Let me add just a couple of very general comments. I hope that in our discussions about communication we’ll be aiming to make policy work better. I think that involves trying to make the markets and the public form expectations that are at least broadly consistent with our goals and our strategy and trying to anchor long-term inflation expectations to the extent possible. Even if you are skeptical about our ability to do this, you may still agree that we want to avoid miscommunication and unnecessary volatility to the extent possible. I agree also that in general we don’t want to provide the future funds rate path. I see a lot of problems with that. One of the reasons not to do it is that, if the market is forced to infer the funds rate path from economic information, that inference provides information to us. Otherwise, they’re simply repeating what we tell them. In an ideal world, how would we get the market to infer our expected path? Well, we would provide them with a conditional forecast with error bands and all kinds of conditioning assumptions, and we would tell them about our objective function, which would include not only the long-term objectives but also the relative weights on inflation and output and the shape of the risk aversion coefficients and the like. Now, of course, we can’t do that. Besides the technical difficulties, as has already been pointed out, we have nineteen very distinct points of view around the table. But I do think there are ways to communicate this kind of information to the public. As an example, in my monetary policy testimony I very consciously—whether it was successful or not I leave it to you to judge—talked about our Committee projections, which gave the public not only some insight into what our general views were but also information about our preferences because it showed a relatively gradual decline in inflation. This removed the fear that at least some market participants had that we were going to try to bring inflation down extremely quickly and extremely far. In that respect, it was very useful, and I generally agree with President Moskow and others that more-detailed and more- frequent projections might be a very useful way for us to go in the future. Finally, since we don’t have the budget to hire a semiotician, I do want to express some frustration with the coded language that we rely on so heavily—I have been exposed to some of the pitfalls that it can create. I think that we are reaching the limits of what codes can provide, and I’d like to encourage us to think about ways to use quantitative information, like forecasts, to provide more information and thereby reduce the weight that’s placed on any single words in statements and the like. So those are just a few comments. I want to thank everybody for an excellent discussion and for a lot of patience. I appreciate it very much. Our next meeting is on Wednesday, September 20, and we are adjourned. August 8, 2006 147 of 158" FOMC20080625meeting--69 67,MS. YELLEN.," Thank you, Mr. Chairman. The intermeeting period has been full of surprises. Real-side data came in considerably stronger than I anticipated, so like the Greenbook I have adjusted up my forecast for growth in the current quarter. At the same time, the adverse fundamentals that will weigh on household and business spending going forward have grown somewhat heavier overall, and that has prompted me to revise down my growth forecast for the second half. On the inflation front, readings on core inflation surprised to the downside. Nonetheless, given that the prices of many commodities have continued to rise more rapidly than I anticipated and that some measures of inflation expectations have turned up, I have adjusted up my inflation forecast for 2008, considerably up for headline inflation and modestly up for core inflation. The strong incoming data on spending eased my fears that we are in or are approaching a recession regime of the sort embedded in the last two Greenbooks. However, given the numerous large and worsening drags on spending, a couple of months of data aren't enough to convince me that we are on a solid trajectory. Moreover, the spending data may well fail to reflect the real underlying strength of consumer demand because of the effects of the tax rebates. Spending patterns could easily be distorted by small differences between what we projected that households would spend each month out of rebate checks and what they actually spent. In monthly spending data, a swing of just a few billion dollars looks enormous. Perhaps households who were already paying through the nose for food and gas and are increasingly credit constrained have put their rebate checks to work a bit early this time. After all, households knew in advance that the checks were going out. For example, Google searches related to tax rebates peaked in April. We actually kept track of the data on that. So I will be closely watching the data over the next few months, hoping to get a cleaner read on the underlying state of consumer demand. As I said, the adverse fundamentals are still with us and in some part are worsening. Evidence that the credit crunch is ongoing is all too clear. Bank asset quality continues to deteriorate. Banks continue to deleverage, and they are tightening lending standards as they do so. The market for private-label securitized mortgages of even the highest quality remains moribund. Spreads on agency-backed mortgage-backed securities have risen during the intermeeting period, which are likely to spill over to the primary mortgage market with a lag. Anecdotal reports suggest that the constraints on household borrowing continue to tighten. For example, two of my most senior bank supervisors--both with FICO scores in the stratosphere-- have had their home equity lines slashed. One has deferred a planned home renovation project as a consequence. If that is happening to them, I can only imagine how hard it must be to get a loan if you have a merely average credit rating. Housing prices have also fallen at a somewhat faster rate than the Greenbook previously anticipated. Given the overhang of homes for sale, the recent rise in mortgage rates, and the fact that the homeownership rate is likely to continue trending lower, I think the downward pressure on home prices and construction will persist, as the Greenbook suggests. The Greenbook is actually at the conservative end in its estimates of the wealth effect. It assumes a marginal propensity to consume out of housing wealth of about 3� cents on the dollar. In contrast, a number of recent estimates in the literature are in the 6 cent to 9 cent range. There is a clear risk, then, that the combination of declining housing wealth and tightening credit could lead households to restrict spending more, and more persistently, than anticipated. But the big adverse shock since the last meeting is oil prices, which are up $25 a barrel from the already elevated April levels. Empirically, since the mid-1980s, the estimated responses to relatively exogenous increases in the relative price of oil have tended to look qualitatively like the simulations in the Bluebook and the Board staff's special memo on oil prices, in which we are credible in our commitment to long-term price stability. Most notably, the empirical estimates suggest at most a modest effect on core inflation. Nominal wages barely respond; by some estimates they even fall slightly. The model results suggest that the outcomes we have seen in the actual data are crucially dependent on our having credibility. With substantial target drift, workers demand higher wages, which firms pay and then pass on. Fortunately, the anecdotes I hear are more consistent with credibility than with an upward wage�price spiral. In particular, my contacts uniformly report that they see no signs of wage pressure. There also is no evidence of real wage rigidity in response to energy prices. When energy prices have risen, real wages--in product as well as consumption terms--have generally fallen. In other words, real wages have been depressed in the 2000s, at least in part reflecting rising energy prices. But there is no sign that workers have over a number of years tried to recoup these losses at the bargaining table. Given the importance of credibility, the substantial increase in expected inflation in the Michigan survey is concerning but not yet alarming. I discount these readings somewhat because of analysis by my staff that suggests that, at either the one-year or the five-to-ten-year horizon, consumers have always tended to react strongly to contemporaneous inflation data. Changes in credibility are fundamentally about changes in the process by which people form expectations. But as far as consumer expectations are concerned, that process appears remarkably stable. For example, if you use data through the early 2000s to estimate equations that link inflation expectations to contemporaneous inflation, you will find that those relationships fit remarkably well out of sample. They don't show the systematic underprediction of inflation expectations one might expect if the Fed had suffered a significant loss of credibility at this point. The dependence of consumer inflation expectations on recent data also leads me to believe that they will fall if, in fact, headline inflation comes down as we are predicting as commodity prices level off. Furthermore, I don't think that households' elevated expectations will make it harder to achieve our projections. Earlier research suggested that surveys did, in fact, provide useful information about future inflation. But during the past 15 or 20 years, the actual inflation process has become much less persistent even though households appear to assume otherwise. There is, thus, a notable divergence between the actual inflation process and the one that is embodied in consumers' inflation forecasts. As a result, inflation forecasts incorporating consumer expectations have been a lot less than stellar over this recent period. So it does not appear unreasonable to believe that the effects of recent commodity price shocks will wear off faster than consumers are expecting. An unresolved question is, Whose expectations matter for the dynamics of inflation? I take some solace from the fact that 10-year inflation expectations in the Survey of Professional Forecasters have been relatively stable since the late 1990s and from the fact that five-to-ten-year breakeven rates on TIPS are below their peaks from earlier in the year. Taken all together, I think inflation expectations remain reasonably well anchored. The oil price increases have led me to raise my projections for overall PCE inflation sharply. Cost pressures are likely to push core inflation up a bit, though I see less pass-through than the Greenbook does. Higher oil prices and interest rates and lower housing prices have led me to modestly reduce my forecast of growth in the second half of this year and next year. My forecast is predicated on fed funds rate increases that begin in December of this year, gradually bringing the funds rate to 4� percent in 2010. Briefly, on the issue of long-term economic projections, I welcome greater transparency about our long-term objectives. I think that would be beneficial, and there is a good reason, as you have articulated, to try to do that now, given that for many of us--certainly for me--2010 is not long enough for me to project that the economy will have converged to a steady state. My preference is to provide projections of the average values for output growth, unemployment, and total inflation that are expected, say, five to ten years out. I think that these values can communicate the necessary steady-state information without burdening us with forecasting every year of the transition to the steady state. Also, I would favor conducting a trial in October. " FOMC20080318meeting--38 36,MR. SHEETS.," The global economy has likewise seen some extraordinary developments during the intermeeting period. Notably, the spot price of WTI has surged more than 15 percent, briefly reaching $110 per barrel, and many nonfuel commodities prices have moved up by similar magnitudes. The exchange value of the dollar, which had been relatively stable since November, has returned to a depreciating path, falling more than 5 percent against the major currencies since midFebruary and reaching a post�Bretton Woods low. The global financial stresses that began last summer have further intensified. Also, as Dave has outlined, recent data suggest that the U.S. economy has continued to weaken. Nevertheless, not all the news from the foreign sector has been grim. Indeed, given the shocks that have materialized, the foreign economies appear to be showing somewhat more resilience than we would have expected. Total foreign real GDP growth in the fourth quarter of last year stepped down to 3.2 percent from the rapid 4.5 percent rate that had prevailed through the previous three quarters, as the pace of activity slowed in both the advanced economies and the emerging market economies. This fourth-quarter out-turn, however, was about � percentage point stronger than we had expected, reflecting an upside surprise in the emerging markets. Available indicators of first-quarter activity paint a mixed picture. In the euro area, economic sentiment fell in February for the ninth consecutive month, but the purchasing managers index for the services sector and the German IFO index of business conditions picked up. In addition, industrial production and retail sales posted stronger readings in January. The ECB's bank-lending survey indicates a tightening of lending standards, but measures of bank credit to the corporate sector have continued to expand. Indicators of activity in the United Kingdom have also been mixed. Consumer confidence in February slid to a five-year low, but business confidence and conditions in the services sector have been more upbeat. In emerging Asia, while the impetus from external demand is clearly diminishing, Chinese retail sales have continued to grow robustly; industrial production in Korea, Singapore, and Taiwan moved up in January; and domestic consumption in the ASEAN countries has remained solid. Taken together, these data seem to indicate that growth abroad has cooled but has not stalled. Our forecast thus seeks to balance several offsetting considerations. On the one hand, the projection for U.S. growth this year has been cut by a sizable 1� percentage points; this has particularly stark implications for countries like Canada, Mexico, and some in emerging Asia that have close trade ties with the United States. The further deterioration in global financial conditions should also weigh on activity abroad. On the other hand, the incoming data suggest that the foreign economies are not yet following the United States into recession, and the red-hot commodities markets also lead us to believe that activity is holding up in some corners of the world. Weighing these factors, we have cut our forecast for total foreign growth in 2008 to 2.3 percent, down from 2.9 percent in the last Greenbook, with much of this markdown reflecting softer growth in Canada and Mexico. Our projections for emerging Asia have also been reduced, but we see these economies still expanding at a moderate pace. Clearly, there are both upside and downside risks around this forecast. On the downside, the adverse spillovers from the U.S. slowdown and continued financial stresses may be more severe and more broadly felt than we envision. On the upside, the apparent resilience in foreign demand to date suggests the possibility that growth abroad may hold up better than we now expect. In 2009, foreign growth is projected to rebound to 3� percent, in line with the expected easing of global financial stresses and economic recovery in the United States. With commodities prices increasing sharply, foreign inflation has continued to rise. Notably, in the euro area, 12-month headline consumer price inflation climbed to 3.3 percent in February, well above the ECB's 2 percent ceiling, driven up by food and energy prices. In China, 12-month inflation in February surged to 8.7 percent, at least in part reflecting sharp increases in food prices due to severe winter weather. In an effort to temper these pressures, the Chinese authorities have introduced temporary price controls for some basic necessities and this morning announced plans to raise reserve requirements another 50 basis points. We now see average foreign inflation in 2008 as coming in at around 3� percent, up � percentage point from the last Greenbook. Central banks have responded to this cocktail of slowing growth and higherthan-desired inflation in divergent ways. To date, the ECB has held its policy rate firm at 4 percent, citing the level of headline inflation, possible second-round effects from commodity price increases, and risks from ongoing wage negotiations. Given these concerns, we now expect the ECB to remain on hold a while longer but, in response to a projected further slowing of activity, to cut rates 50 basis points later this year. The Bank of England, in contrast, has reduced its policy rate 50 basis points since the fall--and we expect another 75 basis points by year-end--in an effort to cushion the economy against financial headwinds and slowing in the housing and commercial real estate sectors. Finally, the Bank of Canada has reduced rates 100 basis points since the autumn, in response to downdrafts from the United States and the strong Canadian dollar, and the Bank has indicated that ""further monetary stimulus is likely to be required."" Thus we see another 50 basis points of easing in the second quarter. As noted earlier, the dollar has depreciated more than 5 percent against the major currencies since mid-February as the widening divergence between the path of policy rates in the United States and other industrial countries, particularly the euro area, has weighed on the dollar. As a related factor, the tone of the recent U.S. economic data has been much softer than for most other advanced economies. In broad real terms, the path of the dollar in our current forecast is about 2� percent weaker than in the January Greenbook. Going forward, our forecast calls for the broad real dollar to decline at a 3 percent annual rate, with this depreciation expected to come disproportionately against the currencies of the emerging market economies. I conclude with a few words regarding the performance of the U.S. external sector. The January trade data showed exports continuing to rise at a healthy pace while nonpetroleum imports contracted. Imports of consumer goods were particularly soft. For 2008 as whole, we now expect the external sector to contribute a substantial 1.2 percentage points to growth, about twice as much as in our previous forecast. To be sure, much of this larger arithmetic contribution from net exports reflects a contraction in imports caused by the slowdown in U.S. demand. However, part of the reduction in imports is also due to the decline in the dollar. Exports this year are seen to grow at a pace of nearly 7 percent, just a touch less than in the last Greenbook, as the effects of the weaker dollar almost offset the markdown in foreign growth. In 2009, imports rebound as the U.S. economy recovers, and the positive contribution from net exports accordingly shrinks to about percentage point. Finally, yesterday the BEA reported that the current account deficit narrowed to 4.9 percent of GDP in the fourth quarter, its smallest share of GDP since 2004. We had expected the rise in oil prices to drive up the deficit, but this was more than offset by a marked improvement in net investment income, partly as earnings received by foreigners on their investments in the U.S. financial sector declined, reflecting the effects of the ongoing financial turmoil. We will now be happy to take your questions. " FOMC20070807meeting--42 40,MR. WILCOX.," Thank you, Mr. Chairman. In putting together the Greenbook forecast for this meeting, we adjusted our outlook in five ways in response to the developments that Bill Dudley has just described. First and foremost in terms of its implications for real activity, we took on board the implications of the decline in the value of equities since the June Greenbook. Second, we adjusted our home-price forecast down a notch, both in response to slightly disappointing indicators of home- price appreciation during the second quarter and in recognition of the bleaker conditions in housing markets more generally, including the developments in the subprime mortgage market. In all, we took the level of home prices down 1½ percent by the end of 2008, with about one-third of that amount representing our response to the incoming indicators and two-thirds reflecting the other considerations. In combination and allowing for some relatively minor offsets, the reduction in equity values and home prices took about $1 trillion off the balance sheet of the household sector and weakened our outlook for consumer spending through the usual wealth- effect channels. Third, we further adjusted our forecast of real PCE to allow for a direct effect of interest-rate resets. We estimate that 4.7 million variable-rate subprime loans are scheduled to undergo interest-rate resets over the next year and a half. If all these resets were to take full effect, they would result in extra interest payments cumulating to about $12 billion between now and the end of 2008. For several reasons, however, we think that $12 billion figure represents a loose upper bound on the likely effect of resets on consumption spending. For example, even in today’s relatively more hostile financial environment, some households will succeed in refinancing into a prime mortgage with a lower rate; others will sell their property and become renters rather than bear the additional debt service payments; and some who remain in their homes with no refinancing will have the financial wherewithal to shield their spending from a dollar-for-dollar reduction in response to the increase in debt service payments. In light of these considerations, we took consumer spending down by half the amount of the reset-induced payments. Fourth, we adjusted down our forecast for new-home sales to allow for the unusual restraint that the tightening in mortgage-borrowing conditions since the last Greenbook will likely impose on the demand for new homes. The adjustment we made this time followed similar downward revisions in March and June; together, these three revisions were calibrated to unwind the boost to mortgage originations that we think was provided by nonprime lending in 2005 and 2006. Overall, we took the trajectory of new-home sales down 6 percent this round—half in response to the mortgage developments and half in response to the disappointing pace of sales data for June. Having cut the pace of sales, we then also took down the rate of new construction in the forecast to keep inventories of unsold new homes from bulging too much further. Finally, we trimmed our forecast for investment in equipment and software a bit on the theory that the increase in spreads that investment-grade and especially non- investment-grade firms now are facing might reflect greater uncertainty in the business climate and that they might respond to that uncertainty by being a little more reluctant to invest. To be sure, the econometric evidence supporting this hypothesis is not rock solid, but it did strike us as suggestive enough to warrant a modest adjustment. All told, these responses to the more hostile financial climate took about ¼ percentage point off our forecast for the growth of real GDP over the second half of this year and next, with about half of that amount reflecting the changes working through the traditional wealth channel and the remainder representing the combined influence of the three less traditional adjustments. Could the implications of the financial situation for the real economy be even worse than we have built into the baseline? You bet. I almost invariably resist the temptation to declare that uncertainty about the real economy is greater than usual, but the current situation strikes me as the exception that proves the rule. In the “Alternative Scenarios” section of the Greenbook, we sketched three situations in which economic activity would be markedly weaker than in the baseline. In the first, residential investment drops 10 percent relative to baseline by the middle of next year, and home prices drop a total of 20 percent in nominal terms over the next year and a half—unprecedented in modern times but not outside the realm of possibility, as it would merely return the valuation of the housing stock to the level predicted by one of the house-price models that we track. The second scenario adds a deterioration in consumer sentiment, giving the meltdown in the housing sector an additional vehicle for spilling over into consumer spending more generally. In both of these scenarios, financial conditions deteriorate relative to baseline but only to the extent judged “normal” by the model in light of the weaker overall economy. The third scenario adds a further and more virulent deterioration in financial conditions, with a 10 percent decline in equity values and a 100 basis point widening in the spread on investment-grade securities. In the third scenario, we nearly—though not quite—succeed in generating a recession despite a substantial easing of monetary policy. On the other hand, could it be better? A key objective in putting together this forecast has been to ensure that risk lies on both sides of the baseline forecast. For example, yesterday’s market rebound is a reminder that stranger things have happened than for calm to break out in financial markets. One cannot rule out that, six months or a year from now, we will look back on this episode much as we look back on the flare-up in February of this year or as we look back on the stock-market break in 1987, with a sense of surprise that the financial event did not leave a greater imprint on the real economy. Even if the financial markets do not heal themselves quickly, consumers may prove more willing to postpone the increase in the saving rate that we have assumed in the baseline; businesses may aim to build the investment share of GDP back much closer to the levels that it attained in the late 1990s; and home sales may recover more quickly than we have assumed. A second challenge that we faced in putting the forecast together—more routine than the task of factoring in the implications of financial-market developments—was to take account of the annual revision to the national income and product accounts. As you know, the BEA revised down the growth of real GDP ⅓ percentage point, on average, in 2004, 2005, and 2006. Conveniently, this time around, the BEA made only very small adjustments to their estimates of PCE inflation. Because the NIPA revision gave us no new reason to revise our previous assessment of the pressures in product markets, we took our estimate of potential output down in line with actual GDP, thereby maintaining the gap between the two at its previous level as of the end of 2006. In line with our custom in years past, we carried the revision to the growth of potential through into the forecast period. As a result, we now have potential output increasing 2¼ percent in both 2007 and 2008. A virtue of the approach that we have taken in revising the supply side of the projection is that it leaves most of the variables you care about undisturbed. Thanks to the BEA, inflation is essentially unrevised. Because we moved potential down in line with actual, the GDP gap and the unemployment rate trajectories are also essentially unrevised. And with real interest rates and the GDP gap about the same as before, r* is also roughly unrevised. In short, if you make your policy decisions based on expected inflation and expected resource utilization, your policy choices after the revision should be about the same now as they were before the revision, provided that you see the prospects for resource utilization as roughly the same now as they were before the revision. The one variable that is different, of course, in the projection as well as in history, is the growth rate of real GDP. But a conventional analysis would view the revision to that variable as something you simply have to accept—not something you can do anything about. In a statement that will strike you as reminiscent of “other than that, Mrs. Lincoln…,” I would summarize the nonfinancial news that we received during the intermeeting period as having been remarkably consistent with our June projection. On the downside, the most notable development, to be sure, was in home sales, both new and existing, confirming the recent step-down in housing demand. Pending home sales—our most reliable near-term indicator of existing-home sales— rebounded in June, but to a level that is still well below its average in the first quarter. Even so, were it not for the substantial disruption on the lending side, the portrait of the housing sector that we would be reporting to you today would be substantially the same as the one we presented in June. Elsewhere, the data on orders and shipments of nondefense capital goods in June were a little softer than we had expected. The slowdown in light-vehicle sales in July to 15.2 million units at an annual rate raises a warning flag, but we are inclined at this point to interpret that result as a temporary pause rather than a harbinger of much weaker spending ahead. All that said, last Friday’s employment report once again showed a little more momentum in hiring than we had expected, and initial claims for unemployment insurance in the two weeks since the July survey week have remained low, giving no sign of any material deterioration in labor-market conditions. The increase in the unemployment rate to 4.6 percent in July was not a surprise given the moderate pace of growth, on average, thus far this year. Moreover, the indicators that we have in hand put manufacturing IP on track to post a solid increase in July. All told, the real economy seems to have entered the period of intense financial-market turbulence with, if anything, a little more momentum than we would have projected at the time of the June meeting. On the inflation front, the picture looks very much the same as it did at the time of the June Greenbook. We still see the bulk of the improvement in core PCE inflation during the second quarter as likely to prove transitory. In a nod to the relatively favorable recent monthly readings, we trimmed our forecast for the second half of this year by 0.1 percentage point despite a number of factors that could put slightly greater upward pressure on inflation, including the slower pace of structural productivity growth, the higher level of commodity prices, and the uptick of a tenth in the Michigan measure of long-term inflation expectations. Next year, as energy prices turn down slightly, inflation expectations remain well contained, and pressures on resource utilization ease slightly, we continue to have core inflation edging down to a rate of 2 percent; and we have top-line inflation dipping slightly below the core rate to 1.8 percent for the year as a whole, before coming back up in line with the core over the next two years. Karen will now continue our presentation." FOMC20080318meeting--146 144,MR. FISHER.," I just can't bring myself to go that far, Mr. Chairman. I listened very carefully to what was said at the table, and implicit in Tim's question to me was, Would you be willing to do something? The answer is ""yes,"" but not as much as you're suggesting. I try as hard as possible, even though I've made my living in financial markets, to ignore the reports that we were just given as we started this conversation because what we're paid to do and what I believe is our duty and obligation to do is what's right for the long-term interests of the economy. I am more bearish now than before, and I was an outlier on the bearish side of economic growth. I've been at the lower end of the range, but I also believe that we have significant inflationary concerns. I have a further point to add to President Hoenig's--I agree with his intervention. I think that, by being accommodative, we are encouraging others who have a role to play here--you mentioned them yourself, Mr. Chairman--to sit back and let us do the job. To me the combination of inflationary pressures, which I consider to be real, imputing into a much weaker economic growth scenario, which I have thought for a long time, means that we cannot do this job alone. The fact of the matter is that we have undertaken significant liquidity enhancement initiatives, and I think we're going to have to do more, and I've been fully supportive of them, but I think 75 basis points, Mr. Chairman, is way too much. My thought is that it encourages the financial markets. They're not going to be satisfied. I said this last time. It's Jabba the Hutt. They will keep asking for more and more. We have to quit feeding them. I'm in a pizza mode, by the way, in this conversation. I do have a suggestion, however. " FOMC20060629meeting--186 184,CHAIRMAN BERNANKE.," Let me say that I hope in my monetary policy testimony to talk a bit about our framework, our focus on the forecast and on the outlook, and the fact that we will not ever respond to any individual number. I would be quite happy to receive any suggestions that members might have about how to explain these issues. We’ll be working on that over the next couple of weeks. President Pianalto, did you have a comment?" FOMC20070918meeting--130 128,MR. MISHKIN.," Thank you, Mr. Chairman. Clearly, the key issue in thinking about where the economy is and what we need to do about policy is the financial destruction that is going on right now. When I look at it, I think about the different episodes that we’ve had in the post-World War II period and separate them into two sets of episodes. There’s the episode of 1970 with the Penn Central crisis, there’s the 1987 stock market crash, there’s the 1998 LTCM episode, and then, of course, the World Trade Center terrorist tragedy in 2001. That’s one group. In those contexts, there was a lender-of-last-resort operation. It was active policy on our part, and it did resolve the situation in the financial markets very quickly. The other episode is the early 1990s, when there was much more of a severe structural problem in which the banks got into trouble. Therefore, it took quite a long time for them to fix their balance sheets in order to get players back into the financial markets to make loans to people who had good investment opportunities. When I look at the current episode, I see something in-between. I do not think that in this case the situation can be resolved quickly because I think that the price discovery issues are severe. In particular, we’ve gone to an originate-to-distribute model, which Governor Kroszner mentioned, and we have found some serious flaws in it. The expectation is that we will have new models coming out. In fact, I think that this is actually going to be a long-run profit opportunity for the banks. So if we were allowed to buy bank stocks, I think it would be a good idea. [Laughter] But the key problem is that this is going to take a substantial amount of time, even if things go very well; in that context, there is a substantial negative shock to aggregate demand and, therefore, a substantially weaker economy. However, the issue that most concerns me here is that, even though I think the modal forecast is that growth will be slower than we expected, the downside risk is actually very, very substantial. Though we may not be allowed to mention it in public, we have to mention the “R” word because there is now a significant probability of recession. The problem here is really the interaction of the financial side with the real side. I’m worried that, as the economy becomes more nonlinear, we have the potential for a vicious circle or a downward spiral, whatever phrase you want to use—that, in particular, we have a financial disruption, which means that it’s harder to allocate capital to people with productive investment opportunities and, as a result, you get a contraction in economic activity. A contraction in economic activity makes information revelation or price discovery harder to do. That can then lead to more financial disruption, which leads to a downward spiral in terms of economic activity. So the big issue here for me is that this nonlinear element is very real right now. The question is what to do about it, and that’s what we will be discussing shortly. However, I think it is also important to recognize that inflation risks are just not that severe right now. That’s the good news because it will allow us flexibility to deal with the situation. In particular, we see inflation expectations that are very grounded, something that everybody has mentioned. Also, even in the modal forecast and not worrying about the downside risks, the expected future output gaps are more negative, so we have less pressure going forward there. I was happy that the staff slightly lowered the NAIRU estimate, which was consistent with my views in the past couple of cycles, when I thought that it might be a smidgeon under 5 percent. I think their revision makes sense, and, again, it means that there’s a bit less likelihood of upside risk to inflation. Then, also, there are the downside risks to real growth. When I look at the inflation situation, I do think that inflation expectations are grounded around 2 percent right now. By the way, that’s not necessarily written in stone because things that we might do could actually change inflation expectations; but I think that we have to take inflation expectations as given right now. However, I see that the risks are slightly to the downside from that 2 percent level because of the things that I’ve just mentioned. The key point here is that we have a situation of potential nonlinearities, big tail risk, that could actually get very nasty, and in fact there is a potential for recession. On the other hand, I don’t see that inflation risk is the big problem right now. Thank you." FOMC20060510meeting--54 52,MS. JOHNSON.," On the international side, two major developments during the intermeeting period merit some further discussion this morning: the rapid and sizable run-up in global prices for crude oil and the significant depreciation of the exchange value of the dollar in the second half of the period. Those developments occurred against a background of continued strong global growth, with some economic indicators again surprising us on the positive side for some countries. As a result, we are still expecting moderately strong foreign real GDP growth at an annual rate of 3½ percent over the forecast period, with inflation projected to remain contained although upside risks are a concern. When we finalized the March Greenbook forecast, the spot price of WTI was just over $60 per barrel. Last week, as we completed the forecast for this meeting, that price reached about $75 per barrel before partially retracing. The intervening seven weeks had witnessed almost daily tales of woe of higher prices, with the supply problems in Nigeria proving more persistent and serious than earlier thought and tensions over the nuclear program of Iran adding to heightened pressures on energy prices. In addition, outages of U.S. crude production as a result of the hurricanes continue, as do issues regarding supply from Iraq and Venezuela. Events in Bolivia have also rattled the energy market. As a result, and consistent with the shift in futures prices for the rest of this year and next, we raised the projected path of the U.S. oil import price about $10 per barrel. As in March, that path rises slightly through the end of this year and then is about flat in 2007. One significant and direct consequence of the higher oil prices is an increase in the U.S. oil import bill from that forecast in March. In the baseline forecast, the value of oil imports has been revised up $34 billion for this year and $48 billion for next. As a consequence, of the approximately $150 billion widening of the U.S. nominal trade balance that we now project from the fourth quarter of last year to the final quarter of 2007, just about one-third is accounted for by the enlarged oil bill. The overall trade deficit is now expected to be about 6½ percent of GDP at the end of next year. A second consequence of higher global oil prices is that the revenues to the world’s oil exporters have significantly increased. This positive change to the external revenue of these countries has raised a number of questions about their propensities to import and from whom and their decisions about how to hold the funds that they have received and have not as yet spent on goods and services. Data on the portfolio allocation of oil revenues by many exporting countries are sparse; in many cases, the funds are held by national oil companies or in special stabilization funds, neither of which are likely to be included in reports of foreign official reserves. Moreover, officials in some of these countries tend not to reveal detailed information about their holdings. A case can be made that increased revenue flows to these countries over recent years likely added to overall global net saving and contributed to low long-term interest rates globally. It is still uncertain whether their behavior has had or will in the future have a systematic influence on exchange rates. From U.S. TIC data, we have some limited information about some categories of dollar holdings that are current through March of this year. As was reported in Part 2 of the Greenbook, inflows of foreign official assets in the United States held by OPEC countries were quite strong in the fourth quarter of last year and in January. However, in February and March those inflows dropped sharply, as did aggregate official inflows from other non-G-10 countries. For total portfolio inflows to the United States that combine public and private investors, funds from oil exporters (including the Middle East, Mexico, Russia, and Norway) were more than $25 billion in the first quarter—a pace comparable with that in 2005. The $25 billion inflow compares with estimates of the net oil revenues of the oil exporters of about $200 billion in the first quarter. Again, the monthly data show a sizable step-down in the size of inflows after January. Among the oil exporters, there is some variation across countries in their inflows into the United States. After showing positive inflows in the previous two years, net outflows were recorded for both Russia and Venezuela in the first quarter. In contrast, inflows from Middle East oil exporters, Mexico, and Norway were strong. All told, although total inflows for oil exporters remained near rates in 2005, there are some hints of possible diversification away from assets held in the United States by some oil-exporting countries, especially in more recent months. I should note that these countries may hold dollar assets outside the United States; changes in such holdings are not captured by the TIC data and may give rise to entries for countries such as the United Kingdom that are the location of major global financial intermediaries. We have only extremely partial data for U.S. financial inflows in April, so it is not possible to relate the recent sharp depreciation of the dollar to any pattern in such data. The exchange value of the dollar fell significantly against all the currencies of our index of major industrial country trading partners as well as against the currencies of Brazil, Korea, Chile, and most other Asian emerging-market economies. This broad-based decline reflects a significant change in preferences on the margin among at least some global investors and may alter expectations of some of those holding large amounts of dollar assets. Over the intermeeting period, U.S. long-term nominal interest rates moved up nearly 40 basis points. But rates rose 20 or more basis points in most foreign industrial countries. Real long-term interest rates taken from inflation-indexed, sovereign securities in Japan and the euro area also rose about 20 basis points, comparable to the change in U.S. inflation-indexed rates. A significant decrease in the market value of the dollar with no evident change in relative real rates of return on comparable fixed-income securities could indicate an increase in the risk premium attached to holding dollars, or it could signal a change in perceptions of the long- run real exchange value of the dollar. Even given lags in the underlying relationships, the weaker projected path of the dollar does show through in our forecast. For real exports of core goods, the drop in the level of the dollar to date and the slightly faster pace we now project for real dollar depreciation imply that relative prices will boost growth of these exports about 1 percentage point more over the remainder of the forecast period than we thought in March, based on our model. For real exports of services, the story is similar. For core import prices, our equations imply a positive effect, concentrated in this year. However, when incoming data and other factors are taken into account, our projection for import price inflation is only a little above that in the previous Greenbook, and so the net effect on real imports is negligible. For real imports of services, a negative effect from higher relative prices is evident in the baseline projection. For the nominal measures at the end of the forecast period, total exports are revised up, but total imports are up more. The enlarged oil bill accounts for virtually all of the upward revision to nominal total imports. As a consequence, the trade deficit has been revised to a somewhat larger figure. That change is significantly offset by the effects of the lower dollar on projected investment income. The lower dollar is positive for investment income as it translates earnings abroad of U.S. firms into more dollars. In addition, in our forecast those earnings are directly boosted by higher oil prices. All told, our outlook for the current account deficit is for more-rapid deterioration this year than we previously thought but a deficit at the end of 2007 that is only slightly larger than we had been expecting in March. David and I would be happy to answer any questions." FOMC20070628meeting--283 281,CHAIRMAN BERNANKE.," Why don’t we reconvene? We had some hurried consultation during the break about how best to proceed with this discussion. Breaking with our usual practice, we decided that it might be best for me to begin and to provide you with my sense of a broad schematic of how I see us going forward with our communications, in particular with the projections, which I view as being central to our plan. I note that people can justifiably complain that they haven’t had enough preliminary information for this discussion, which I’m about to give you. But let me also say, first, that there will be, of course, opportunity to react in the round to follow and, second, that we will continue to poll you and to consult with you and that we’re not going to be finalizing this for some time yet. So in the interest of trying to give you something to react to, let me just present an overview of how I see this going. The extended projections that we have been experimenting with can be a central critical element of a new and expanded communication strategy that will, in fact, address many of the concerns that were raised today. I’ll be very explicit about that as I go through this. In particular, what are the elements of these expanded projections? First, I recommend that we extend the projection horizon. We have used a third year in our experiment so far. I think that might be the right solution, but let me just leave open for discussion the possibility of either using a fourth year or replacing the third year with a third through fifth year average or something of that sort—sort of a long-term average. Second, I recommend that we release this projection quarterly. That would mean approximately quarterly because the calendar is not conducive to an exact quarterly release schedule. That would mean that two of the projections would appear in the context of the Monetary Policy Report. This is not a central concern, but my thought at this point would be that we should revisit the Monetary Policy Report and try to make it more informative. There is a lot that we could do to make it better—to include more information, include boxes, and essentially make it a more-effective publication. That would be, as now, twice a year. Perhaps on the off quarters we could have a small release of some sort, or we could include the projections in the minutes. That’s one of the issues that we need to discuss as we go forward. Third, I think that in our projections we ought to project a total inflation measure. As many people have noted, there is confusion—and even some resentment, I would say— about what appears to be our excessive attention to core inflation. Projecting a total inflation measure throughout the projection would, first of all, clarify that our definition of price stability is in terms of total inflation and would give us opportunities to explain in this document, in speeches, and elsewhere not only why we do look at core inflation, how we use core inflation, and its role as a forecasting mechanism but also—as President Fisher and others have mentioned—that it’s not a necessarily sufficient statistic and that we should look at other things as we try to forecast overall inflation. I would go even further here—just, again, to be concrete. I’ve wavered myself on thinking about which particular measure. I’ve had discussions with the staff, and I am not wedded to anything in particular at this point, but currently I am leaning toward suggesting that we use the PCE deflator as our measure of inflation. It’s a technically better measure. It uses chain weighting and has a lower weight on shelter costs, which have their obvious problems. It has disadvantages: There is a significant nonmarket component, for example. An argument can be made for the CPI on the grounds that it is better known although, as has been pointed out to me, if we begin to really focus on the PCE, it may endogenously become better known. Another point to make here is—and I don’t want to get too distracted with this—that since there is a fairly stable wedge between the PCE and the CPI, we might be able to use the CPI in some of our communication as long as we’re clear that we are not picking and choosing as far as our objective and our definition of price stability are concerned. Another component of the projections that we have been doing, which I think is very valuable, is adding a considerable amount of both qualitative and quantitative information to our projection. That includes, in particular, our explanation of the qualitative material that we have been submitting—describing the forecast, the risk to the forecast, the sense of uncertainty that we have, and so on—and I think that will be very valuable. As I said, we can combine this with other supporting information. There are various ways to do this. There could be a separate document four times a year. It could be in the minutes. I suggested one possibility, which is to include it in the Monetary Policy Report twice a year and keep it in the minutes or as a separate document on the off quarters. Let me talk a bit about what this would accomplish for us, and then I will summarize that at the end. First of all, the public is very hungry for information about the Federal Reserve’s outlook and our sense of the risks to the economy. We have, as I have noted before, the best forecasting group in the world. We have useful information to add to the debate. By providing that information, I think we can help people make better decisions and understand policy and the economy better. In particular, the more we are forced to explain our predictions and our forecasts, the more credible we’ll be and we’ll be inviting discussion, reaction, and debate that will, I think, make our projections better. One of the advantages of transparency is that we begin to interact more with the outside world. Second, I think we should assume optimal monetary policy. I had some other ideas before, but in the end, I think that’s the right thing to do. An important implication of assuming optimal monetary policy is that the projections therefore become essentially, as everyone understands, a plan for how we propose to steer the economy, if you will— subject, of course, to all the qualifications of uncertainty, forecast problems, and so on. It gives an explicit road map with reference to both sides of our mandate about how we expect our policies to move the economy toward our objectives over the next three years. I think that’s very important for a number of reasons, such as accountability and transparency. But let me give you an example of where I think it’s particularly useful. One issue we have been discussing is the appropriate period for achieving price stability, and two suggestions are out there. One is sort of the standard Bank of England approach, which says that we have a two-year horizon. We have certain concerns about that. In particular, it doesn’t necessarily take into account, at least not explicitly, the state of the real economy, the initial conditions, how far we are from price stability, and so on. Another possibility is to say, well, it’s just an aspirational number. It’s a long-term number. We don’t have any particular schedule for getting there. People have raised the obvious objection: Where’s the discipline? Where’s the credibility associated with that? So, as we understand this, we can explain to the public that the projections go a long way toward solving this problem because they show how far out we think we have to go to get to what we and the public view as being reasonable levels of price stability. So it does in a very important way solve the problem of the appropriate horizon. Now, I should add a point that will come up, which is that one could object that the projections are not the same as a Committee forecast. We are not going to come together and make a single forecast that the entire Committee buys into, except to the extent that we do have consensus building, which we will have over time in our meetings. That aspect of it could be viewed as a lack of clarity. However, the aggregation process does reflect unique features of the Federal Reserve, including its institutional structure, the large size of Committee, the geographical dispersion of its membership, and our longstanding willingness to accept and encourage diverse views within the Committee. So we won’t be forcing some kind of artificial consensus. There will be opportunity for disparity. In particular, I would recommend that we provide information to the public about the cross- sectional distribution, as we already do. But my inclination—and people can react—would be to provide the entire cross-sectional distribution to convey the sense of uncertainty or the sense of dispersion of views, and that will be informative in the same way that the votes in the BOE’s Monetary Policy Committee are informative. However, as in the case of the Bank of England and other banks, even though we won’t be having a common forecast, nevertheless—as I think we have already seen— the preparation of our individual forecasts does create a certain amount of discipline and has been useful for us in thinking about our forecast. A very important question is what is conveyed by the third-year projections, and I think that they are at the heart of the innovation created by this step. Assuming that we’re not too far from the steady state initially, which I think characterizes our current situation, it is evident that the third-year projections—or, alternatively, the third through fifth or however we decide to do it—reveal a lot of information about our views on sustainable long-run growth; our views on sustainable unemployment; and, of course, our views of what price stability is. I simply take note of the fact that the latest projections show the central tendency of the Committee’s inflation objectives to be 1.5 to 2 percent on the core PCE deflator. I actually—and I’m speaking entirely for myself—would be not at all displeased if that became known as the Federal Reserve’s comfort zone or informal definition of price stability. First, it’s a compromise among different views. Second, I realize that I’m complicit in the 1 to 2 percent comfort zone, but I do note that the lowest twelve-month core PCE, in 2003, was 1.27. I don’t think we’d be comfortable with inflation rates below 1 percent even though we’re obviously willing to tolerate inflation rates slightly above 2. It’s not symmetrical, and I think that the comfort zone revealed by our third-year forecast would be reasonable and would provide useful information. Some would be concerned that we’re also providing information about the Committee’s views on sustainable growth and sustainable unemployment. I am not that concerned about it. I think that a transparent Committee should do that. However, for those who are concerned about possible risks, I’ll point out that Committee projections will have a lot of dispersion that probably will essentially encompass most reasonable estimates of these variables. Moreover, there will be forecast errors around those projections, and as we get information about productivity and other factors, we will be able to update those estimates. I don’t think that they will be a major constraint. I think that they will, in fact, just provide some information to the public. I note that some participants have talked about an opportunistic approach to disinflation, which still seems to have some adherents around the table—that is, people who may say, “Well, I’m sort of for 2 percent now, but I can see over time, if the opportunity arises, very gradually moving down to 1½ and so forth.” Obviously, the revealed preference shown by the third-year projection doesn’t distinguish between those things. One thing that might happen—and I don’t think it’s necessarily a bad thing—is that, if opportunistic disinflation happens and those individuals therefore lower their projections, the Committee’s projection might drift down a bit. I don’t think it would drift up. I think there would be a strong resistance to that. But it would be responding appropriately to changing conditions, and I don’t think it would change very much; so the fact that it would not be literally rigid is not necessarily a problem to me. Some thought will have to be given to vocabulary, how we describe these things. I think that I will myself want to talk about the Committee’s projections. It’s not quite right to call them a target because we will not have agreed universally and chosen a number once and for all. That being said, I think that the normative implications of the number will not be missed by the public, and that it will do a lot to clarify people’s views on what the Committee is trying to do and will also be useful for internal discussions. In particular, in testimony, speeches, and the like, I would use the projections as my reference point as I talk about what the Committee is trying to do, where we are heading, and what we think is the best way to get there. So let me summarize what I think this component of our communication strategy could do for us, noting that some other things could come in the package—perhaps faster minutes, changes in the statements, and so on. But let me just talk about what I think is best for us. First, it is going to allow us to provide considerably more information to the public and in a more timely way because it will be quarterly. Second, it will give us an opportunity to clarify how quickly we intend to move toward our objectives. It will give us a way to deal with the problem of the horizon. Those of you who were at the St. Louis Fed’s conference on inflation targeting in 2003 might remember a paper by Board staff members Jon Faust and Dale Henderson in which they talked about inflation targeting as being focused on the mean of the objective but needing also to focus on the variance. What they mean by that is the speed with which misses are fixed and that some regimes are not adequately constructed to deal with that. Again, this would allow us to be very explicit and very accountable about how we return to our objectives. Third, it would allow us, again, to move to total inflation as our objective and to clarify how we use core inflation as an input into forecasting total inflation. Fourth, it would clear up the current confusion about comfort zones and individual views. We’re not going to take a vote on the particular number, but I think a reasonable way to proceed is to consider the range of third-year projections as being a kind of consensus view of what most of us think is an appropriate measure of price stability. Again, I think the normative implications will be clear. Fifth, it will improve our internal discussion and decisionmaking. We’re already seeing that. In fact, it has highlighted some problems that we have in our communications and in our coherence. This will help, I think. Sixth, it respects the Fed’s unique institutional structure, the nature of its Committee, its governance procedures, and its attention to diversity of views. Moreover, it builds explicitly on a communication device that we’ve been using for thirty years. In that respect, it will look in some sense as incremental even though I think it’s very substantive. But I think with its incremental nature, the transition risks—be they market risks, political risks, and so on—will be more moderate than they would otherwise possibly be. So this is an outline. I know that some of you may think that this is a bridge too far. Some of you will think that I’ve only started on the road to Damascus here. [Laughter] As I said, there will be an opportunity now to go around as you talk to give any reaction you might have to this. Also, I have not been very specific about the questions raised in exhibit 1 that Vince put out. These things bear on the details, but I’m pretty flexible about them. I think I’d like to see the minutes moved up if possible, consistent with doing all of what I’ve described. Otherwise I’m pretty flexible about this. Let me just say a few other things about going forward. This, together with the other elements, is part of an ongoing process. We’re not going to lock this down. I will ask the subcommittee to continue in existence. Certainly we’re going to have to move forward, if we all agree that this is the direction that we want to go, to implement the details of the minutes, the Monetary Policy Report, the collection of this information, and so forth. I would like to talk about the whole package, whatever we come to, in the fall—that is, in the next three or four months. I will surprise Don by saying this. It would be very nice if I could have something to point to in October, but it’s certainly possible and I think it’s very important for us to move deliberately. If that’s not possible to do in a safe and clean way, then we could wait until January to actually deliver some product. So that is a question. I think that what will happen is that we will see the reaction we get. We will see how the public and the markets respond. We may have to take further steps. When we see how this goes, the markets and the public will tell us what they need to know that we’re not yet telling them, and then we can move it still further if we need to. But my sense is that, with some of the details that we need to work out—and your comments are more than welcome, as they are with the entire vision—as a central part of a package, this would move us in a good direction. So I’m going to stop there, and we’ll have a go-round. Did you have an intervention?" CHRG-111shrg57320--279 Mr. Reich," So they do have a role. Senator Levin. Well, not at that time. You wrote her in August. You must have been upset. You reminded her that the FDIC has no role. Those are your words, not mine. " FOMC20070628meeting--35 33,MR. WILCOX.,"2 Thank you, Mr. Chairman. My colleagues and I will be referring to the packet entitled “Staff Presentation on the Economic Outlook.” Your first exhibit summarizes our economic forecast. As shown in the top panels, we have edged up our forecast for the growth of real GDP this year and next. Taken by itself, the increase in interest rates that Bill Dudley mentioned was a negative for our growth outlook, but it was outweighed by a variety of other factors, including the higher stock market, the upward revision to wages and salaries, and the more favorable composition of real growth during the first half of this year. As shown in the middle pair of 2 Material used by Mr. Wilcox, Ms. Liang, and Mr. Leahy is appended to this transcript (appendix 2). panels, we have trimmed our forecast of the unemployment rate—partly in response to the latest readings on this series and partly in light of the slightly stronger outlook for real output—and we now have it ending 2008 just below 5 percent, our estimate of the natural rate. As shown in the bottom right panel, core PCE inflation in the current quarter appears to be running at an annual rate of 1.4 percent, considerably less than the 2.2 percent we expected as of the May Greenbook. However, as I will discuss later in more detail, we have interpreted most of that good news as likely to prove transitory and so have taken down our forecast for core inflation over the projection period only 0.1 percentage point. Exhibit 2 turns to the market for single-family housing. The yellow stripes in the top left panel mark major downturns in single-family housing starts since 1970. As can be seen in the box to the right, the current contraction now ranks among these major episodes in terms of magnitude. It differs importantly from previous ones, however, in terms of its origins because this one did not result from a round of monetary tightening aimed at taking economic activity down to bring inflation under control. That difference has important implications for the likely contour of the recovery. In earlier episodes, once the desired reduction in inflation appeared to be in train, the policy rate was brought back down and longer-term interest rates often came down as well. But this time, as shown in the middle left panel, with policy assumed to hold at its current position, we are not banking on any reduction in mortgage interest rates from here forward, suggesting that the housing recovery may be more subdued than it often has been in the past. One factor that poses some downside risk is the overhang of unsold homes, shown in the middle right panel. Months’ supply remains at a very high level. As we illustrated in one of the alternative simulations in the Greenbook, the contraction in the housing sector could be a good deal deeper than the one in our baseline if builders decide to bring inventories down more quickly. Another factor that will be important in shaping the recovery is the pace of sales, shown in the bottom left panel. In light of the tighter conditions in the subprime loan market and the recent backup in rates, we have sales moving a little lower over the next few months but then stabilizing and beginning to edge up around the turn of the year. The data on both new and existing home sales that were released earlier this week were consistent with our Greenbook forecast. I should also note the situation with regard to the price of single- family housing. As you know, home prices have decelerated greatly, and over the projection period, we have them remaining close to their current levels on a national-average basis. But our ability to judge the alignment of prices with fundamentals is limited, to say the least, and a substantial move downward is certainly possible. The bottom right panel illustrates that risk by presenting the estimated valuation error according to the very simple model that we showed you two years ago in our special presentation on housing. To be sure, other models deliver different answers, but this one judges the misalignment of the price-rent ratio to be historically large. If prices break more sharply because builders decide to clear out inventories more quickly, construction activity might well recover faster, even as other consumer spending is crimped by the damage to household balance sheets. Which effect would predominate in terms of overall aggregate demand is not entirely clear. Exhibit 3 focuses on business fixed investment. As shown in the top left panel, sales of medium and heavy trucks have more or less fallen off a cliff thus far this year, reflecting the influence of new EPA regulations that took effect on January 1, and this has been an important factor holding down overall equipment spending. We think that this dynamic should be coming to a close over the next few months and are looking for truck purchases to begin trending up sometime during the second half of this year. As shown in the top right panel, orders and shipments of nondefense capital goods hit an air pocket around the turn of the year, apparently driven down in part by the trials of the motor vehicle and construction industries. However, the orders and shipments data for March and April—the latest that were available to us when we were putting together the Greenbook, encouraged us to think that a rebound of at least modest proportions is in train, and this morning’s release came in close to our Greenbook expectations. Moreover, surveys of business conditions, including the two orders-based indexes shown in the middle left panel, suggest that businesses concur that the situation has brightened somewhat in the past few months. As shown in the first line of the middle right panel, we are projecting that, over the next six quarters, equipment investment will post respectable—if unspectacular—increases. Two of the variables conditioning that view appear at the bottom of the page. As shown on the left, we expect real business output to grow a little more slowly over the forecast period than in the preceding few years, suggesting—all else being equal—somewhat more modest growth in investment than in earlier years. Similarly, as shown on the right, we expect the user cost of capital for high-tech equipment, the red line, to continue to decline at about the average pace of the past few years, and we expect the user cost for non-high-tech equipment, the black line, to be about unchanged, much as it has been over the past year and a half. All in all, these factors point to a steady outlook for business investment. Exhibit 4 takes a slightly longer term perspective on the inflation outlook by comparing our current projection to the one that we had in the January Greenbook—the last time you submitted projections for a Monetary Policy Report. As shown in the top left panel, since January we have revised up our near-term forecast for overall PCE price inflation but not our longer-term outlook. Part of the near-term revision is due to faster food price inflation— the top right panel—which in turn reflects, among other things, the greater pressure that ethanol production has placed not only on the price of corn but also the prices of other foods that are produced using corn as an input, such as beef, dairy, and poultry. By the end of this year, though, we assume that the livestock and poultry sectors have adjusted to the higher level of corn prices, so we have food prices coming back in line with core inflation. Another part of the upward surprise in overall PCE inflation is due to a steeper climb in consumer energy prices—the middle left panel—reflecting crude oil prices that have been running about $10 per barrel above our January assumption and refinery outages that have kept utilization below typical levels. But as with food, we have energy price increases moderating greatly over the projection period. Excluding food and energy—the middle right panel—core PCE price inflation has looked a little tamer thus far this year than we expected in January. Nonetheless, our projection for core inflation next year is unrevised, on net, relative to the January Greenbook. The absence of any net revision since January reflects a mix of considerations. For one thing, not all the news related to inflation has been good; both import and—as I just noted—energy prices have been running higher than we expected and thus have been generating more upward pressure on inflation than we had foreseen. For another, some of the recent good news seems likely to prove relatively short- lived. For example, as shown in the bottom left panel, nonmarket-based prices, which account for about 20 percent of the core index, have been rising less quickly thus far this year than we expected in January. Historically, however, fluctuations in nonmarket prices have not conveyed much information about the future behavior of this series, so we have trimmed our projection for the increase in this component of prices over the second half of this year by only a tenth. As shown to the right, both tenants’ rent—the black line—and owners’ equivalent rent, or OER—the red line—have decelerated lately but, as shown by the bars at the bottom of the panel, OER has slowed by noticeably more. Historically, differences of this magnitude have not persisted long—see, for example, the bulge that emerged and then disappeared in 2003; moreover, these divergences have tended to be resolved in favor of tenants’ rent. Accordingly, we expect the increases in OER over the projection period to look more like the recent increases in tenants’ rent rather than the other way around. In the end, these influences happen to roughly offset one another, leaving our core inflation projection for next year unchanged from January. Exhibit 5 focuses on the recent behavior of inflation expectations and, as noted in the top left panel, asks whether those expectations have moved above levels that were typical from mid-1996 through mid-2004—a period when actual core PCE inflation was mostly between 1 percent and 2 percent. As noted in the last bullet in the box, the answer varies by series. In the next three panels, I use shaded bands to indicate levels of each series that were typical during the eight-year reference period—the darker bands marking the middle 50 percent of the series’ observations and the lighter bands marking the middle 80 percent of the observations. As shown in the top right panel, the short-term expectations measure from the Michigan survey of households has indeed been tending to run above the levels that were typical of the earlier period. Roughly, those higher readings seem to reflect the steep climb in energy prices over the past few years. In contrast, as shown in the middle left panel, longer-term inflation expectations from that survey have remained remarkably stable. They have drifted slightly higher relative to the levels that were typical during the reference period, but even so the latest reading sits just at the edge of its 50 percent band. The middle right panel shows a measure of short-term inflation expectations from the Philadelphia Fed’s Survey of Professional Forecasters; the most recent reading on this series is near the center of its 50 percent band. As you know, the measure of ten-year expectations from the SPF, not shown, has mostly been stuck at 2.5 percent since 1998 and was slightly below that in both the first and the second quarters of this year. Unfortunately, the TIPS market is too young to allow an apples-to-apples comparison on the basis used here. On the whole, however, we interpret the evidence as suggesting that inflation expectations have been quite stable recently. We assume that they will remain so over the projection period and thus will not be an important influence on the inflation contour this year and next. The bottom left panel plots our projection of the unemployment rate and our estimate of the NAIRU. We expect the small amount of upward pressure currently being generated from this source to be relieved over the projection period as the unemployment rate drifts up and resource utilization eases. The bottom right panel summarizes our inflation outlook. Relative to the May Greenbook, our forecast for core PCE inflation in 2007 as a whole is down 0.3 percentage point; as I noted earlier, our forecast for the second half of this year and for next year is down only a tenth. Nellie will continue our presentation." CHRG-109shrg30354--86 Chairman Bernanke," No, not perfectly, but if things go as generally expected. I think there is a lot we could do to make those forecasts more informative and that might be one direction to go in the future. But I understand that is an ambiguous phrase. Senator Sununu. You also say in your testimony that ``It bears emphasizing that, because productivity growth seems likely to remain strong.'' So you were assuming that productivity growth will remain strong. On what are you basing that assumption? " FOMC20050920meeting--89 87,MR. LACKER.," Thank you, Mr. Chairman. Fifth District economic activity appears to have expanded at a quicker pace from mid-August through mid-September. For the most part, production and sales in our area were not substantially affected by Hurricane Katrina. Shipments from District factories accelerated from August’s modest upturn, and new orders grew for the first time since May. Service firms reported faster growth in their revenues, and they maintained the moderate pace of hiring seen in early August. Retailers told us that overall sales grew modestly. Labor market conditions remained solid, with District job growth maintaining the moderate pace of recent months. Hurricane Katrina had relatively few real effects in our area, as I said, causing only some scattered and short-lived outages of gasoline and interrupting raw materials shipments to a small number of manufacturing firms. In addition, higher gasoline prices, combined with fears of September 20, 2005 61 of 117 Ophelia, battered the Carolina coast last week, but preliminary assessments suggest it was not any more damaging than the typical, run-of-the-mill hurricane. While several of our contacts tell us that higher fuel costs will squeeze profit margins, the majority tell us that they are passing on cost increases to their customers. Many firms report that customers are more receptive to price hikes in the current environment. With about half the responses in as of yesterday morning, preliminary results from our September business surveys are showing that both prices paid and prices received are rising at a quicker pace than in August, and expected price trends have generally ratcheted up as well. Turning to the national picture, the Greenbook’s forecasts for output and its components appear broadly consistent with private forecasters and with what we were hearing from our Fifth District contacts. Prior to Katrina, the economy was growing at a reasonably strong pace but with some signs of inflation pressures rising from elevated oil prices. And the real effects of the hurricane that are projected in the Greenbook forecast appear quite plausible, given the difficulties of assessing the temporal extent of the disruptions to economic activity. But on the inflation side, the Greenbook forecast paints a picture that I find somewhat distressing. The staff’s inflation forecast has been steadily drifting up over time—as shown, for example, in the fine new table on page 21. [Laughter] And it was revised up markedly for this meeting. Core PCE inflation is near 2½ percent throughout 2006 and does not fall below 2 percent until 2007. Inflation expectations move upward as well, which causes growth in compensation and unit labor costs to step up significantly at the beginning of next year. This September 20, 2005 62 of 117 While the real, quantitative effects of the hurricane are uncertain at this time and may prove more moderate than first feared, the qualitative implications for short-term real rates seem quite clear to me. A real interest rate is, of course, the price of current resources relative to forgone future resources, and for a number of reasons Katrina has caused a temporary scarcity of current resources. A portion of the capital stock in the affected region has been destroyed or damaged, and workers have been separated from employers. It will inevitably take time and resources to rebuild the capital stock and reestablish productive labor market matches. The good news is that these effects are likely to be relatively short-lived. Within a year or so, we are likely to be back to more or less where we would have been in the aggregate. But this means that, if anything, Katrina should cause real interest rates to rise to encourage adjustment to the temporary scarcity of current resources. The fiscal response to the disaster points in the same direction regarding real rates. The sustainability of federal deficits was questionable prior to Hurricane Katrina, and the spending amounts being proposed for hurricane recovery efforts just strengthen the case for tighter policy. I think we have to be careful about reasoning on the basis of the gap between current output and estimates of potential output. Some estimates appear to identify the decline in potential primarily with a small estimated effect of lost capital. Such approaches see the supply- side effects of Katrina as minimal and, therefore, interpret most of the decline in output as a shock to aggregate demand. This makes it tempting to a naive policymaker to consider counteracting the September 20, 2005 63 of 117 which I’m aware amount to reductions in our current capacity to produce goods and services. Lower real interest rates can do little to counteract these reductions. I think we should be careful about the widely cited analogy in the public press to the 1970s when oil supply shocks were subsequently followed by recessions. I say this recognizing that several participants around the table were somewhat closer to monetary policy than I was then. But in the 1970s, inflation expectations were untethered, and people came to expect us to allow energy price shocks to feed through to overall inflation. We often confirmed that expectation by keeping real interest rates from rising. In fact, at times, we kept nominal rates from rising as fast as inflation and, thus, real rates fell. We were then forced to raise rates dramatically to bring inflation back down and, in the process, exacerbated the real effects of the oil price shocks. So, to interpret the effects of Katrina as signaling an imminent shortfall of aggregate demand is to draw the wrong lesson from the 1970s, in my view. The right lesson for us today is the importance of keeping inflation expectations anchored in the face of this shock. At our last meeting, we noted the relative stability of longer-term inflation expectations as measured by the TIPS inflation compensation numbers, even in the face of sustained oil price increases. But the behavior of the fed funds futures prices and the TIPS curve since Hurricane Katrina suggest to me that our credibility is seriously incomplete, in the sense that many market participants appear to think that we might be willing to tolerate elevated inflation for some time in an attempt to ease the real effects of the hurricane. Our action and statement today should provide the public with greater certainty about our near-term intentions. Thank you. September 20, 2005 64 of 117" FOMC20080318meeting--118 116,VICE CHAIRMAN GEITHNER.," I guess another way to frame the question is, If we are reasonably successful in mitigating this adverse feedback dynamic in markets and the effects that has on financial conditions, would we still need to lower the nominal fed funds rate further to achieve the forecast laid out in the Board staff's Greenbook? " FOMC20070918meeting--64 62,MR. STOCKTON.," Yes, it helps for forecasting near-term consumption. But you are right, I don’t think the low level of consumer sentiment that we have seen through the middle of September is telling us a great deal about where consumer spending will be early next year. There is not a lot of predictive content that way." FOMC20060131meeting--93 91,MR. LACKER.," Thank you, Mr. Chairman. Fifth District economic activity continued to advance broadly in December and January. Service-sector employment and revenue strengthened, and retailers reported generally strong sales and a pickup in hiring. In manufacturing, the signals are mixed. Shipments flattened out in December and turned down in January, and our new orders index turned negative as well. At the same time, we’ve seen a very sharp rise in our index of expected manufacturing shipments six months out. Major swings in this index do a pretty good job of predicting subsequent upturns in orders and shipments. The last time we saw a rise nearly this steep was at the beginning of 2002, and a sharp rebound in orders and shipments soon followed. While the figures for prices paid and prices received for both manufacturing and services have come down off their November highs, they remain noticeably elevated, and measures of expected price trends have moved up over the past two months. On the national economy, until I saw the fourth-quarter GDP report, I was thinking that economic growth was on pretty solid footing. Friday’s report came in weaker than expected, of course, but as Dave Stockton mentioned, it appears plausible that several temporary factors are at work. So I continue to think that prospects for economic growth are pretty good this year. Both employment and consumer spending are likely to continue expanding at a healthy pace, and the fundamentals for business investment point toward fairly robust spending growth. At our last meeting, I, like many others, believed that the threat that energy-price increases would pass through to core inflation and inflation expectations had diminished since the immediate aftermath of Hurricane Katrina. However, I wasn’t convinced that the threat was entirely behind us, and unfortunately, my concerns on that score remain. Oil prices have nearly returned to their September highs. The fourth-quarter core PCE price index came in at 2.2 percent, 0.3 above the Greenbook’s estimate, and the Greenbook has reversed course and marked up the ’06 inflation forecast a bit. The staff is now expecting core PCE inflation to rise to 2.3 percent in the middle of 2006 and not to fall below 2 percent until 2007 and then only slightly below. This forecast represents a bulge that is somewhat more extended than I would like to see. So, for today, I believe we should strive not to move the near-term yield curve down. In the broader context of the historic nature of today’s meeting, however, it’s quite striking that among the prominent subjects are a quarter-point bulge in inflation and the issue of whether long-run and trend inflation should be 1.5 percent or 2.0 percent. Few now doubt whether the Federal Reserve can or will keep inflation stable, a question that was seriously in play decades ago. Your leadership in the intervening years, Mr. Chairman, completed the work begun by your predecessor to restore the expectation of price stability that had been lost in the transition from the prior commodity standard. Given the number of centuries that regime was in place, I believe future monetary historians would be justified in marking the Volcker–Greenspan era as a millennial transition. This achievement required altering public expectations about the trend rate of inflation that we would tolerate. It also required substantially damping the association between strong real growth and resurgent inflation. Moreover, it required demonstrating that there was no need for adverse cost shocks to spawn higher trend inflation. The key to all of this, in my mind, was establishing a pattern of predictable FOMC behavior that was well understood by the public. Leading this transition as you did, Mr. Chairman, required tremendous acumen and tremendous courage. Personally, Mr. Chairman, I count serving with you, however briefly, as one of the greatest privileges an economist could imagine." FOMC20050630meeting--361 359,MS. MINEHAN.," Thank you, Mr. Chairman. New England continues to expand but probably more slowly than the nation. At our last meeting, I spoke of a couple of bumps along the road to a stronger regional economy. Those bumps remain—in particular, rising concerns about slow job growth, rapidly growing input costs, the strength of demand, and the availability of skilled June 29-30, 2005 121 of 234 Moreover, with the base realignment and closure (BRAC) proposals by the Pentagon now public, there are clear challenges to be faced in both Connecticut and Maine, which together bear about half of the related job losses for the whole nation. While there will be extensive efforts in Washington by New England legislators to modify the BRAC results through the work of the BRAC Commission, judging by the outcome of the last four rounds of base closures, little will change. This will be particularly difficult for Maine, with its smaller and less differentiated economy. And I expect the news of the MBNA/Bank of America merger won’t go over well in Maine either. So it’s not hard to see why the general tone in New England seems a bit on the soft side. Employment in our District is growing but at a slower pace in May than in the three previous months. Unemployment has edged up, and most other indicators of economic health show only modest growth. Indeed, business confidence has trended down sharply, and commercial real estate markets remain sluggish across the region. Regional manufacturers—those contacted for the Beige Book, those who sit on our New England Advisory Council, or those who participate in our economic forums—are for the most part experiencing rising demand and volume growth. But they view increases in costs as a particular impediment. They see the costs of raw materials of all sorts, including energy and transport, as problems. And they believe passing on such costs is difficult, except when they have unique or technologically advanced products. Many talked about margin pressures and, as compared to the last several meetings, fewer talked about pricing power. Perhaps this is because energy surcharges already have been implemented and accepted but other pricing changes are proving more difficult. Health care costs are a concern as well. And the rising costs—or unavailability of—necessary June 29-30, 2005 122 of 234 To end the regional discussion on a little more positive note, there are industries that are clearly doing well. As a generic category, the leisure and hospitality industry is growing. Tourism is solid and hotel margins are good. Retailers are more optimistic as well, though the wet weather in May dampened sales [laughter] and caused inventory levels to rise. Many software companies are facing good demand for their products, and business service firms say that job markets are tightening, especially for technology workers. And I’d have to say that in my 11 years of reading the notes on Beige Book discussions, I’ve never seen a description of the business outlook quite like the one I read in our recent notes, which was, I quote, “Crazy, busting at the seams.” That was the case for one very large regional producer of aircraft integrated systems. For this company, demand from the airlines for retrofits and for fuel management and diagnostic systems has taken off, literally. [Laughter] So, not everything is growing slowly in New England. Turning to the national scene, there is clear evidence that the economic softening we noted at the last meeting has reversed course, at least partially. The so-called soft patch in the first quarter is in the process of being revised away with the changes to net exports and inventory levels. And while the second quarter will suffer some from the unwinding of auto inventories, there does seem to be a solid pattern of underlying growth. Looking further ahead, there is very little difference between our forecast in Boston and that in the Greenbook. Through late ’05 and into ’06, we continue to see an evolving handoff from policy-stimulated, consumer-led growth to a solid pace of underlying demand led by increased business spending that is being driven by relatively sound fundamentals. Incoming data, while June 29-30, 2005 123 of 234 We, like the Greenbook, see four-quarter growth rates in both 2005 and 2006 in the mid- threes, unemployment close to the staff’s estimate of full employment, and both core CPI and core PCE edging downward. This isn’t terribly different from our outlook at the previous meeting. But while some aspects of the earlier soft patch have gone away, new or perhaps more sharply drawn risks have emerged. In particular, oil prices continue to surprise on the upside. This could both dampen growth and contribute more to inflation than we currently expect. The baseline forecast sees inflation moderating over the next year and a half, but that assumes that oil prices flatten and don’t continue their upward climb. By the end of the forecast period, some slack remains, but there are risks on the upside that resource pressures could occur sooner. Indeed, some compensation measures may be hinting at this, and slowing productivity could also contribute. Risks exist on the downside as well, in particular that the drag of higher energy prices will slow worldwide growth even further, working to create greater slack here in the United States. The other major area of risk, as I see it, involves a wide array of asset and financial variables. We’ve discussed whether there is a housing bubble or just symptoms of froth in some markets. While much of the rise in house prices can be explained by rising incomes and demographics, low interest rates clearly have been a contributing factor. They have also contributed to what most market practitioners view as a sense of reaching for risk in markets and to relatively narrow credit spreads. The complications of some of the newer, more intricate, and untested credit default instruments caused a bit of market turmoil recently. This was far from a systemic event, but it does I think illustrate the fact that nasty surprises can occur when markets overdo. I found the papers prepared by Vincent and his colleagues on the conundrum of low 10-year June 29-30, 2005 124 of 234 more credence in the low 10-year yield as a signal of increased financial ease rather than potential economic weakness. But the case for both interpretations I thought was well made. For both these major risks—rising oil prices and excesses in asset and financial markets— there are possible downside effects on growth and upside effects on inflation and market volatility. So how should policy react? Or, more pointedly, when should we pause from our “measured pace” to assess where things are? Given the Greenbook forecast and reasonable assumptions about remaining slack, one could look at the downside risks and say that a pause should occur sooner rather than later. But one could also look at the upside risks and decide a pause should come at a later point. Frankly, I think the latter course is less costly. That is, if we err on the side of tighter policy, easing can be done quickly if it’s necessary—and at little relative cost. Higher rates, if approached sensibly and cautiously, will help to wring out of the system some excesses and protect against unexpected surges in inflation. If we stay too accommodative for too long, then the price of correction in terms of economic growth may well be higher. But, really, pausing is not the question for today. I think our best course of action should be to repeat what we’ve done over the last several meetings and move the funds rate up. I know we’ll have more to say later about the language in the statement, but for now let me emphasize once again that I think saying what we did and why we did it should be enough. I know there will be no desire to change the statement in any fundamental way until we take a pause or decide to move faster. That may be wise, and it has worked pretty well so far. But I continue to believe that there is a risk in continuing to imply that we know more than we do about what the future course of policy will need to be. June 29-30, 2005 125 of 234" CHRG-109hhrg28024--11 Mr. Bernanke," Mr. Chairman and members of the committee, I am pleased to be here today to present the Federal Reserve's monetary policy report to the Congress. I look forward to working closely with the members of this committee on issues of monetary policy, as well as on matters regarding the other responsibilities with which the Congress has charged the Federal Reserve system. The U.S. economy performed impressively in 2005. Real gross domestic product increased a bit more than three percent, building on a sustained expansion that gained traction in the middle of 2003. Payroll employment rose two million in 2005, and the unemployment rate fell below five percent. Productivity continued to advance briskly. The economy achieved these gains despite some significant obstacles. Energy prices rose substantially yet again, in response to increasing global demand, hurricane-related disruptions to production, and concerns about the adequacy and reliability of supply. The gulf coast region suffered through severe hurricanes that inflicted a terrible loss of life, destroyed homes, personal property, businesses and infrastructure on a massive scale, and displaced more than a million people. The storms also damaged facilities and disrupted production in many industries, with substantial effects on the energy and petrochemical sectors and on the region's ports. Full recovery in the affected areas is likely to be slow. The hurricanes left an imprint on aggregate economic activity as well, seen in part in the marked deceleration of real GDP in the fourth quarter. However, the most recent evidence, including indicators of production, the flow of new orders to businesses, weekly data on initial claims for unemployment insurance, and the payroll employment and retail sales figures for January suggests that the economic expansion remains on track. Inflation pressures increased in 2005. Steeply-rising energy prices pushed up overall inflation, raised business costs, and squeezed household budgets. Nevertheless, the increase in prices for personal consumption expenditures, excluding food and energy, at just below two percent, remained moderate, and longer-term inflation expectations appeared to have been contained. With the economy expanding at a solid pace, resource utilization rising, cost pressures increasing, and short-term interest rates still relatively low, the Federal Open Market Committee over the course of 2005 continued the process of removing monetary policy accommodation, raising the Federal funds rate two percentage points in eight increments of 25 basis points each. At its meeting on January 31st of this year, the FOMC raised the Federal funds rate another one quarter percentage point, bringing its level to four and a half percent. At that meeting, monetary policymakers also discussed the economic outlook for the next 2 years. The central tendency of the forecasts of members of the Board of Governors and the presidents of Federal Reserve Banks is for real GDP to increase about three and a half percent in 2006 and three percent to three and a half percent in 2007. The civilian unemployment rate is expected to finish both 2006 and 2007 at a level of between four and three quarters percent and five percent. Inflation, as measured by the price index for personal consumption expenditures excluding food and energy, is predicted to be about two percent this year and one and three quarters percent to two percent next year. While considerable uncertainty surrounds any economic forecast extending nearly 2 years, I am comfortable with these projections. In the announcement following the January 31st meeting, the Federal Reserve pointed to risks that could add to inflation pressures. Among those risks is the possibility that to an extent greater than we now anticipate, higher energy prices may pass through into the prices of non-energy goods and services or have a persistent effect on inflation expectations. Another factor bearing on the inflation outlook is that the economy now appears to be operating at a relatively high level of resource utilization. Gauging the economy's sustainable potential is difficult, and the Federal Reserve will keep a close eye on all of the relevant evidence and be flexible in making those judgments. Nevertheless, the risk exists that with aggregate demand exhibiting considerable momentum, output could overshoot its sustainable path, leading ultimately, in the absence of countervailing monetary policy action, to further upward pressure on inflation. In these circumstances, the FOMC judged that some further firming of monetary policy may be necessary, an assessment with which I concur. Not only the risks to the economy concern inflation. For example, a number of indicators point to a slowing in the housing market. Some cooling of the housing market is to be expected and would not be inconsistent with continued solid growth of overall economic activity. However, given the substantial gains in house prices and the high levels of home construction activity over the past several years, prices and construction could decelerate more rapidly than currently seems likely. Slower growth in home equity in turn might lead households to boost their saving and trim their spending relative to current income by more than is now anticipated. The possibility of significant further increases in energy prices represents an additional risk to the economy. Besides affecting inflation, such increases might also hurt consumer confidence and thereby reduce spending on non-energy goods and services. Although the outlook contains significant uncertainties, it is clear that substantial progress has been made in removing monetary policy accommodation. As a consequence, in coming quarters, the FOMC will have to make ongoing provisional judgments about the risks to both inflation and growth, and monetary policy actions will be increasingly dependent on incoming data. As I noted, core inflation has been moderate, despite sharp increases in energy prices. A key factor in this regard has been confidence on the part of the public and investors in the prospects for price stability. Maintaining expectations of low and stable inflation is an essential element in the Federal Reserve's effort to promote price stability. Thus far, the news has been good. Measures of longer-term inflation expectations have responded only a little to the larger fluctuations in energy prices that we have experienced, and for the most part they were low and stable last year. Inflation prospects are important, not just because price stability is in itself desirable and part of the Federal Reserve's mandate from the Congress, but also because price stability is essential for strong and stable growth of output and employment. Stable prices promote long-term economic growth by allowing households and firms to make economic decisions and undertake productive activities with fewer concerns about large or unanticipated changes in the price level and their attendant financial consequences. Experience shows that low and stable inflation and inflation expectations are also associated with greater short-term stability of output and employment, perhaps in part because they give the central bank greater latitude to counter transitory disturbances to the economy. Similarly, the attainment of the statutory goal of moderate long-term interest rates requires price stability because only then are the inflation premiums that investors demand for holding long-term instruments kept to a minimum. In sum, achieving price stability is not only important in itself; it is also central to attaining the Federal Reserve's other mandated objectives of maximum sustainable employment and moderate long-term interest rates. As always, however, translating the Federal Reserve's general economic objectives into operational decisions about the stance of monetary policy poses many challenges. Over the past few decades, policymakers have learned that no single economic or financial indicator, or even a small set of such indicators, can provide reliable guidance for the setting of monetary policy. Rather, the Federal Reserve, together with all modern central banks, has found that the successful conduct of monetary policy requires painstaking examination of a broad range of economic and financial data, careful consideration of the implications of those data for the likely path of the economy and inflation, and prudent judgment regarding the effects of alternative courses of policy action on prospects for achieving our macroeconomic objectives. In that process, economic models can provide valuable guidance to policymakers, and over the years, substantial progress has been made in developing formal models and forecasting techniques. But any model is by necessity a simplification of the real world, and sufficient data are seldom available to measure even the basic relationships with precision. Monetary policymakers must therefore strike a difficult balance, conducting rigorous analysis informed by sound, economic theory and empirical methods, while keeping an open mind about the many factors, including myriad global influences at play in a dynamic, modern economy like that of the United States. Amid significant uncertainty, we must formulate a view of the most likely course of the economy under a given policy approach, while giving due weight to the potential risks and associated costs to the economy should those judgments turn out to be wrong. During the nearly 3 years that I previously spent as a member of the Board of Governors and of the Federal Open Market Committee, the approach to policy that I just outlined was standard operating procedure under the highly successful leadership of Chairman Greenspan. As I indicated to the Congress during my confirmation hearing, my intention is to maintain continuity with this and the other practices of the Federal Reserve in the Greenspan era. I believe that with this approach, the Federal Reserve will continue to contribute to the sound performance of the U.S. economy in the years to come. Thank you, and I'd be happy to take your questions. [The prepared statement of Hon. Ben. S. Bernanke can be found on page 65 in the appendix.:] " FOMC20070131meeting--115 113,MR. STOCKTON.," I’m not sure I have an empirically based response. We can actually estimate from the model a confidence interval around a parameter estimate of the NAIRU, which as I indicated, is wide; but I don’t have a similar thing for inflation expectations. However, I would argue that, if you just look at the confidence intervals around inflation forecasts over the longer haul, they are pretty wide. Obviously you control inflation over the longer haul. If you would tell me what your tolerance is for five years from now, given our ability on a year-to-year basis to forecast inflation, plus or minus 1 percentage point, actual inflation would fall plus or minus 1 percentage point around whatever you tell me your longer-run inflation objective would be. In terms of the measures that we look at—and I think those probably have not changed much since Vincent presented them in the Bluebook a while back—0.5 percentage point is just on the difference in the measures alone; it is not actually a measure of uncertainty around any individual measure. So it’s wide. I don’t know if you would want to add a confidence interval around that." FOMC20080916meeting--90 88,MR. SHEETS.," I also will be very brief in summarizing economic developments abroad. Indeed, I would just like to make six very brief points. The first one is that the incoming data we've received since the last Greenbook for the foreign economies have been extraordinarily soft. Indeed, we've marked down our forecast or projection of the second quarter by a full percentage point. The data also suggest that we should carry forward a fair amount of that softness at least through the next year. So our foreign outlook is much softer than it was before. The second point is that this softening outlook in our view has been a key factor that has contributed to further sizable declines in oil and commodity prices. This morning, oil prices were trading around $92 a barrel, which was down another $25 a barrel from where we were at the time of the last meeting. The third point is that this deteriorating foreign outlook also seems to have triggered something of a reassessment in currency markets. Since your last meeting, the dollar has strengthened nearly 5 percent in broad nominal terms. In our view, what happened in currency markets was that the markets had priced in the expectation that the foreign economies would remain quite resilient in the face of a slowing in the United States. Now with the incoming data over the past couple of months, it is becoming clearer and clearer that the U.S. slowing is going to have a marked effect on these foreign economies, and this has shifted the relative attractiveness of the dollar and supported the appreciation that we've seen over the last couple of months. The fourth point is that, in a number of emerging market economies, we've seen a resurgence of certain sorts of financial vulnerabilities. We've seen across really a broad array of these economies rising external debt spreads and rising CDS spreads. We've seen falling equity prices and, for a number of these economies, downward pressures on their currencies. On that last point, a number of the Asians have been intervening in the foreign exchange market over the intermeeting period but have actually been intervening to try to prevent their currencies from depreciating, which is a marked change from what we've seen in the last couple of years. The fifth point is that the surprisingly strong performance of U.S. exports that we've seen appears to have continued through July. After the Greenbook went to bed, we got the July trade data, and they continue to point to a fair amount of strength in the export sector. It was particularly strong in the auto sector, but it was a broad-based strength through July. Nevertheless, our view is that, given the rise in the dollar and the softening outlook for foreign growth, we're very likely to see some slowing in export growth going forward. The final point I'd like to mention is that, also late last week after the Greenbook went to bed, we received data on import prices. These data, really for the first time in a long time, showed a marked deceleration in both material-intensive goods import prices and finished goods import prices. Our forecast for a long time has called for a deceleration in import prices in line with the projected flattening out of commodity prices and a projected flattening out of the dollar. Now it seems that we're at a point at which all those things that have been incorporated into our forecast but we haven't had a lot of evidence for are starting to materialize. We have the dollar flattened out and, indeed, somewhat stronger than in the last Greenbook. We have lower paths for commodity prices, and then the data that we recently received showed an actual deceleration in core import prices, which gives us some confidence that perhaps the rise in those import prices has peaked. I'll stop there. " FOMC20080805meeting--28 26,MR. DUDLEY., We have never argued that the role of our facilities is to prevent the adjustment. We have always argued that the role of the facilities is to allow the adjustment to be orderly rather than disorderly. That is what we have been going for. FOMC20080916meeting--153 151,MR. WARSH.," Thank you, Mr. Chairman. Let me do three things. I'll talk first about a modal forecast but probably give it short shrift; second, about financial market conditions; and third, about policy. Working under the assumption that our modal forecast doesn't look quaint a week from now, if the world were somehow to hew to a reasonably moderate view of how financial market conditions work going forward, personally I'd be a bit more optimistic than the Greenbook for the second half of '08. I think that the net export growth is likely to prove stickier than embedded in that forecast in spite of a stronger dollar and weaker global demand. But as we get to 2009 and 2010, I would actually be less rosy than the Greenbook. I don't see real catalysts for the economy to normalize and to approach trendlike growth. Key uncertainties around financial markets, labor markets, and housing and, I think, broader macroeconomic uncertainties that I've discussed before in terms of trade policy, tax policy, and regulatory policy, would make the creepback to potential slower than embedded in those forecasts. On the inflation front, I continue to be encouraged by the strength in the exchange value of the dollar and the work that is doing for us on import price inflation. I'm encouraged by the move down across a breadth of commodities--not just energy, metals, and food but really across the entire basket--but I'm still not ready to relinquish my concerns on the inflation front. Let me turn now to financial market conditions. I have talked before about the financial architecture. I guess what we can say today with more confidence than I've been able to say before is that the dismemberment of the existing financial architecture has accelerated in the last few days and weeks, and we will very quickly look at business models, and industry will find new business models, we hope, to provide credit to the real economy. Financial markets have been testing financial institutions with weaker capital structures, uncertain management teams, and unsustainable business models. I think the question before us today that's hard to judge is whether financial markets are now to the point at which they are acting indiscriminately, testing all financial institutions regardless of capital structure or business model. I'd say that the evidence of the past twenty-four or forty-eight hours is still unclear. I think we'll have a greater clarity several days from now about whether markets are able to make the distinguishing judgments that we would count on. Look at the CDS spreads for the two remaining independent broker-dealers, Goldman Sachs and Morgan Stanley, which Bill referenced. Goldman Sachs's CDS moved up another 190 or so this morning. They are up 340 in the last two days. Morgan Stanley's are up 690. I wouldn't want to say whether those numbers are right or wrong. It may be that the business model is a failing one--that is, wholesale funding is no longer practicable in the world that we're now in. If the problems were confined to that part of the financial services industry, it would be tough and it would be ugly and, if you were a resident of New York, particularly painful. But I don't think it would rise to the level that would force us to recalibrate monetary policy. But if, in fact, those losses end up being endemic to all financial institutions, even those with strong deposit bases and higher capital ratios, then we certainly would have to take that into consideration. The few that are trying to swim against this tide are flailing; and without extraordinary actions either by a consortium of their competitors or by the official sector, they're likely to continue to fail. I think our efforts to date to protect the broader financial markets and the economy from knock-on effects in particular financial services sectors do seem to be helping to cushion the blow. But the prospect of some meaningful discontinuity and of some systemic risk remains real, and it's hard for me to judge today whether that prospect is as low as we might have thought even some weeks ago. Ultimately, the question for the real economy is whether the emergence of this new financial architecture can come quickly enough to get credit markets to normalize. Is the suddenness of events in the last week going to accelerate the move toward a new financial architecture? Will the forces of creative destruction make that faster but ultimately bring credit back to these markets sooner? Are these forces so strong and overwhelming that all financial institutions will be hunkering down, clinging to an architecture that no longer works? That's a question to which I don't know the answer. A couple of more points on markets. I think the work that was done over the past few days on Lehman Brothers should make us feel good in one respect. Market functioning seems to be working okay--by which I mean that the plumbing around their role in the tri-party repo business, due in part to the Fed's actions, seems to be working. It's ugly. The backroom offices of these places are going crazy. There's a lot of manual work being done. So they wouldn't give it high marks. But it looks as though positions are being sorted out in a tough workmanlike way, and so that's encouraging. Other than the CDS moves and the equity moves on the other broker-dealers, Goldman Sachs and Morgan Stanley, I don't think that that is the real specter that's casting some question over broader financial institutions. I think the Lehman situation, no matter what judgment we made this past weekend about whether or not to provide official-sector money, is not what is driving markets broadly outside of the investment banks. What's driving the broader uncertainty are questions about institutions like AIG that were rated AAA, that were so strong that counterparties didn't need collateral, and that were a certain bet to be a guarantor around stable value funds and all sorts of other products. If in a matter of weeks that AAA rating and that security could turn out to be worthless, then that would force institutions to evaluate two things. First, narrowly, how much AIG exposure do I have? Second, more broadly, if that's AIG, what about the rest of the insurance companies? What about the rest of the financial institutions, which aren't investment banks but are really representing the foundations of the U.S. financial system? So it is both those direct and indirect aspects that we have to try to understand as best we can. My own view is that the AIG question would be more financial devastation if these institutions turn out to be meaningfully insolvent but actually, in some ways, less market dislocation among intermediaries. That is, Lehman Brothers, Merrill Lynch, and Bear Stearns are touching and are in the middle of many more flows of data, and there are real losses being felt. But if an AAA company like AIG were really fundamentally insolvent, the direct losses to a range of institutions, particularly those that are not just wholesale institutions but are retail institutions, could be very significant. I don't think we know the answer yet to the question of whether AIG speaks to a broader loss of confidence that could affect the foundations of the U.S. financial system. Let me turn finally to policy, Mr. Chairman. I support alternative B and, based on some of the discussion from Presidents Lockhart and Stern, I'd make some simple suggestions that may strike a balance that acknowledges the concerns we have about financial markets but doesn't put us in the position where we are inclined to lurch in one direction, which as some people suggested could create more uncertainty than we intend. My suggestion, Mr. Chairman, would be to take the first sentence from alternative A, paragraph 2--""strains in financial markets have increased significantly and labor markets have weakened further""--and make that the first sentence of alternative B. Then strike the second sentence of alternative B, because I think we've largely covered that. That order gives proper attention, it strikes me, to the financial market developments. Finally, in the assessment of risk, Mr. Chairman, if you look at the last sentence, I would suggest modifying that ever so slightly by inserting the word ""closely"" and making one other modification. So that last sentence would read, ""The Committee will continue to monitor economic and financial developments closely and will act as needed to promote sustainable economic growth and price stability."" Also, if you think it's acceptable, rather than saying ""financial developments"" maybe there we would say, ""The Committee will continue to monitor economic and financial market developments closely."" Those would be my suggestions to try to strike that balance--that we are keenly focused on what's going on, but until we have a better view of its implications, we are not going to act. Thank you, Mr. Chairman. " CHRG-109shrg26643--30 Chairman Bernanke," Thank you. Mr. Chairman and Members of the Committee, I am pleased to be here today to present the Federal Reserve's Monetary Policy Report to the Congress. I look forward to working closely with the Members of this Committee on issues of monetary policy as well as on matters regarding the other responsibilities with which the Congress has charged the Federal Reserve System. The U.S. economy performed impressively in 2005. Real gross domestic product increased a bit more than 3 percent, building on the sustained expansion that gained traction in the middle of 2003. Payroll employment rose two million in 2005 and the unemployment rate fell below 5 percent. Productivity continued to advance briskly. The economy achieved these gains despite some significant obstacles. Energy prices rose substantially yet again in response to the increasing global demand, hurricane-related disruptions to production, and concerns about the adequacy and reliability of supply. The Gulf Coast region suffered through severe hurricanes that inflicted a terrible loss of life, destroyed homes, personal property, businesses and infrastructure on a massive scale, and displaced more than a million people. The storms also damaged facilities and disrupted production in many industries with substantial effects on the energy and petrochemical sectors and on the region's ports. Full recovery in the affected areas is likely to be slow. The hurricanes left an imprint on aggregate economic activity as well, seen in part in the marked deceleration of real GDP in the fourth quarter. However, the most recent evidence, including indicators of production, the flow of new orders to businesses, weekly data on initial claims for unemployment insurance, and the payroll employment and retail sales figures for January, suggest that the economic expansion remains on track. Inflation pressures increased in 2005. Steeply rising energy prices pushed up overall inflation, raised business costs, and squeezed household budgets. Nevertheless, the increase in prices for personal consumption expenditures excluding food and energy, at just below 2 percent, remained moderate, and longer-term inflation expectations appear to have been contained. With the economy expanding at a solid pace, resource utilization rising, cost pressures increasing, and short-term interest rates still relatively low, the Federal Open Market Committee over the course of 2005 continued the process of removing monetary policy accommodation, raising the Federal funds rate 2 percentage points in eight increments of 25 basis points each. At its meeting on January 31 of this year, the FOMC raised the Federal funds rate another one-quarter percentage point, bringing its level to 4\1/2\ percent. At that meeting, monetary policymakers also discussed the economic outlook for the next 2 years. The central tendency of the forecast of Members of the Board of Governors and the Presidents of the Federal Reserve Banks is for real GDP to increase about 3\1/2\ percent in 2006 and 3 percent to 3\1/2\ percent in 2007. The civilian unemployment rate is expected to finish both 2006 and 2007 at a level between 4\3/4\ percent and 5 percent. Inflation, as measured by the price index for personal consumption expenditures excluding food and energy, is predicted to be about 2 percent this year and 1\3/4\ percent to 2 percent next year. While considerable uncertainty surrounds any economic forecast extending nearly 2 years, I am comfortable with these projections. In the announcement following the January 31 meeting, the Federal Reserve pointed to risks that could add to inflation pressures. Among those risks is the possibility that to a greater extent than we now anticipate, higher energy prices may pass through into the prices of nonenergy goods and services or have a persistent effect on inflation expectations. Another factor bearing on the inflation outlook is that the economy appears now to be operating at a relatively high level of resource utilization. Gauging the economy's sustainable potential is difficult and the Federal Reserve will keep a close eye on all the relevant evidence and be flexible in making those judgments. Nevertheless, the risk exists that with aggregate demand exhibiting considerable momentum, output could overshoot its sustainable path, leading ultimately--in the absence of countervailing monetary policy action--to further upward pressure on inflation. In these circumstances, the FOMC judged that some further firming of monetary policy may be necessary, an assessment with which I concur. Not all of the risks to the economy concern inflation. For example, a number of indicators point to a slowing in the housing market. Some cooling of the housing market is to be expected and would not be inconsistent with continued solid growth of overall economic activity. However, given the substantial gains in house prices, and the high levels of home construction activity over the past several years, prices and construction could decelerate more rapidly than currently seems likely. Slower growth in home equity, in turn, might lead households to boost their saving and trim their spending relative to current income by more than is now anticipated. The possibility of significant further increases in energy prices represents an additional risk to the economy. Besides affecting inflation, such increases might also hurt consumer confidence and thereby reduce spending on nonenergy goods and services. Although the outlook contains significant uncertainties, it is clear substantial progress has been made in removing monetary policy accommodation. As a consequence, in coming quarters, the FOMC will have to make ongoing, provisional judgments about the risks to both inflation and growth, and monetary actions will be increasingly dependent on incoming data. As I noted, core inflation has been moderate despite sharp increases in energy prices. A key factor in this regard has been confidence on the part of public and investors in the prospects for price stability. Maintaining expectations of low and stable inflation is an essential element in the Federal Reserve's effort to promote price stability, and thus far the news has been good. Measures of longer-term inflation expectations have responded only a little to larger fluctuations in energy prices that we have experienced, and for the most part they were low and stable last year. Inflation prospects are important, not just because price stability is in itself desirable and part of the Federal Reserve's mandate from the Congress, but also because price stability is essential for strong and stable growth of output and employment. Stable prices promote long-term economic growth by allowing households and firms to make economic decisions and undertake productive activities with fewer concerns about large or unanticipated changes in the price level and their attendant financial consequences. Experience shows that low and stable inflation and inflation expectations are also associated with greater short-term stability and output and employment, perhaps in part because they give the central bank greater latitude to counter transitory disturbances to the economy. Similarly, the attainment of the statutory goal of moderate long-term interest rates requires price stability, because only then are the inflation premiums that investors demand for holding long-term instruments kept to a minimum. In sum, achieving price stability is not only important in itself; but it is also central to attaining the Federal Reserve's other mandated objectives of maximum sustainable employment and moderate long-term interest rates. As always, however, translating the Federal Reserve's general economic objectives into operational decisions about the stance of monetary policy poses many challenges. Over the past few decades, policymakers have learned that no single economic or financial indicator or even a small set of such indicators can provide reliable guidance for the setting of monetary policy. Rather, the Federal Reserve, together with all modern central banks, has found that the successful conduct of monetary policy requires painstaking examination of a broad range of economic and financial data, careful consideration of the implications of those data for the likely path of the economy and inflation, and prudent judgment regarding the effects of alternative courses of policy action on the prospects for achieving our macroeconomic objectives. In that process, economic models can provide valuable guidance to policymakers and over the years substantial progress has been made in developing formal models and forecasting techniques. But any model is by necessity a simplification of the real world and sufficient data are seldom available to measure even the basic relationships with precision. Monetary policymakers must therefore strike a difficult balance, conducting rigorous analysis informed by sound economic theory and empirical methods while keeping an open mind about the many factors including myriad global influences at play in a dynamic modern economy like that of the United States. Amid significant uncertainty, we must formulate a view of the most likely course of the economy under a given policy approach while giving due weight the potential risks and associated costs to the economy should those judgments turn out to be wrong. During the 3 years that I previously spent as a Member of the Board of Governors of the Federal Open Market Committee, the approach to policy that I have just outlined was standard operating procedure under the highly successful leadership of Chairman Greenspan. As I indicated to the Congress during my confirmation hearing, my intention is to maintain continuity with this and the other practices of the Federal Reserve in the Greenspan era. I believe that with this approach, the Federal Reserve will continue to contribute to the sound performance of the U.S. economy in the years to come. Thank you, Mr. Chairman. " CHRG-111shrg57320--267 Mr. Dochow," Exhibit 66? Senator Levin. ``Dear Sheila, You really know how to stir up a colleague's vacation.'' ``I do not under any circumstances want to discuss this on Friday's conference call. . . . I want to have a one on one meeting with Ben Bernanke prior to any discussion. . . . I may or may not choose to have a similar meeting with Secretary Paulson. I should not have to remind you the FDIC has no role until the PFR [the primary regulator] (i.e., the OTS), rules on solvency and the PFR utilizes PCA.'' So no role for FDIC. Now, this is a bank. If this bank goes under, their Insurance Fund is wiped out. They have about one-third of the money in the Insurance Fund that they would have to lay out if this bank goes under. But you are telling her, the head of FDIC, ``I should not have to remind you that FDIC has no role''--which is not accurate. They have a back-up role surely to protect their Insurance Fund. Then Scott Polakoff writes to you that he has ``read the attached letter from the FDIC regarding supervision of WaMu and am once again disappointed that the FDIC has confused its role as insurer with the role of the Primary Federal Regulator,'' that its letter is ``inappropriate and disingenuous.'' \1\--------------------------------------------------------------------------- \1\ See Exhibit No. 59, which appears in the Appendix on page 419.--------------------------------------------------------------------------- And now going to July 2008, you have your letter saying that they are ``posturing.'' That is why you sent the MOU to them. So you think they are exceeding their jurisdiction, and you think they are posturing. Is that fair? That is what your emails show. At that time you thought they were exceeding their jurisdiction, they had no role---- " FOMC20081029meeting--163 161,MR. MORIN.," 3 Thank you, Mr. Chairman. I'll be using the packet with the green lettering on the cover entitled ""Staff Presentation on Nonfinancial Developments."" Over the intermeeting period, the data we received on real activity were considerably weaker than we had been expecting. That, combined with the intensification of financial turmoil since mid-September, led us to significantly mark down our nearterm and medium-term projections for economic activity. Your first exhibit focuses on the near-term outlook. As shown by the blue bars in the top left panel, we currently expect real GDP to fall at an annual rate of slightly more than 1 percent, on average, in the second half of 2008--a reduction of about 2 percentage points from our projection in the September Greenbook (the red bars). One factor that has informed our thinking about the near-term forecast is the labor market, which looks weaker than at the time of the last FOMC meeting. As you 3 The materials used by Mr. Morin are appended to this transcript (appendix 3). know, payrolls fell steeply in September. Since then, initial claims for unemployment insurance (the black line in the top right panel) have been quite elevated, even after adjusting for factors that are temporarily boosting claims (the red line). As shown in the inset box, the latest claims data point to another sizable drop in employment this month. Turning to spending, sales of light motor vehicles (plotted in the middle left panel) have been dismal of late and are expected to stay that way at least through the end of the year. Motor vehicle sales have been depressed, in part, by financing constraints, limited sales incentives, a retreat by the automakers from leasing, and worsening consumer assessments of car-buying conditions. More broadly, as you can see by comparing the black and red lines in the panel to the right, consumer spending excluding motor vehicles has been significantly softer in recent months than we were expecting. In addition, the conditions influencing consumer outlays have worsened considerably, including a sharp drop in household wealth, tepid real income gains, a weakening labor market picture, historically low levels of sentiment, and reduced credit availability. Consequently, as reported in the inset box, we substantially revised down the projection for overall real PCE in the second half of the year. In the housing sector, single-family starts, shown in the bottom left panel, fell to about 550,000 units in September--6 percent below our expectation. Even with the ongoing cutbacks in production, the weak demand has left the months' supply of unsold new homes (not plotted) very elevated, and we expect starts to decline well into next year. In the business sector, the spending data in hand are somewhat stale-- tomorrow morning we receive the advance reading on durable goods shipments and orders in September--but the information we do have points to softening business investment in the third quarter. Moreover, as shown on the right, the first available surveys on business activity in October plunged to very low levels. Exhibit 2 summarizes the enormous changes to the key conditioning factors that we confronted in putting together the staff forecast. As shown in the top left panel, reflecting the recent plunge in equity prices, the stock market path in this projection is markedly below the path anticipated in our September forecast. This downward revision, together with the projected declines in house prices that Bill Bassett presented in his briefing, leaves the level of the wealth-to-income ratio, plotted to the right, substantially lower than in the September Greenbook. As a result, over the next two years, household wealth exerts a much greater drag on consumer spending than we assumed earlier. Yields and spreads on corporate bonds, illustrated by the Baa rate in the middle left panel, soared over the intermeeting period. We expect the higher cost of capital in this forecast to weigh on business capital spending over the projection period. A further drag on economic activity in the medium term is the recent jump in the exchange value of the dollar, shown to the right. While we expect the dollar to decline a touch more quickly than in the September Greenbook, by the end of 2010 it remains more than 4 percent above the level assumed in our previous forecast. In addition, as Linda Kole will discuss shortly, the outlook for foreign activity has deteriorated. A partial cushion to these factors depressing activity is the plunge in oil prices over the past few weeks; the bottom left panel shows the spot price of West Texas intermediate crude oil. The path for oil prices over the projection period, based on futures quotes, averages nearly $30 per barrel below the September Greenbook path and should provide some countervailing support to household purchasing power and consumer spending. As noted to the right, according to our standard forecasting models, the lower level of equity prices, the higher bond rates, and the higher exchange value of the dollar--all of which are intertwined with the intensification of financial turmoil--exert a considerable drag on real activity over the next two years. Through conventional wealth, cost-of-capital, and terms-of-trade channels alone, these developments would lead us to revise down real GDP growth about 1� percentage points, on average, in 2009 and 2010. But these effects likely understate the full extent of the fallout on real activity from financial turmoil. This is because our standard models do not explicitly account for the additional effects of such factors as tighter lending standards and heightened uncertainty. Consequently, for some time we have been using supplementary analyses to try to account for these credit-channel effects in our judgmental projection. Your next exhibit provides some detail on how we updated these adjustments in light of the intensification of financial stress during the intermeeting period. Two measures that we have found useful for measuring the extent of financial turmoil are plotted in the top row of your third exhibit. On the left is an index of financial market stress, and on the right is an index of bank credit standards derived from the Senior Loan Officer Opinion Survey. Both indexes have skyrocketed lately, reflecting the sharp deterioration of financial conditions. As discussed in the past two Greenbooks, we use two basic empirical approaches to try to quantify the effects of financial turmoil on real activity that are not captured by our standard models: One is based on the historical correlations between these financial turmoil measures and errors in FRB/US spending equations, and the second method incorporates these indicators of turmoil into small-scale vector autoregressions. The middle left panel shows estimates of the cumulative effect of our judgmental adjustments for financial turmoil, outside the conventional channels noted earlier. The effects are shown relative to the level of real GDP in the fourth quarter of each year. The solid black line is the judgmental estimate built into the current Greenbook forecast, whereas the red dashed line plots the estimates used in the September projection. The shaded area shows the range of results from the model-based estimates detailed in Part 1 of the October Greenbook. As you can see by comparing the black and red lines, we now expect that financial turmoil, outside the usual channels, will impose a markedly greater drag on real activity than we projected in the last Greenbook. For 2008, we think that much of the unexpected weakness observed recently in the spending data reflects financial turmoil effects, which puts our judgmental adjustment near the bottom of the model-based range. In contrast, our adjustment for 2009 is in the middle of the range of model-based results, whereas for 2010 our adjustment is near the top end of the range. We are more optimistic than the models for 2010 in part because none of the model-based estimates fully accounts for what we assume will be the likely restorative effects over time of the actions taken by governments to mitigate the problems afflicting the financial system. As shown in the middle right panel, these restraining influences, taken together, led us to mark down our assumed path for the federal funds rate. We now assume that the funds rate is lowered to � percent by early next year and is held at that level until mid-2010. Although the path for the funds rate is appreciably lower than we had assumed in the September Greenbook, the additional monetary easing only partially offsets the greater restraint on activity from the other factors shaping the projection. All told, as shown in the first line of the table at the bottom of the page, we project that real GDP will fall at an annual rate of nearly 1 percent in the first half of 2009 and then turn up modestly in the second half. In 2010--with the drag on activity from the strains in financial markets beginning to ease, housing market conditions stabilizing, and an accommodative monetary policy in place--activity accelerates further, and real GDP increases 2.3 percent over the four quarters of the year. The contributions of selected domestic spending categories to changes in real GDP are shown in lines 3 to 5. As you can see, we think that consumption will begin to recover next year and that the drag from housing will diminish over time. In contrast, we expect business fixed investment to remain quite weak next year, reflecting in part the lagged effects on investment of declining business output, the high cost of capital, and heightened uncertainty. Although each of the major components of private domestic demand contributes to the acceleration in economic activity in 2010, the contribution to growth from net exports (line 6) is expected to turn slightly negative late next year. As shown in the top panels of exhibit 4, the margin of slack both in labor markets (the panel to the left) and in the industrial sector (the panel to the right) is expected to remain substantial through the end of the projection period. We expect this persistent slack to be a source of downward pressure on inflation. Other influences are also likely to hold down inflation over the projection period. As shown in the middle panels, energy prices and core goods import prices decelerate sharply from their recent elevated paces. The projected path for consumer energy prices (the left panel) largely reflects the effect of the intermeeting plunge in oil prices, and the forecast for core import prices (the right panel) reflects both the sharp drop in commodity prices and the stronger dollar. As shown in the bottom left panel, while the Michigan survey readings on near-term inflation expectations have remained elevated (the black line), those on longer-term inflation (the red line) have more than retraced the run-up observed earlier this year. Taken together, as shown in line 7 of the bottom right panel, we now expect core PCE inflation to move down to 1� percent in 2009 and to slow further to 1� percent in 2010, roughly � percentage point less in each year than projected previously. Total PCE inflation (line 1) is projected to run at about the same rate as core PCE inflation in both years. Turning to exhibit 5, a critical feature of the staff forecast is our assumption that the strains in financial markets will ease gradually over the next two years. However, the current situation is so extraordinary, in terms of both the financial disruptions and the policy responses to those disruptions, that an extremely wide band of uncertainty surrounds this assumption: Matters could easily turn out much worse or much better. To give some sense of possible magnitudes, this exhibit reviews two alternative scenarios from the Greenbook. In the first scenario, outlined in the top left panel, financial turmoil intensifies further over the projection period rather than gradually abating, and the accompanying economic fallout turns out to be more severe than in the baseline projection. Specifically, risk premiums on loans, corporate bonds, and equity jump a further 50 basis points and are slower to fall back over time; in addition, the level of house prices falls an additional 10 percent relative to the baseline. We also assume that credit-channel and other nonconventional effects are even more restrictive in 2009 and 2010 than those built into the staff forecast--to a degree more in line with the bottom end of the range of empirical estimates I presented earlier. As shown by the red line in the middle left panel, with the intensification of the financial turmoil and the larger judgmental adjustments for the impact of financial stress on economic activity, real GDP is significantly weaker than in the baseline (the black line). As a result, the unemployment rate (plotted to the right) rises faster and farther, peaking at nearly 8� percent at the end of 2010, more than 1 percentage point above the baseline. Reflecting the greater accompanying slack, core PCE inflation (shown in the bottom left panel) moves down appreciably faster than in the baseline, reaching just � percent at the end of 2010. With substantial slack and a low and falling inflation rate, the funds rate remains pinned through 2010 at � percent and continues at that level through 2012 in the extended simulation presented in the Greenbook. In the second scenario, outlined in the top right panel, the stress weighing on financial institutions and markets lifts much more quickly than in the baseline, perhaps in response to the extraordinary recent government actions. Here, we assume that risk spreads recede by early next year to the levels that were projected in the September Greenbook, and as a result, equities reverse most of their recent losses by the middle of next year. In addition, we cut back the size of the judgmental adjustments for financial turmoil to their September Greenbook levels. As shown by the blue lines in the middle panels, economic activity responds fairly vigorously to the improvement in financial conditions, with GDP growth reaching about 4� percent by the end of 2010 and the unemployment rate moving down to 5� percent. As shown in the bottom left panel, the narrower margin of slack in the alternative scenario tempers the decline in core PCE inflation relative to baseline. Finally, as shown to the right, the federal funds rate, under an optimal control monetary policy, declines briefly to 1 percent early next year but then moves up steadily as it becomes clear that the financial strains are lifting rapidly. Linda Kole will now continue our presentation. " FOMC20070628meeting--115 113,MS. MINEHAN.," Thank you, Mr. Chairman. The pace of growth in New England, at least as measured by employment, remains below that of the nation. Indeed, since the trough of the last recession, New England’s jobs have grown at less than half the pace of the nation as a whole. Some of this is the traditionally slower pace of job formation in the region, and some is undoubtedly the result of the kind of industries— telecommunications and technology more generally—that were hardest hit in the 2001 recession and have yet to recover fully. But some of it also revolves around issues of supply. Almost every firm, large or small, comments on the difficulty of finding skilled labor. There is also reason to believe that, at least relative to the rest of the nation, the supply versus demand imbalance may be a particular issue in the region. This comes from the Conference Board’s online job-posting measure, which for some time has shown New England as having the highest number of advertised job openings relative to the size of the labor force. Contacts report that they are willing to offer—and do offer— higher pay to get the skills they need, but finding the workers is harder to do and takes longer than earlier in the cycle. Another issue that came up again in our round of contacts is the pervasive rise in the cost of almost any metal, but especially copper and aluminum. Contacts at one very large diversified company speculated about China’s stockpiling valuable metals. Whatever the cause, worldwide demand is strong, and prices are rising for all types of metal inputs. Some firms report progress in passing on those price increases. Indeed, larger manufacturing companies appear to be buoyed, if not driven, by strength in foreign markets. One firm reported that their booming aircraft business required such long hours and continued stress on skilled workers to figure out ways to meet demand that employee turnover had tripled. Not surprisingly, year-over-year manufactured exports for the region rose in the first quarter. Elsewhere, news in the region has been fairly positive, with business confidence rising and commercial real estate markets good and improving throughout. Residential real estate markets remain slow. Regardless of what measure is used, the region’s home prices appear to have slowed more than the nation’s. However, although we had led the nation—this is not something in which you want to lead the nation—in the rate of rising foreclosure initiations, especially for those related to subprime mortgages, the pace of this growth has subsided. Indeed, initiations of subprime foreclosures went down in the region most recently. Moreover, in the most recent data on home sales, the Northeast was a bright spot. I have speculated before that the New England residential real estate market could be bottoming out. Such thoughts may remain in the category more of a hope than a certainty, but perhaps the pace of decline is slowing. Finally, while consumer confidence has been bouncy recently, probably from concerns about gasoline prices, demand seems reasonably strong as gauged by local retailers. Software and IT firms are showing considerable strength, and at least in our region, so is temporary help. Coincident indicators of regional health also show solid growth for all six states. In sum, the region appears to be doing fairly well; and except for residential real estate, there are perhaps growing signs of price and resource pressures, in that regard not unlike the nation as a whole. Turning to the nation, I was pleased to see that incoming data validated the substantial pickup in second-quarter growth that we, along with the Greenbook, had forecasted. Indeed, outside of residential investment, incoming data have depicted an economy that is growing at a relatively healthy pace. Data on shipments and orders of capital goods have improved, consumer demand seems relatively well maintained despite high gas and soft home prices, and payroll data show little sign of dwindling labor demand. Markets have at last decided to adopt the Committee’s more positive outlook on economic prospects, and credit was repriced as a result. I view this event as healthy. It has tempered our GDP forecast slightly, but the continued ebullience of equity markets is an important offset. As I noted at our last meeting, we find ourselves a bit more optimistic than the Greenbook about trends in residential real estate, based on new housing starts and data on new home sales most recently, and we have moderated the pace of decline of residential investment for the second quarter just a bit relative to our May forecast. The April value of nonresidential construction put in place was a clear positive as well. The health of the rest of the world continues to surprise, and we, like the Greenbook, expect little drag from net exports over the forecast period. Turning to projections for 2008 and 2009, the factors shaping our outlook haven’t changed much. We continue to see output accelerating mildly as the housing situation moderates and more of the underlying strength of the economy shows through. This is tempered a bit both by rising long-term interest rates and by our expectations that consumers will mend their ways a bit—consume less and save more. This hasn’t shown signs of happening yet. By the end of 2009, GDP is about at potential, unemployment has ticked up a bit but remains below 5 percent, and core inflation moves down gradually to 2 percent—again, not much change and certainly within the central tendency of members’ forecasts. One obvious risk to this forecast lies in housing, as everybody has said. But as I noted at our last meeting, the longer there are no obvious spinoffs from the subprime problem to the wider economy, the more that particular risk seems to ebb. Indeed, as we have yet to see the saving rate pick up with the moderation in consumption over what would be expected by the fundamentals, there may be some upside to growth. Pressures from abroad—worldwide expansion of somewhat larger size than we expected—do raise some upside issues, both for growth and for inflation. On the inflation side, it is true that the April and May core data were encouraging. However, those numbers were dominated by temporary rather than permanent effects, at least in our view. So we haven’t moderated our forecast of core inflation, as have the Greenbook authors, albeit they moderated it only in a very minor way, and I remain concerned about upside risks. Headline CPI inflation has been strong. The unemployment rate and widening concerns about input costs suggest that pressures to raise prices might have grown, and strong growth worldwide affects not only input prices but the value of the dollar as well. If anything, since our last meeting, I think that risks related to growth have abated and have become more balanced and risks regarding inflation have grown. Thus, as we look over the next two and a half years, our forecast sees policy staying somewhat restrictive given the inflation risks and then easing a bit in late 2008 or 2009 to a level closer to its equilibrium rate. Finally, continuing some thoughts I began to articulate at our last meeting, as we think about policy, we also need to be concerned about financial stability. This is particularly true given what we’ve seen in the markets for credit derivatives. We’ve talked before about how high levels of liquidity and low interest rates worldwide cause much reaching for risk, much reaching for return, and related risk-taking. While the Bear Stearns hedge fund issue may well not have legs, the concerns regarding valuation of the underlying instruments do give one pause. Can markets adequately arrive at prices for some of the more exotic CDO tranches? What happens when the bottom falls out and positions thought to be at least somewhat liquid become illiquid? Is there a potential for this to spread and become a systemic problem? Maybe not, and I am not advocating our taking any action as a central bank. But I do think the size of the credit derivatives market, its lack of transparency, and its activities related to subprime debt could be a gathering cloud in the background of policy. Thank you." CHRG-111shrg57322--269 Mr. Birnbaum," I think it is important to distinguish our role in terms of the products that we were trading versus making broader judgments about Goldman Sachs. So I just want to be clear. Are you asking about our specific role with the products that we traded? Or are you asking us to sort of editorialize about the financial system and how investment banks played a role? Senator Pryor. Well, I was actually asking about Goldman Sachs, but if you want to editorialize on the financial system, you can. But I was asking about Goldman. " CHRG-111hhrg52397--149 Mr. Price," So a decrease in potential business viability? Mr. Don Thompson. It is generally being exposed to a risk that is not its core business. 3M is a great example. They make all these little things in the book and they do a great job, and we all use them. Their specialty is not forecasting interest rates or forecasting the exchange rate of the U.S. dollar versus the Thai bhat. They would prefer to hedge those risks away and focus on their core business, which is the attitude of many of our corporate clients. However, if they have to post liquid securities or cash to a clearinghouse or if they have to suffer income statement volatility because their hedges have to be on an exchange and thus do not qualify for FAS 133 hedge accounting, they face a difficult choice: Do I pay the increased cost? Do I suffer the increase income statement volatility and go ahead and hedge the risk anyway or do I not hedge the risk and hope it works out for the best? I am sure some companies will pay the increased cost. I am sure some companies will say, ``No, we will leave the risk open.'' I think in neither case is that good for American business. " FOMC20050630meeting--302 300,MS. JOHNSON.," Absent a dollar depreciation that’s now probably on the order of 8, 9, or 10 percent, the deficit is going to steadily worsen. If the dollar were to start depreciating, that would slow the rate of deterioration. If the dollar depreciation that we put into the forecast were to get as high as 8 or 9 percent, that might plateau the deficit." FOMC20061025meeting--171 169,MR. REINHART.," I think the issue is whether “going forward” means starting from the quarter we’re currently in or whether it is a statement about 2007. The reason we drafted the explicit reference to the third quarter is that we’re in the fourth quarter, and at least if you believe the staff forecast, you think GDP growth has already bounced back from the third quarter." CHRG-111shrg57320--275 Mr. Dochow," My concern was that they would start documenting the files with a series of information that we would then have to respond to and that would drag out the process. Therefore, we would not be effective in getting the supervision enforcement in place in a timely manner. Senator Levin. And, Mr. Reich, you are the one who wrote that memo to Sheila Bair in August reminding her the FDIC has no role until OTS rules on solvency. Is that accurate, they have no role? Don't they have a back-up role? " FOMC20050322meeting--105 103,MS. YELLEN.," Thank you, Mr. Chairman. Little has changed in the Twelfth District economy since we last met. It has continued to expand in line with the nation. For that reason, I’ll focus my remaining remarks on the national economy. The data we have received since late January have been remarkably consistent in their upbeat message. Important indicators from the output side—employment in manufacturing production, in particular—gained strength over the past couple of months. The same can be said of most of the major components of domestic demand. The strength in orders and shipments for core capital goods, despite the expiration of partial expensing, was particularly significant. In the Greenbook, all of this good news appears to show up mostly in the form of higher interest rates that offset the upward pressure on growth in the second half of this year and in 2006. Developments that bear on productivity have also been heartening. First is the recent upward revision to fourth-quarter productivity growth as well as estimates of continuing strength for the current quarter. Second, enhanced prospects for business investment in equipment and software bode well for productivity in the future. Finally, some of the signs of slowing in IT [information technology] investment that were worrisome last year have moderated, although there is still reason for some caution about the outlook. IT investment bounced back in the fourth quarter, and production of high-tech industries has been strong in recent months. Taken together, these developments helped to assuage concerns about a pronounced slowdown in productivity growth, and I remain optimistic that advances in this area will continue to boost output growth and restrain inflation. Of course, there are always risks. Developments in oil markets are an obvious one, and bond rates are another concern. It is striking that, until recently, long-term rates were falling a bit, even as March 22, 2005 42 of 116 June when the Committee first raised the funds rate, and this has led to considerable discussion of whether term premiums have fallen to levels that are lower than can be justified by fundamentals. If the term premium is abnormally low now, economic growth could be significantly dampened if the term premium suddenly returns to more normal levels. And the risks here are nicely illustrated by an alternative simulation in the Greenbook. For this reason, the low level of long-term interest rates constitutes a downside real risk to the staff forecast. Our staff decided to examine this issue more closely. We looked at several model-based approaches to explaining and estimating the term premium for 10-year Treasuries. All of the approaches predict a lower average premium since at least 2001, compared to the average for the 1990s. This result appears consistent with a number of macro developments, including reduced volatility in interest rates, output, and inflation. So a portion of the paradox of why bond rates are so low may be that the term premium has declined for reasons that are justified by fundamentals. The element of risk for the outlook arises because the approaches we examined suggest that the term premium is even lower than is justified by fundamentals. According to our estimates, long- term rates still remain 30 to 60 basis points below the fundamentals-consistent level, even after the run-up in long-term yields since the last FOMC meeting. Since our previous meeting, the 10-year bond rate has risen by just under 40 basis points. Using the approach that yielded the larger term premium conundrum, our analysis suggests that about one-third—about 12 basis points—of the intermeeting increase is due to the correction of the low term premium. The remaining two-thirds is split between a higher path for expected future short-term real interest rates, presumably due to strong economic news, and higher inflation expectations. The latter concern is reflected in an increase since late January in inflation compensation, especially over the next few years. Part of this March 22, 2005 43 of 116 prices. Our analysis suggests that oil developments might have raised 10-year inflation compensation by less than 0.1 percent. To sum up, our estimates suggest that the term premium has probably increased moderately, about 12 basis points, since our last meeting. But even so, the premium may remain as much as 60 basis points below normal, according to our estimates. Our analysis thus suggests that the risks for the term premium on bond rates are asymmetric. While the Greenbook expectation of a relatively flat path for bond rates through the end of next year may be a reasonable modal forecast, I don’t think the risks here are balanced. And, indeed, they seem to be on the side of restraint for demand. Of course, the recent news on inflation, and, in particular, the core PCE in January, was disappointing. And with oil prices rising further, it seems reasonable to raise the core PCE inflation forecast through 2006 by a tenth or two, to just over 1½ percent. But I do not think we should overreact to January’s adverse inflation data, especially in light of the continued containment of wages and salaries and evidence of even greater strength in actual and structural productivity growth than previously assumed in the staff forecast. In my view, the policy situation has changed notably since the last meeting. We now see stronger momentum in aggregate demand, importantly due to more robust investment spending and slightly disappointing inflation data. This means, as is implicit in the Greenbook forecast, that we now appear to be further from the real short-term neutral funds rate than previously, and monetary policy remains quite accommodative. What I would like to see today is for us to raise the funds rate by 25 basis points and retain both the “measured pace” language and the characterization of policy as accommodative. At present, I believe the Greenbook path and market expectations are quite well aligned and coincide March 22, 2005 44 of 116 term “measured pace” remains a good description of the likely path, and I would think it wise to act to confirm market expectations today rather than upset them. I don’t think that retaining the “measured pace” language eliminates the Committee’s flexibility to raise the funds rate by 50 basis points if it does prove necessary. Obviously, such a move would need to be justified by the strength of incoming data, but with those data I believe the markets would have adjusted to the idea by the time it became appropriate to implement it." FOMC20061212meeting--105 103,MR. MISHKIN.," Thanks, Mr. Chairman. I see the economy evolving very much along the lines of the past couple of Greenbooks, particularly the ones since I’ve been here. The staff is to be very highly commended: They pointed out that outcomes were going to be weaker than other forecasters thought, and they really did get it right. Now, I have promised Dave that I wouldn’t jump on him when they get it wrong, and today I’ll be nice in the other direction. I think their forecast has been very useful in terms of the numbers. In fact, I think we’re seeing the economy evolve very much along the lines that we discussed at the past couple of meetings. There really is not all that much new. I think there’s a smidgen more weakness on the real side, but it doesn’t alter my basic view that the economy is evolving along the lines of having slightly below potential GDP growth. I don’t see any indications that we will have big spillovers into other sectors from weak housing and motor vehicles. In that sense, there’s a slight concern about a little weakness, but the right word is I guess a “smidgen,” not a whole lot. I see that inflation pressures are also very similar to what they were at the time of our last meeting. Inflation is likely to decelerate to somewhere around 2½ percent in the core CPI and 2 percent in the core PCE. Part of the reason I believe those numbers is that the nature of the output paths we’ve talked about is consistent with them, but I also think that we have anchored inflation expectations around those levels. I don’t like to use the word “persistence” the way other people do. I think of mean reversion to expected inflation—and very likely that’s where inflation will be heading, given the paths that we see in terms of the economy and the forecast from the Greenbook. I see the risks to forecast inflation as fairly balanced. The good news is that compensation is not as scary as it was. But the bad news is that the labor markets are very tight, and we’re just not quite sure what the implications of that are going to be. So my view is that we have a bit greater uncertainty, not a whole lot, so that we need to be very vigilant on inflation because it is too high, labor markets are tight, and there is still some question about how quick the mean reversion to expected inflation will be. We also need to be vigilant about real output. There is a bit more certain information coming in, so I think we have to watch both inflation and output. The last thing to mention is the yield curve. I did some of the research on yield curves in recessions, and I do not think that the yield curve is providing much information at this time, exactly for the reasons that Governor Kroszner and others have discussed. I think there are special reasons that the term premium is extremely low. There is always that nice little table of the yield curve and recession probabilities, but you notice that I haven’t mentioned it, and I’m not going to mention it in the future. [Laughter] Thank you very much." FOMC20071031meeting--34 32,MR. STOCKTON.," On the anecdotal side, as I think about the revisions that we’ve made to the forecast of this most recent period, by which we have taken down the level of GDP nearly ¾ percentage point for our estimate of the effects of the financial disturbance, I don’t know whether you’d call that based on anecdotal or on actual data. It felt pretty much like guesswork with a few anecdotes at the time of the last meeting, when we had some measures of financial stress that were significant and we knew on the data side, in terms of the impairment to the mortgage markets, that something very significant was going on. The housing side was about half the adjustment that we made. So I guess I’d just say that a big chunk of that was probably data based, but some guesswork was involved in how much restraint on housing activity would come from the cutbacks in mortgage availability that were going to occur in the subprime market. In terms of the consumer side last time, we really had very little to go on, except a hint that maybe consumer sentiment had weakened somewhat. Since then I think we have accumulated a little more evidence in favor of our hypothesis that possibly some restraint on spending will occur going forward. Consumer sentiment has remained low relative to what we think the other macro fundamentals would suggest. We think that there is a correlation between the residuals of explaining consumer sentiment and our consumption equation. So that correlation, in addition to the senior loan officer survey—again, I don’t know whether you consider that anecdotal evidence or systematic data, but there’s a very substantial and widespread uptick in the tightening of terms and standards for both business and household loans—gives us more confidence that what we thought were pretty sizable effects that we built into the forecast have some credible basis. Now, there are still some touchy-feely kinds of things that we’re looking at. For example, with the assistance of the Reserve Banks, we did the survey of our Beige Book contacts on capital spending. I can’t say that we didn’t make some adjustment to our E&S forecast on the basis of those anecdotes, but again, those anecdotes gave us a little more confidence that something may be happening on the capital spending side going forward. So I wish I could tell you that, yes, three- tenths of this is anecdotes and seven-tenths is data. There’s a big gray area between the kinds of information that we gather versus the GDP data. If you ask how the GDP data alone influenced our outlook, as I noted in my briefing, those have been pretty clearly to the upside, and we haven’t yet seen any hard evidence in the actual spending data outside the housing sector that we’re getting any restraint. So that remains a forecast based upon these other shreds of evidence that we think support some notion that there will be a weakening going forward." FOMC20061025meeting--23 21,MR. STOCKTON.," A little work has been done in this area, but it’s a bit like modeling the stock market. You wouldn’t take it very seriously in the sense that these are asset markets and they’re sometimes moving in ways that are very difficult to model on the basis of, for example, fundamentals—especially in a period when, by our assessment, prices have moved up significantly above what we think can be justified in terms of interest rates and rents. So now we have a situation in which that asset price misalignment is projected in our forecast to just barely begin to unwind but we’re really uncertain about what the timing of that process is going to be. One of the reasons we wanted to show the alternative simulation is that we’ve taken a fairly conservative approach here. Our slowdown in the growth rate of house prices, to roughly 1½ to 1¾ percentage points over the next two years, doesn’t make a big dent—if you remember from the briefing that we did one and a half years ago—in the price-to-rent ratio, which we plotted there and showed that that had increased very significantly. So our best guess is that, as in the past, those nominal prices will flatten out rather than actually decline. But the run-up was so large that we couldn’t rule out this time around that the adjustment of house prices could be more significant and more rapid than in the past. But I don’t know of any reliable empirical model or evidence. We’ve certainly done our share of work in modeling those house prices, and I know our colleagues at the New York Fed have as well. There’s a lot of controversy about whether there even is an asset price misalignment, much less, if there is, how it will unwind. So I don’t have a lot to offer you there, except that we’re going to try to present you with the range of possible outcomes in the sensitivity of our forecast to the baseline assumption that we’ve made. In that regard, I still see more downside risk there than upside risk to our house-price forecast." FOMC20051101meeting--86 84,MR. STOCKTON.," A couple of tenths. One of the reasons for raising this issue is that it remains a matter of considerable uncertainty on our part. And I think a good case could be made that we haven’t really seen much sign yet of any underlying inflation being built into the labor cost side especially. That’s still just a part of our forecast. The pickup we’re projecting in compensation costs is, in part, a feed-through of higher headline inflation. It’s also, in part, a feed-through of better productivity finding its way eventually into real wages. But we haven’t really seen it yet. So I think a case could be made that even the small amount that we have built in could be overdoing it. And that’s one of the reasons we wanted an alternative simulation in the Greenbook in which we showed you what would happen if we’re wrong about that. Obviously, on the other side, it’s hard to know whether or not your actions and your statements perhaps have been the key factors keeping overall inflation expectations relatively well contained. Your actions and communications about policy intentions may have, in essence, conditioned both the wage- and price-setting environment in which workers and firms currently find November 1, 2005 22 of 114 On the other side of our forecast, if you were to stop tightening soon and communicate that basically the inflation situation wasn’t a problem, there is some risk that observers would interpret that to mean you would be more likely to acquiesce to higher inflation going forward. And that could feed through to expectations. So we also showed a simulation in which things deteriorate more noticeably on our funds rate assumption than we built into the baseline. As I said, I feel that we’ve balanced the risks. As I looked ahead and asked myself if no change in inflation expectations going forward would be a balanced forecast—meaning, “is it just as likely that they’ll be going down as going up over the next year?”—I didn’t think that scenario, in fact, had balanced risks. So we felt comfortable building in a little more upside on the thought that that would probably better balance the risks given the inflation pressures that are currently confronting firms and workers." FOMC20071211meeting--94 92,MR. EVANS.," Thank you, Mr. Chairman. Coming out of our October meeting, I expected a period of subpar growth stretching into the middle of 2008. Since I was anticipating some soft data, it was not obvious to me that the outlook had worsened until later in the intermeeting period. A lot of the data that we have cited are financial items that are difficult to assess and are somewhat unusual for the current period. But the incoming information has caused us to mark down our outlook further, although we don’t see growth declining as far below potential as in the Greenbook baseline forecast. Although housing continues to weaken, that by itself did not cause a substantial revision to our outlook. The bigger factor was a noticeable weakening of consumption. PCE was basically flat in September and October—I guess dead on arrival. The financial headlines are taking their toll on consumer sentiment, and higher energy prices are lowering real incomes. It is not clear, however, that we are seeing a major sustained pullback in consumption; but, of course, that is arguable. The limited information we have about November—motor vehicle sales and the chain store data—suggest at least modest gains in consumer expenditures. I realize that the chain store sales could be a bit artificial. I was talking to one of my business contacts who has a significant presence in retail, and I am accustomed to hearing that, “Well, the Christmas season is a bit short this year, so that could be a problem.” But I actually caught him this time saying, “Gee, it’s so long this time that people seem to be losing interest.” [Laughter] On balance, I think the fundamentals for consumption are still reasonably good. Importantly, although they may be somewhat lagging, the payroll numbers are still consistent with decent growth in wage income, and the unemployment rate remains low. Elsewhere, foreign growth remains good, which along with the lower dollar should support continued growth in exports. We have seen some softening in capital spending as well, but the usual indicators still point to moderate gains in investment. These developments seem reasonably consistent with what I heard from business contacts. Most of them think that growth is slowing, and they are more cautious, but I would summarize their views as guarded and not alarmist. Furthermore, many say that their improved inventory control methods are preventing an inventory cycle from exacerbating the current situation, and they bring this up without my prompting. So to me their comments do not yet suggest a sharp curtailment in real economic activity. Of course, the financial markets continue to weigh negatively on the outlook. In my view, the biggest concerns are the large markdowns on structured securities and the volume of assets that may be returning to banks’ balance sheets. These effects appear to be larger than the banks had planned for as of October and could have a significant impact on lending capacity. This is an important downside risk to the real economy, as the Greenbook highlights in many places. That said, when I talk with my business contacts, there continues to be a disconnect between the credit conditions they report facing and the turbulence we see in money and credit markets. Outside of lending for residential and nonresidential construction, my CEO contacts at nonfinancial firms do not report much change in credit costs or availability. We have heard this from a number of sources. For example, two of the larger banks in our District said they have not changed terms to borrowers, and they expressed relatively sanguine views of lending conditions overall. For the time being, some lenders report offsetting a portion of their higher funding costs by taking a hit on their interest margins. Credit conditions for construction-related industries are another matter. A major shopping center developer who has been one of the largest issuers of commercial mortgage- backed securities indicated that this market has dried up completely. However, the developer has been able to obtain financing from other traditional sources, such as life insurance companies. He is paying similar interest rates, he says, but the terms include lower loan-to-value ratios. So there is some credit effect, but he still has access for the moment. That is a bit like what President Lacker was suggesting. He said the switch is not a big deal for him currently, but if it continues for too long—say, for more than six months or so—it would then weigh more heavily on his business activity. The evolution of such developments will obviously be an important thing to watch over the next few meetings. I would just note that I don’t often look at the Duke University survey of CFOs. But as I looked at it—and I don’t have a great deal of experience— it did seem to indicate that they had higher spending plans on average from their September survey for capital expenditures and technology spending. It wasn’t a great bit, but given all the negative headlines associated with the credit conditions—which are unweighted, whereas these spending plans are weighted—that was a bit of a surprise. Putting all of this together, we have marked down our current quarter and 2008 real GDP forecasts 0.4 percentage point, which is pretty significant. We now have growth next year of 2¼ percent. We expect growth to improve to our assessment of potential thereafter, namely about 2½ percent. This forecast assumes two policy easings, similar to but sooner than the Greenbook, and it is shaded toward the “stronger domestic demand” alternative scenario, which has less financial restraint on PCE and business fixed investment than in the Greenbook baseline. Turning to inflation, our forecast is for PCE inflation to settle in at 1.8 percent. This continued favorable projection for inflation is important for my policy views now. We think resource utilization likely will be about neutral for inflation over this forecast period. Our GDP projection does not result in appreciable resource slack over the forecast period. Even under the weaker Greenbook scenario, the GDP gap remains less than ½ percentage point. But there are upside risks. The most recent data on core prices have been a bit higher. The lower dollar could put pressure on prices, and my business contacts remain concerned about the cost of energy and other commodities. Finally, at least by the Board staff calculations, five-year forward TIPS inflation compensation has moved up to the range that it was in during the spring of 2006, a period when we were more concerned about the inflation outlook. I wouldn’t put too much weight on this particular inflation expectation development at the moment, but it may be looming ahead. So I continue to see upside risk to inflation, which if realized would complicate our policy reaction to developments on the growth and employment side of the ledger. Thank you, Mr. Chairman." CHRG-111shrg53085--203 PREPARED STATEMENT OF SENATOR TIM JOHNSON Thank you Chairman Dodd and Ranking Member Shelby for holding today's hearing. As we now know, the regulatory structure overseeing U.S. financial markets has proven dangerously unable to keep pace with innovative, but risky, financial products; this has had disastrous consequences. Congress is now faced with the urgent task of looking at the role and effectiveness of the current regulators and fashioning a more responsive system. I share my colleagues' great interest in a systemic risk regulator. I am interested in how that entity would interact with existing bank regulators. I also think it is vitally important that we address the ``too big to fail'' issue. How do the regulators unwind these institutions without causing economic harm? In addition, I share the interest in proposals to enhance consumer protections--particularly whether this should include a separate regulatory body specifically designed to protect consumers. I look forward to hearing the views of today's witnesses on these topics and a variety of other topics that they believe we should consider as we look for solutions. I will continue working to fashion good, effective regulations that balance consumer protection and allow for sustainable economic growth. Today's hearing is an important piece in the development of proposals to modernize the bank regulatory structure. Any proposal must create the kind of transparency, accountability, and consumer protection that is lacking in our system of regulation. Thank you, Mr. Chairman. ______ FOMC20051213meeting--45 43,MR. STOCKTON.," We will certainly take on board your recommendation to expand more of our analysis of the aggregate supply side. I would just say that this is an area where, in the past several years, we have made very significant changes in the underlying structure of the way we’ve produced the forecast. We present a great deal more detail in terms of the composition of the aggregate supply side of our forecast than we were doing five or six years ago. So I think we’ve taken December 13, 2005 21 of 100 I would also caution, just a bit, against page counting for judging the amount of analysis of the supply side. To get to output, we’ve got to go through all the various pieces of the spending side to get there. I hope in my remarks this morning I made it clear that we were interpreting much of the news that we’ve received about spending to have supply-side implications and that the information should not be taken just as a feature of aggregate demand. But we certainly share your desire to have a better and more thorough understanding of what is happening on the supply side of the economy, because it has proven over the last decade to be a very important source of macroeconomic variation." FOMC20050322meeting--109 107,MR. POOLE.," Thank you, Mr. Chairman. One of my business contacts, my Wal-Mart contact, started our conversation by saying that the situation is rather strange—his word. Spending coming out of the Christmas season has been higher than anticipated—with same-store sales about 4 percent higher on a year-over-year basis—and they’re not sure where this strength is coming from. They are anticipating about that same strength, or maybe even a bit more, going forward. He noted that their inflation situation is not a concern. Their prices overall are flat; food prices are up a little and prices of nonfood items are down a little. The labor market is very stable; Wal-Mart is having no problem at all hiring associates at their stores. My UPS contact noted an expansion of their capital spending. He said that business from retail mail order firms is very strong. He indicated that his company has some labor concerns. They March 22, 2005 48 of 116 doing contingency planning for it. They do not believe that the rest of the industry has the capacity to fill in, should UPS be shut down. My FedEx contact noted also an increase in capital spending, up 15 percent for this fiscal year over last fiscal year. He indicated that about two-thirds of that is for expansion of capacity and about one-third for productivity enhancements. Also, he said that they had no concern regarding labor availability. Fuel prices, obviously, are a concern for them. My contact in the trucking industry had contrary information. He said that demand is softer than anticipated and that there has been a switch from prebookings for truck shipping services to last-minute bookings. He also noted that the driver shortage is getting worse and worse. A contact in a major software company said that sales had come in a little soft relative to their expectations but attributed it to Intel coming up short on inventory—I think particularly on notebook computers. Apparently Intel was surprised by demand that was higher than anticipated. Also, I might mention that a contact in the banking industry noted that C&I [commercial and industrial] loans year-over-year are now positive and accelerating and that there appears to be a lot of momentum. Let me turn now to some comments about the economy in general. We have in place a very broad-based and robust recovery. Business fixed investment is taking hold and taking the lead. I think it’s highly likely, of course, that employment and income will grow, which will provide support for consumption, as the Greenbook emphasizes. So even if we had a welcome increase in the saving rate, we’d probably see continued strength in consumption. The Greenbook contains—and we continue to hear elsewhere—a lot of comments on energy prices. In my view, it’s very important that we think of energy prices as being demand-driven. This March 22, 2005 49 of 116 appropriate to think about what the world would look like if energy prices had not increased and how much gets taken off growth. But I’m not sure that that’s quite the right way to look at this, because the situation is being driven fundamentally by demand. It’s not that output is being constrained by energy; it’s that vigorous output growth is driving up energy prices. As for labor compensation, productivity gains are holding down growth in unit labor costs. That’s a source of great stability. Let me make a general point about this expansion that really took hold roughly six quarters ago. Relative to U.S. business cycle history, this expansion has been one of the most orderly and best predicted. The forecast errors are astonishingly small—much lower than the usual standard errors that we see—and I think that has a lot to do with the very well-balanced and orderly nature of the expansion. This expansion is about as surprise-free as we ever see. I think our policy goal should be to maintain the orderly nature of the expansion as far as we can, and, of course, that includes as an essential element maintaining the stable inflation environment. I think the staff forecasts for both real GDP and inflation make a lot of sense. As point forecasts, they’re as good as one can find. I think the risks around the GDP forecast are probably pretty symmetrical, but I do not believe that the risks around the inflation forecast are symmetrical. I view the inflation forecast more as a median of the distribution than a mean. I think the distribution is skewed to the right—that there’s a substantially higher probability that we could have a ½-point upside surprise than a ½-point downside surprise on the inflation outcome. That’s all I’ll say at this time. Thank you." FOMC20060629meeting--38 36,MR. FISHER.," Mr. Chairman, I want to thank the staff for the global presentation, particularly for the beginning of this analysis on resource utilization, which as you know I find useful. It is noteworthy that we’re beginning a process or, maybe, continuing a process and have not enough information yet to understand or to analyze it in terms of Chinese capacity. Your striking figure in exhibit 12 about steel production and steel capacity—China now has 31 percent of the world’s capacity. I would imagine that you’re going to see that in shipbuilding and several other sectors as we go through time. So I want to thank you for the analysis. Thank you, Karen, as well. The question I have is this: If you go to exhibit 11 and look at your forecast for the second half of 2006 and for 2007 for the emerging economies, what’s striking about these numbers at the bottom right-hand side of the table is that they are occurring as we forecast a slowing in the U.S. economy. I wonder if you might comment on the linkages between the two or on what other work we have to do on that front. One would think that either emerging-market GDP would slow by virtue of our slowing or that they would build up their own domestic consumption. And I’m wondering about the interrelationship we build into our models between the two. Again, thank you for the analysis." CHRG-109shrg30354--32 Chairman Bernanke," Thank you. Mr. Chairman and Members of the Committee I am pleased to be here again to present the Federal Reserve's Monetary Policy Report to the Congress. Over the period since our February report, the U.S. economy has continued to expand. Real gross domestic product is estimated to have risen at an annual rate of 5.6 percent in the first quarter of 2006. The available indicators suggest that economic growth has more recently moderated from that quite strong pace, reflecting a gradual cooling of the housing market and other factors that I will discuss. With respect to the labor market, more than 850,000 jobs were added, on net, to nonfarm payrolls over the first 6 months of the year, though these gains came at a slower pace in the second quarter than in the first. Last month, the unemployment rate stood at 4.6 percent. Inflation has been higher than we has anticipated in February, partly as a result of further sharp increases in the prices of energy and other commodities. During the first 5 months of the year, overall inflation, as measured by the price index for personal consumption expenditures, averaged 4.3 percent at an annual rate. Over the same period, core inflation--that is, inflation excluding food and energy prices--averaged 2.6 percent at an annual rate. To address the risk that inflation pressures might remain elevated, the Federal Open Market Committee continued to firm the stance of monetary policy, raising the Federal funds rate another three-quarters of a percentage point to 5.25 percent in the period since our last report. Let me now review the current economic situation and the outlook in a bit more detail, beginning with developments in the real economy and then turning to the inflation situation. I will conclude with some comments on monetary policy. The U.S. economy appears to be in a period of transition. For the past 3 years or so, economic growth in the United States has been robust. This growth has reflected both the ongoing reemployment of underutilized resources as the economy recovers from the weakness of earlier in the decade, and the expansion of the economy's underlying productive potential, as determined by such factors as productivity trends and the growth of the labor force. Although the rates of resource utilization that the economy can sustain cannot be known with any precision, it is clear that, after several years of above-trend growth, slack in resource utilization has been substantially reduced. As a consequence, a sustainable, noninflationary expansion is likely to involve a modest reduction in the growth of economic activity from the rapid pace of the past 3 years to a pace more consistent with the rate of increase in the Nation's underlying productive capacity. It bears emphasizing that, because productivity growth seems likely to remain strong, the productive capacity of our economy should expand over the next few years at a rate sufficient to support solid growth in real output. As I have noted, the anticipated moderation in economic growth now seems to be underway, although the recent erratic growth pattern complicates this assessment. That moderation appears most evident in the household sector. In particular, consumer spending, which makes up more than two-thirds of aggregate spending, grew rapidly during the first quarter but decelerated during the spring. One likely source of this deceleration was higher energy prices, which have adversely affected the purchasing power of households and weighed on consumer attitudes. Outlays for residential construction, which have been at very high levels in recent years, rose further in the first quarter. More recently, however, the market for residential real estate has been cooling, as can be seen in the slowing of new and existing home sales and housing starts. Some of the recent softening in housing starts may have resulted from the unusually favorable weather during the first quarter of the year, which pulled forward construction activity, but the slowing of the housing market appears to be more broad-based than can be explained by that factor alone. Home prices, which have climbed at double-digit rates in recent years, still appear to be rising for the Nation as a whole, though significantly less rapidly than before. These developments in the housing market are not particularly surprising, as the sustained run-up in housing prices, together with some increase in mortgage rates, has reduced affordability and thus the demand for new homes. The slowing of the housing market may restrain other forms of household spending as well. With homeowners no longer experiencing increases in the equity value of their homes at the rapid pace seen in the past few years, and with the recent declines in stock prices, increases in household net worth are likely to provide less of a boost to consumer expenditures than they have in the recent past. That said, favorable fundamentals, including relatively low unemployment and rising disposable incomes, should provide support for consumer spending. Overall, household expenditures appear likely to expand at a moderate pace, providing continued impetus to the overall economic expansion. Although growth in household spending has slowed, other sectors of the economy retain considerable momentum. Business investment in new capital goods appears to have risen briskly, on net, so far this year. In particular, investment in nonresidential structures, which had been weak since 2001, seems to have picked up appreciably, providing some offset to the slower growth in residential construction. Spending on equipment and software has also been strong. With a few exceptions, business inventories appear to be well aligned with sales, which reduces the risk that a buildup of unwanted inventories might act to reduce production in the future. Business investment seems likely to continue to grow at a solid pace, supported by growth in final sales, rising backlogs of orders for capital goods, and high rates of profitability. To be sure, businesses in certain sectors have experienced financial difficulties. In the aggregate, however, firms remain in excellent financial condition and credit conditions for businesses are favorable. Globally, output growth appears strong. Growth of the global economy will help support U.S. economic activity by continuing to stimulate demand for our exports of goods and services. One downside of the strength of the global economy, however, is that it has led to significant increases in the demand for crude oil and other primary commodities over the past few years. Together with heightened geopolitical uncertainties and the limited ability of suppliers to expand capacity in the short-run, these rising demands have resulted in sharp rises in the prices at which these goods are traded internationally, which in turn has put upward pressure on costs and prices in the United States. Overall, the U.S. economy seems poised to grow in coming quarters at a pace roughly in line with the expansion of its underlying productive capacity. Such an outlook is embodied in the projections of Members of the Board of Governors and the Presidents of Federal Reserve Banks that were made at around the time of the FOMC meeting late last month, based on the assumption of appropriate monetary policy. In particular, the central tendency of those forecasts is for real GDP to increase about 3.75 percent to 3.5 percent in 2006 and 3 percent to 3.25 percent in 2007. With output expanding at a pace near that of the economy's potential, the civilian unemployment rate is expected to finish both 2006 and 2007 between 4.75 percent and 5 percent, close to its recent level. I turn out to the inflation situation. As I noted, inflation has been higher than we expected at the time of our last report. Much of the upward pressure on overall inflation this year has been due to increases in the prices of energy and other commodities and, in particular, to the higher prices of products derived from crude oil. Gasoline prices have increased notably as a result of the rise in petroleum prices as well as factors specific to the market for ethanol. The pickup in inflation so far this year has also been reflected in the prices of a range of nonenergy goods and services, as strengthening demand may have given firms more ability to pass energy and other costs through to consumers. In addition, increases in residential rents, as well as the imputed rent on owner-occupied homes, have recently contributed to higher core inflation. The recent rise in inflation is of concern to the FOMC. The achievement of price stability is one of the objectives that makes up the Congress's mandate to the Federal Reserve. Moreover, in the long-run, price stability is critical to achieving maximum employment and moderate long-term interest rates, the other parts of the Congressional mandate. The outlook for inflation is shaped by a number of factors, not the least of which is the course of energy prices. The spot price of oil has moved up significantly further in recent weeks. Futures quotes imply that market participants expect petroleum prices to roughly stabilize in coming quarters; such an outcome would, over time, reduce one source of upward pressure on inflation. However, expectations of a leveling out of oil prices have been consistently disappointed in recent years, and as the experience of the past week suggests, possible increases in these and other commodity prices remain a risk to the inflation outlook. Although the cost of energy and other raw materials are important, labor costs are by far the largest component of business costs. Anecdotal reports suggest that the labor market is tight in some industries and occupations and that employers are having difficulty attracting certain types of skilled workers. To date, however, moderate growth in most broad measures of nominal labor compensation and the ongoing increases in labor productivity have held down the rise in unit labor costs, reducing pressure on inflation from the cost side. Employee compensation per hour is likely to rise more quickly over the next couple of years in response to the strength of the labor market. Whether faster increases in nominal compensation create additional cost pressures for firms depends in part on the extent to which they are offset by continuing productivity gains. Profit margins are currently relatively wide, and the effect of a possible acceleration in compensation on price inflation would thus also depend on the extent to which competitive pressures force firms to reduce margins rather than pass on higher costs. The public's inflation expectations are another important determinant of inflation. The Federal Reserve must guard against the emergence of an inflationary psychology that could impart greater persistence to what otherwise would be a transitory increase in inflation. After rising earlier this year, measures of longer-term inflation expectations, based on surveys and on a comparison of yields on nominal and inflation-index Government debt, have edged down and remained contained. These developments bear watching, however. Finally, the extent to which aggregate demand is aligned with the economy's underlying productive potential also influences inflation. As I noted earlier, FOMC participants project that the growth in economic activity should moderate to a pace close to that of the growth of potential both this year and next. Should that moderation occur as anticipated, it should also help to limit inflation pressures over time. The projections of the Members of the Board of Governors and the Presidents of the Federal Reserve Banks, which are based on information available at the time of the last FOMC meeting, are for a gradual decline in inflation in coming quarters. As measured by the price index for personal consumption expenditures excluding food and energy, inflation is projected to be 2.25 percent to 2.5 percent this year, and then to edge lower, to 2 percent to 2.25 percent, next year. The FOMC projections, which now anticipate slightly lower growth in real output and higher core inflation than expected in our February report, mirror the somewhat more adverse circumstances facing our economy, which have resulted from the recent steep run-up in energy costs and higher-than-expected inflation more generally. But they also reflect our assessment that with appropriate monetary policy and in the absence of significant unforeseen developments, the economy should continue to expand at a solid and sustainable pace and core inflation should decline from its recent level over the medium-term. Although our baseline forecast is for moderating inflation, the Committee judges that some inflation risks remain. In particular, the high prices of energy and other commodities, in conjunction with high levels of resource utilization that may increase the pricing power of suppliers of goods and services, have the potential to sustain inflation pressures. More generally, if the pattern of elevated readings on inflation is more protracted or more intense than is currently expected, this higher level of inflation could become embedded in the public's inflation expectations and in price-setting behavior. Persistently higher inflation would erode the performance of the real economy and would be costly to reverse. The Federal Reserve must take account of these risks in making its policy decisions. In our pursuit of maximum employment and price stability, monetary policymakers operate in an environment of uncertainty. In particular, we have imperfect knowledge about the effects of our own policy actions as well as of the many other factors that will shape economic developments during the forecast period. These uncertainties bear importantly on our policy decisions because the full influence of policy actions on the economy is felt only after a considerable period of time. The lags between policy actions and their effects imply that we must be forward-looking, basing our policy choice on the longer-term outlook for both inflation and economic growth. In formulating that outlook, we must take account of the possible future effects of previous policy actions--that is, of policy effects still ``in the pipeline.'' Finally, as I have already noted, we must consider not only what appears to be the most likely outcome but also the risks to that outlook and the costs that would be incurred should any of those risks be realized. At the same time, because economic forecasting is far from a precise science, we have no choice but to regard all our forecasts as provisional and subject to revision as the facts demand. Thus, policy must be flexible and ready to adjust to changes in economic projections. In particular, as the Committee noted in the statement issued after its June meeting, the extent and timing of any additional firming that may be needed to address inflation risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by our analysis of the incoming information. Thank you. I would be happy to take questions. " FOMC20060808meeting--54 52,MS. MINEHAN.," Thank you very much, Mr. Chairman. Incoming data on the national economy have been slightly lower on the growth side and slightly higher on the side of continuing price escalation than at least we expected, and we have seen reflections of both these trends in the New England economy. Overall, however, my sense is that growth for the region and the nation remains relatively solid but that price pressures are a concern. The region’s economy appears to continue to grow at a pace that will be sufficient to keep local unemployment levels in the fours. The region has a slower pace of job growth than the nation, but total personal income is growing at about the same pace. This suggests that per capita income growth is relatively solid, which is reflected in rising retail sales and state income tax collection. Indeed, local businesses continually comment on their inability to find skilled labor so that at least some of the region’s slow job growth may be attributable to supply rather than demand conditions. New England’s residential housing correction is becoming more evident and, by some measures, may be more significant than that for the nation as a whole. Home sales were 4 percent to 5 percent off their 2005 highs in the first quarter. That is similar to the nation, but the Case-Shiller-Weiss repeat-sales index sees, at least for Q1, the nation’s home-price escalation at about 10 percent year over year but Boston area prices up much less than that. More-recent data from other surveys suggest that regional prices may be falling. Inventories of homes for sale continue to grow, and the value of regional residential construction contracts fell more than 20 percent, compared with about 4½ percent for the nation. This number likely reflects the relatively small amount of residential construction in the region, but the downturn is eye-catching anyway. Despite this, consumer confidence rebounded a bit from earlier this summer, and business contacts report relatively good performance. Now, one thread in my recent conversations with businesses is not dissimilar to what President Fisher just talked about. I found it a bit troubling that manufacturing and related business services appear to believe that they have greater pricing power than before. They are talking less about increasing competition and less about efforts to increase productivity. They seem to be less worried about margin squeezes and more confident that rising input costs, particularly those related to energy, can be passed on. Some even report that strong demand has enabled them to raise prices or to avoid discounting even without major new input cost pressures. In general, there was a disquieting tone of greater tolerance for inflation. On the national scene, recent data on second-quarter growth, employment, and housing market trends seem to indicate a general softening of the economy. This is not unexpected. All of us have been forecasting a gradual slowdown to potential or slightly below over ’06 and ’07 as the economy makes a transition from consumer-led to business-led growth and the saving rate climbs to a positive number. But has the evolving slowdown turned out to be a bigger soft patch than expected, or are we simply suffering through the ups and downs of the transition process? I am not sure of the answer to that question. I found the relatively low GDP and consumption figures for late ’06 and ’07 in the Greenbook forecast a bit disquieting, even after recognizing the effect of the benchmark revisions on potential GDP. Our forecast in Boston had been in sync with the Greenbook’s and on the low side of the range of forecasts around this table, but now we see growth of 0.6 to 0.7 percentage point above the Greenbook in ’07. We’re not projecting as large a hit to residential investment over the period, and we see solid disposable income offsetting high energy costs and lower housing wealth to a greater degree than does the Greenbook. Moreover, although slow job growth is a concern, at full employment or beyond how much of this is a supply rather than a demand phenomenon, particularly when you take into account lower labor force participation? Are firms hesitant to hire because they are fearful of the future or because they can’t find the skills they need? They certainly are not constrained by a lack of resources. Thus, I am inclined to the view that, although things seem slower than we expected and the Greenbook forecast seems softer, not much has really changed since our last meeting. Consumer spending has been relatively well maintained despite a weakness in Q2. Spending for equipment and software appears to be in good shape. And net exports, given growth abroad, will be positive at least for a time. Residential investment is waning, but how fast is hard to say, and there well could be an offset to that from nonresidential investment. Financial markets remain accommodative, and given the rise in inflation, real rates are down. What is a bit different is the fact that inflation is growing at a faster pace in the short run and is growing across most aspects of the core measure. Certainly it is faster and broader based than I would like, and we continue to see leveling-off or falling price numbers only in the forecast. I recognize that will continue to be the case for some time even in the best of circumstances, but I am concerned that we may not face the best of circumstances. Geopolitical events of all sorts and global demand continue to put pressure on input prices. Productivity growth is likely slower, and economic activity may not wane enough to reduce resource pressures. As time goes by and outsized inflation growth continues, one can imagine a sense of inflation complacency growing. In that regard, as I noted earlier, I found the regional anecdotes about making price increases stick of some concern. I should note here that my own board of directors in a telephone meeting just yesterday indicated concern about the ongoing strength of the economy and voted to maintain the current primary credit rate. I myself worry about overdoing the tightening process, but as I told them, I don’t think we’re at risk of that at present. Given the pace of inflation and given financial market activity, real rates have, in fact, gone down not up, leaving policy and overall financial conditions more accommodative than before our last increase. In sum, I continue to be a bit less worried about variations in the cycle and more worried about the medium-term prospects for inflation." FOMC20080430meeting--63 61,MR. STOCKTON.," What was going on there was probably--I don't know if it was rational or irrational--inattention. But in looking at that over the weekend, it seemed like something that should not be considered as an analytical feature of the forecast. Just in terms of the falloff in consumption that we expect to follow from the end of the tax rebates, my guess is that the consumption folks were trying just to put it somewhere and some of it showed up in services. " FOMC20050202meeting--104 102,MS. MINEHAN.," I have one further question. I’ve been surprised to read in some of the market publications—the newsletters from J.P. Morgan and so forth—that a number of market participants appear to be getting more convinced, based on their reading of the political tea leaves, that a move on the Chinese currency is going to occur sooner rather than later. Have we thought about the implications for this forecast if something like that happens?" FOMC20051213meeting--50 48,MR. STOCKTON.," Well, I’ll just add a couple of further comments that relate to your concerns. One is that, given our forecast of labor force participation—which is pretty mild, as you know—we think you should be lowering your sights as to what the underlying trend employment growth would be on the establishment survey. We’re now putting that at roughly 90,000 a month, so that—" FOMC20070628meeting--197 195,CHAIRMAN BERNANKE.," Thank you. Well, we appear to be in considerable agreement about the policy action. [Laughter] It is a good thing, I guess. Not only are we in agreement, but also the bond market is in agreement. [Laughter] I would just note that, in fact, the bond market is acting as an automatic stabilizer, responding to news, as we have discussed before. I think we are in a very good place, and our forecasting process has served us very well. In that respect, I think this might be an appropriate time to congratulate the staff, including Dave Stockton, Karen Johnson, Vincent Reinhart, and the research directors at the Reserve Banks who are here, for their tremendous contributions to this process, which has really been instrumental in helping us find the right level of policy and in building a lot of credibility in the market. So thank you very much for your outstanding work. With respect to the statement also, I didn’t hear a lot of dissent. First of all, let me say that I think Governor Kohn’s amendments in section 3 are very much to the point— so that would be “a sustained moderation in inflation pressures.” First, the word “pressures” dilutes to some extent the attention to the monthly numbers. Second, as a number of people have said, it is a broader concept, and it can be construed as including some of the headline issues and the oil, commodities, and so on prices that we are concerned about. So I think it is definitely an improvement, and so I would like to recommend it. On section 2, just a couple things. One is that I would hesitate to try to indicate growing strength in the second half, for a couple of reasons. First, at least in terms of the Greenbook, that acceleration is relatively modest—certainly not at all a definite uptick. By continuing to use the language of “moderate pace,” I think we signal that we are not going to take the second quarter as necessarily indicating a new reacceleration of growth. We think that the second quarter represents, at least partly, a transitory increase in the growth rate. Second, Professor Minehan [laughter] was correct about the quality of writing in the section. The last statement began with the term “economic growth.” I am kind of ambivalent about whether or not to do this, but we could say, “Economic growth appears to have been moderate during the first half of this year, despite the ongoing adjustment in the housing sector.”" CHRG-111hhrg53234--2 Chairman Watt," Unfortunately, we have been notified that we will have a series of votes, four or five votes pretty soon, so we are going to try to get as far as we can into the process. I am going to go ahead and get started. Let me call this hearing of the Subcommittee on Domestic Monetary Policy and Technology to order. Without objection, all members' opening statements will be made a part of the record, and I will recognize myself for an opening statement, which I will try to get in before we get called for votes, and maybe we can get the opening statements in before we get the call to the Floor. This hearing is entitled, ``Regulatory Restructuring: Balancing the Independence of the Federal Reserve in Monetary Policy With Systemic Risk Regulation.'' Our current regulatory system, created largely as a response to the Great Depression in the 1930's, has proven ineffective and outdated at preventing and addressing the financial crisis we are currently experiencing. Recognizing this, the President recently put forth a proposal for comprehensive financial regulatory reform. This hearing will examine one aspect of that proposal, the part that proposes to delegate to the Federal Reserve Board new powers, including the power to serve as the systemic risk regulator for all large, interconnected financial firms. As the systemic risk regulator, the Federal Reserve would be empowered to structure and implement a more robust supervisory regime for firms with a combination of size, leverage, and interconnectedness that could pose a threat to financial stability. This hearing will examine whether and how the Fed could perform and balance the proposed new authority as systemic risk regulator with its current critical role as the independent authority on monetary policy. While recent events have caused many to reevaluate and question the role and the extent of independence accorded to the Federal Reserve, the Fed's independence from political influence by the Legislative and Executive Branches of Government has long been viewed as necessary to allow the Fed to meet the long-term monetary policy goals of low inflation, price stability, maximum sustainable employment, and economic growth. Most central banks around the world, including the Federal Reserve, the Bank of England, the Bank of Japan, and the European Central Bank, have had a strong tradition of independence in executing monetary policy. Many scholars and commentators agree that an independent central bank that is free from short-term political influence and exhibits the indicia of independence, such as staggered terms for board members, exemption from the appropriations process, and no requirement to directly underwrite government debt, can better execute the long-term goals of monetary policy. The important question that our hearing today is focused upon is whether the Fed can maintain its current role as the independent authority on monetary policy, and take on a new role, a significantly new role, as the systemic risk regulator. Some scholars and commentators argue that the Fed is uniquely positioned to become the systemic regulator because it already supervises bank holding companies, and through its monetary policy function, helps manage microeconomic policy. Others argue that the Fed is already stretched too thin, and has strayed from its core monetary policy function, particularly by using its powers under section 13(3) of the Federal Reserve Act to purchase securities in distressed industries under existing emergency circumstances. As Congress and the President work to enact financial regulatory reform, it is critical for us to examine carefully the extent to which proposed new rules may conflict with existing roles and whether the Fed can effectively juggle all of these roles while performing its vital function as the Nation's independent authority on monetary policy. For our economy to function effectively, the Fed's monetary activities, such as open market operations, discount window lending, and setting bank reserve requirements must be independent and free from political influence. We need to get a clear handle on the extent to which the Administration's proposals could compromise or interfere with what the Fed already is charged to do. I look forward to learning more about how and whether the Fed can effectively carry out additional regulatory responsibilities while maintaining its current role as the independent authority on monetary policy. I now recognize the ranking member of the full committee for 4 minutes, Mr. Bachus from Alabama. " CHRG-109hhrg31539--9 Mr. Bernanke," Thank you. Mr. Chairman, and members of the committee, I am pleased to be here again to present the Federal Reserve's Monetary Policy Report to the Congress. Over the period since our February report, the U.S. economy has continued to expand. Real gross domestic product is estimated to have risen at an annual rate of 5.6 percent in the first quarter of 2006. The available indicators suggest that economic growth has more recently moderated from that quite strong pace, reflecting a gradual cooling of the housing market and other factors that I will discuss. With respect to the labor market, more than 850,000 jobs have been added, on net, to nonfarm payrolls in the first 6 months of the year, though these gains came at a slower pace in the second quarter than in the first. Last month the unemployment rate stood at 4.6 percent. Inflation has been higher than we anticipated in February, partly as a result of further sharp increases in the prices of energy and other commodities. During the first 5 months of the year, overall inflation, as measured by the price index for personal consumption expenditures, averaged 4.3 percent at an annual rate. Over the same period, core inflation, that is, inflation excluding food and energy prices, averaged 2.6 percent at an annual rate. To address the risk that inflation pressures might remain elevated, the Federal Open Market Committee continued to firm the stance of monetary policy, raising the Federal funds rate another three-quarters of a percentage point to 5\1/4\ percent in the period since our last report. Let me now review the current economic situation and the outlook in a bit more detail, beginning with developments in the real economy and then turning to the inflation situation. I will conclude with some comments on monetary policy. The U.S. economy appears to be in a period of transition. For the past 3 years or so, economic growth in the United States has been robust. This growth has reflected both the ongoing reemployment of underutilized resources as the economy recovered from the weakness of earlier in the decade and the expansion of the economy's underlying productive potential as determined by such factors as productivity trends and growth of the labor force. Although the rate of resource utilization that the economy can sustain cannot be known with any precision, it is clear that after several years of above-trend growth, slack in resource utilization has been substantially reduced. As a consequence, a sustainable noninflationary expansion is likely to involve a modest reduction in the growth of economic activity from the rapid pace of the past 3 years to a pace more consistent with the rate of increase in the Nation's underlying productive capacity. It bears emphasizing that because productivity growth seems likely to remain strong, the productive capacity of our economy should expand over the next few years at a rate sufficient to support solid growth in real output. As I have noted, the anticipated moderation in economic growth now seems to be under way, although the recent erratic growth pattern complicates this assessment. That moderation appears most evident in the household sector. In particular, consumer spending, which makes up more than two-thirds of aggregate spending, grew rapidly during the first quarter, but decelerated during the spring. One likely source of this deceleration was higher energy prices, which have adversely affected the purchasing power of households and have weighed on consumer attitudes. Outlays for residential construction, which have been at very high levels in recent years, rose further in the first quarter. More recently, however, the market for residential real estate has been cooling, as can be seen in the slowing of new and existing home sales and housing starts. Some of the recent softening in housing starts may have resulted from the unusually favorable weather during the first quarter of the year which pulled forward construction activity, but the slowing of the housing market appears to be more broad-based than can be explained by that factor alone. Home prices, which have climbed at double-digit rates in recent years, still appear to be rising for the Nation as a whole, though significantly less rapidly than before. These developments in the housing market are not particularly surprising as the sustained run-up in housing prices, together with some increase in mortgage rates, has reduced affordability and thus the demand for new homes. The slowing of the housing market may restrain other forms of household spending as well. With homeowners no longer experiencing increases in the equity value of their homes at the rapid pace seen in the past few years, and with the recent declines in the stock prices, increases in household net worth are likely to provide less of a boost to consumer expenditures than they have in the recent past. That said, favorable fundamentals, including relatively low unemployment and rising disposable incomes, should provide support for consumer spending. Overall, household expenditures appear likely to expand at a moderate pace, providing continued impetus to the overall economic expansion. Although growth in household spending has slowed, other sectors of the economy retain considerable momentum. Business investment in new capital goods appears to have risen briskly, on net, so far this year. In particular, investment in nonresidential structures which had been weak since 2001 seems to have picked up appreciably, providing some offset to the slower growth in residential construction. Spending on equipment and software has also been strong. With a few exceptions, business inventories appear to be well aligned with sales, which reduces the risk that a build-up of unwanted inventories might actually reduce production in the future. Business investment seems likely to continue to grow at a solid pace, supported by growth in final sales, rising backlogs of orders for capital goods, and high rates of profitability. To be sure, businesses in certain sectors have experienced financial difficulties. In the aggregate, however, firms remain in excellent financial condition, and credit conditions for businesses are favorable. Globally, output growth appears strong. Growth of the global economy will help support U.S. economic activity by continuing to stimulate demand for our exports of goods and services. One downside to the strength of the global economy, however, is that it has led to significant increases in the demand for crude oil and other primary commodities in the past few years. Together with heightened geopolitical uncertainties and the limited ability of suppliers to expand capacity in the short run, these rising demands have resulted in sharp rises in the prices of which these goods are traded internationally, which in turn has put upward pressure on costs and prices in the United States. Overall, the U.S. economy seems poised to grow in coming quarters at a pace roughly in line with the expansion of its underlying productive capacity. Such an outlook is embodied in the projections of members of the Board of Governors and the presidents of Federal Reserve Banks that were made around the time of the FOMC meeting late last month, based on the assumption of appropriate monetary policy. In particular, the central tendency of those forecasts is for real GDP to increase about 3\1/4\ percent to 3\1/2\ percent in 2006, and 3 percent to 3\1/4\ percent in 2007. With output expanding at a pace near that of the economy's potential, the civilian unemployment rate is expected to finish both 2006 and 2007 between 4\3/4\ percent and 5 percent, close to its recent level. I turn now to the inflation situation. As I noted, inflation has been higher than we expected at the time of our last report. Much of the upward pressure on overall inflation this year has been due to increases in the prices of energy and other commodities, and in particular to the higher prices of products derived from crude oil. Gasoline prices have increased notably as a result of the rise in petroleum prices as well as factors specific to the market for ethanol. The pickup in inflation so far this year has also been reflected in the prices of a range of goods and services as strengthening demand may have given firms more ability to pass energy and other costs through to consumers. In addition, increases in residential rents as well as in the imputed rent on owner-occupied homes have recently contributed to higher core inflation. The recent rise in inflation is of concern to the FOMC. The achievement of price stability is one of the objectives that make up the Congress' mandate to the Federal Reserve. Moreover, in the long run, price stability is critical to achieving maximum employment and moderate long-term interest rates, the other parts of the Congressional mandate. The outlook for inflation is shaped by a number of factors, not the least of which is the course of energy prices. The spot price of oil has moved up significantly further in recent weeks. Futures quotes imply that market participants expect petroleum prices to roughly stabilize in coming quarters. Such an outcome would, over time, reduce one source of upward pressure on inflation. However, expectations of a leveling out of oil prices have been consistently disappointed in recent years, and as the experience of the past week suggests, possible increases in these and other commodity prices remain a risk to the inflation outlook. Although the costs of energy and other raw materials are important, labor costs are by far the largest component of business costs. Anecdotal reports suggest that the labor market is tight in some industries and occupations, and that employers are having difficulty attracting certain types of skilled workers. To date, however, moderate growth in most broad measures of nominal labor compensation and the ongoing increases in labor productivity have held down the rise in unit labor costs, reducing pressure on inflation from the cost side. Employee compensation per hour is likely to rise more quickly over the next couple of years in response to the strength of the labor market. Whether faster increases in nominal compensation create additional cost pressures for firms depends in part on the extent to which they are offset by continuing productivity gains. Profit margins are currently relatively wide, and the effect of a possible acceleration in compensation in price inflation would also depend on the extent to which competitive pressures force firms to reduce margins rather than to pass on higher costs. The public's inflation expectations are another important determinant of inflation. The Federal Reserve must guard against the emergence of an inflationary psychology that could impart greater persistence than what could otherwise be a transitory increase in inflation. After rising earlier this year, measures of expectations, based on surveys and on a comparison of yields on nominal and inflation-indexed government debt, have edged down and remain contained. These developments bear watching, however. Finally, the extent to which aggregate demand is aligned with the economy's underlying productive potential also influences inflation. As I noted earlier, FOMC participants project the growth in economic activity should moderate to a pace close to that of the growth of potential both this year and next. Should that moderation occur as anticipated, it should help to limit inflation pressures over time. The projections of the members of the Board of Governors and the presidents of the Federal Reserve Banks, which are based on information available at the time of the last FOMC meeting, are for a gradual decline in inflation in coming quarters. As measured by the price index for personal consumption expenditures excluding food and energy, inflation is projected to be 2\1/4\ percent to 2\1/2\ percent this year and then to edge lower to 2 percent to 2\1/4\ percent next year. The FOMC projections, which now anticipate slightly lower growth in real output and higher core inflation than expected in our February report, mirror the somewhat more adverse circumstances facing our economy which have resulted from the recent steep run-up in energy costs and higher-than-expected inflation more generally. But they also reflect our assessment that with appropriate monetary policy, and in the absence of significant unforeseen developments, the economy should continue to expand at a solid and sustainable pace, and core inflation should decline from its recent level over the medium term. Although our baseline forecast is for moderating inflation, the committee judges that some inflation risks remain. In particular, the high prices of energy and other commodities in conjunction with high levels of resource utilization that may increase the pricing power of suppliers of goods and services have the potential to sustain inflation pressures. More generally, if the pattern of elevated readings on inflation is more protracted or is more intense than currently expected, this higher level of inflation could become embedded in the public's expectations and in price-setting behavior. Persistently higher inflation would erode the performance of the real economy and would be costly to reverse. The Federal Reserve must take into account these risks in making its policy decisions. In our pursuit of maximum employment and price stability, monetary policymakers operate in an environment of uncertainty. In particular, we have imperfect knowledge about the effects of our own policy actions as well as of the many other factors that will shape economic developments during the forecast period. These uncertainties bear importantly on our policy decisions because the full influence of policy actions on the economy is felt only after a considerable period of time. The lags between policy actions and their effects imply that we must be forward-looking, basing our policy choices on the longer-term outlook for both inflation and economic growth. In formulating that outlook, we must take into account the possible future effects of previous policy actions, that is, of policy effects still in the pipeline. Finally, as I have noted, we must consider not only what appears to be the most likely outcome, but also the risks to that outlook and the costs that would be incurred should any of those risks be realized. At the same time, because economic forecasting is far from a precise science, we have no choice but to regard all of our forecasts as provisional and subject to revision as the facts demand. Thus, policy must be flexible and ready to adjust to changes in economic projections. In particular, as the committee noted in the statement issued after its June meeting, the extent and timing of any additional firming that may be needed to address inflation risks will depend on the evolution of the outlook for both inflation and economic growth as implied by our analysis of the incoming information. Thank you. I would be happy to take questions. " CHRG-111hhrg46820--75 Chairwoman Velazquez," Ms. Clarke. Ms. Clarke. Thank you very much, Madam Chairwoman, and to Ranking Member Graves. I am honored to serve with you once again in the 111th Congress. Let me start by just congratulating you, Madam Chair, on becoming chairperson of the Congressional Hispanic Caucus. If you conduct the caucus in the same way and manner that you have conducted your hearings in this committee, I have no doubt that you will be successful and accomplish many great things. Now to the concern that brings us all here today. Small businesses from the construction to the financial services industry are daily facing enormous challenges. They continue to suffer from what many say is one of the worst recessions this country has ever experienced. So it is imperative that our government plays a critical role in assisting our Nation's small businesses, which will create jobs and especially for the unemployed and working poor in urban communities and communities across our country. As we all know, President Bush failed to implement the SBA's women's procurement program, but the administration was quick in its demand for $700 billion to bail out the so-called financial giants of Wall Street. So I urge my clients to move with swiftness to help small business that will help stimulate and sustain our communities and, by extension, our economy. It is my hope that the second economic stimulus package adequately addresses our Nation's small businesses and addresses, establishes and reinforces objectives that ensure minority and women-owned businesses will fully participate in contracting opportunities created by the infrastructure improvement plan and economic recovery plan. My first question is to Mr. Robert Therrien and to Mr. Steve Massie. It is almost definitive that the second economic stimulus package, Congress will target infrastructure improvement projects. It appears that this will be extremely favorable towards the construction industry, which is suffering from this economic downturn. Balancing the need for small business productivity, hiring and retention of dedicated workforce is truly a challenge. We are trying essentially to develop a win-win-win economic policy that is critical to the future prosperity of our civil society. Do you support pre-apprenticeship programs in your sector to benefit disadvantaged workers, especially if these programs are targeted towards green jobs, and do you know of any successful pre-apprenticeship programs that benefit disadvantaged workers that can be used as a model? And please explain the difference between a pre-apprenticeship program and apprenticeship program. And just so you know, I am from Brooklyn, New York and that is why I come from this perspective. Thank you. " FOMC20070628meeting--303 301,MR. PLOSSER.," Thank you, Mr. Chairman. As some others have said, I want to applaud your leadership in laying out a proposal for how we think about this. It’s important to have a framework on the table for thinking about where we want to be. I would add that generally I agree with almost everything you said. I think it’s a good way forward. I view this as a step, not the end game. It’s part of a process in which we evaluate what we’re doing and how we do it. While I share in principle President Lacker’s concern about the potential risks associated with doing this without agreeing on explicit objectives, I’m willing to bear those risks because, since most people around this table know where I’d like to be in terms of that, I think the risks are acceptable in the short run as a means of getting us to that ultimate objective. I think that this will help us as a Committee become more comfortable with being more transparent and more communicative and that the process in itself will help us get to where I think we ought to be. So from that standpoint I’m very supportive of this direction. I support going through with it under the guidelines and broad outline that you described. As to some of the specific things that Governor Kohn mentioned and we talked about, as I said, I want to proceed. I think four times a year is right. The details of the Monetary Policy Report to the Congress are just a detail. We can work them out. Somebody is better at figuring that out than I am. I think that shouldn’t be considered a stumbling block. I support moving to total inflation. As I said both yesterday and earlier today, I think that’s important. I’m marginally indifferent between total PCE and total CPI. Earlier I had advocated the CPI. I’m still perhaps at the margin, but to me that’s not a big issue one way or the other. I agree on the timing—the forecast and the projections ought to be based on information available at the meeting, not subsequent information. In fact, that’s very important in what we’re trying to communicate about our decisionmaking process. I’m fairly happy with the way the staff has crafted the language. I think they have done a pretty good job of capturing the sense. I’m rather indifferent about whether we incorporate it into the minutes directly or we make it an addendum. Again, I think the markets and this group can live with it either way, and people who read the minutes will come to understand and accept it one way or another. The two points with which I have some trouble or perhaps a little disagreement with Governor Kohn’s comments concern the optimal policy and whether we reveal what’s implicit in the fed funds rate forecast going forward. I think that revealing a dispersion or the varying underlying policy assumptions that people are using going forward helps on the issue of uncertainty—that the world is uncertain and that our understanding of the way the macroeconomy works is uncertain. By revealing that some underlying sets of assumptions that we on the Committee are making to get to this set of objectives are different could actually be very helpful in reinforcing the view that the future is uncertain. Therefore, rather than locking us into some path, it may end up, in fact, opening up options to us in a way that we might not have had before. So I think there’s actually potential information there that we’re providing to the marketplace that may be valuable. Giving this area a bit more thought might be worthwhile. The second point is one that President Pianalto just mentioned, and it just occurred to me after she mentioned it. I realized that, if we submit these forecasts anonymously and if they’re reported anonymously, even though the dispersions and so forth are reported in the minutes, we as presidents and as Board members are out giving speeches all the time about our outlook for the economy. At the end of the day, we are unlikely to stop giving out information about what our views are. It’s a little like hiding it over here, but everybody is out talking about what their view is anyway. So I’m not sure we are buying anything real by being anonymous about our forecasts. I guess I’m in favor of revealing more rather than less—revealing more about our uncertainties or our assumptions underlying the future path of the fed funds rate and having that information convey some uncertainty—and being more transparent, because we are anyway, about what our individual forecasts may have been in talking about that outlook. Thank you." FOMC20070131meeting--134 132,MR. FISHER.," Well, Mr. Chairman, first on our cheaper, more affordable, and perhaps luckier Eleventh District economy, we estimate that employment growth ran at a rate slightly greater than 3.2 percent last year and our output growth exceeded 4 percent. We do see some possible slowing, but there is still very strong momentum in the Texas economy and to an extent in the New Mexican economy, despite a lower rig count. What I’m about to talk about is not based on the buoyancy of the Eleventh District economy but on my talking with CEOs as well as the economic projections of our own staff. I’ve talked with twenty-five CEOs for today’s discussion. I’ve added two, and just for the record they are the CEO of Disney and the CEO of MasterCard. First, my retail contacts, with one exception, report a pickup in dollar volume and foot traffic that began with the second half of December and has continued. As a result, the Wal-Mart CEO for the United States is much more optimistic and is now forecasting volume expansion of about 2 to 3 percent. My contact from JCPenney, which is in an income range that is double that of Wal-Mart, reports a similar pattern of behavior that started the Friday before Christmas and has carried forward and says that the consumers “feel good about the economy.” The one exception, incidentally, is 7-Eleven, and I would be upset, too. Tobacco constitutes 30 percent of their sales, and Texas just levied a $10 tax on a $30 carton of cigarettes. Otherwise, the retailers seem to be much more optimistic than they were when I last reported. A not unimportant factor in this report has to do with the phenomenon of gift cards. In the public release of Safeway is an interesting piece of data: Their gift card business, which is called Blackhawk, grew 100 percent last year and dropped $100 million to the pretax bottom line. Wal-Mart reports—and this is not yet public information—a peak gift-card balance for this season of $1.2 billion. Now, mind you, 70 percent of the card use occurs before February 1. So this business has extended the retail season, and it may well have affected the buoyancy that I’m hearing from retailers in terms of their current activity. MasterCard confirms the pickup in consumer activity, particularly that it began late in the Christmas season, and its CEO reports from his contacts certainly much less “noise” about a possible recession and sees that risk abating. Just to jump forward, we forecast, based on economic research, economic growth in our District of 2.7 percent for 2007, which is what MasterCard happens to be projecting—so I found that CEO to be instantly credible. Disney reports extremely strong advertising growth. They expect the year-over-year growth to be 20 percent in terms of their first- quarter network advertising, with strength in every sector except for autos, according to the CEO. They also report record foot traffic at their parks over the holidays. In contrast, UPS reports a weak start to December but a strong finish in the last seven days of the year, with year-over-year numbers for January not as robust as expected—running around 1 percent. The rails also report a bit slower volume, as the CEO of one of the large rail companies said. There are clearly shifts taking place. For example, lumber shipments of Union Pacific and Burlington Northern are down 25 percent year over year, reflecting the falloff in the construction of homes. Both CEOs caution that company year-over-year numbers are like comparing apples and oranges, given the robust growth in the first quarter of 2006. I did talk to two of the top five housing CEOs and a third one, a smaller company. They seem to confirm the sense of the staff in that they feel that the housing situation is bottoming out, but they continue to caution that any reading of the housing industry between Thanksgiving and the Super Bowl is of questionable value." CHRG-110shrg38109--113 Chairman Dodd," Thank you. Senator Brown. I thank my friend from Montana. Thank you, Senator Tester. Chairman Bernanke, in your remarks last week in Omaha, you noted that our policy responses to economic inequality must be informed by our ethics and our values and are ultimately political questions. You said a moment ago that inflation was the canary in the mine. I have for 5 or 6 years worn a depiction of a canary in a cage on my lapel to signify the Government's role in everything from mine safety to the environment to minimum wage to Medicare. You also expressed--and I think that the ethics and values in our domestic economy, I think those ethics and values are reflected in what we do in our domestic economy, like the canary in the cage. It is minimum wage and it is Medicare and it is Social Security, and it is helping the middle class thrive, as it has done in the last 100 years. And there has been clearly a consensus in this country, differences on the edges perhaps, but a consensus that those ethics and values drive what we do in our domestic economy. It seems to me those values and ethics do not stop at the water's edge, that as a Nation we should continue to propagate and promote those same ethics and values as we have done in our country in our domestic policies and our domestic economic issues. We should look at those internationally. I know you expressed concern that inhibiting trade flows would do more harm than good, but I would argue that if our country is, in fact, going to live its values and going to live the ethics that we discuss and that we sometimes pat ourselves on the back about, we would look internationally in some of those cases. I would just start by asking if--we have as a Nation our values say that we should not buy products manufactured by slave labor in China. Do you agree with that? " FOMC20051101meeting--4 2,CHAIRMAN GREENSPAN., Thank you. I notice that we still don’t endeavor to calculate the implicit 2- or 5-year break-even inflation rates—subtracting out the implicit CPI forecast from what the futures markets are telling us about energy prices to get inferentially what the CPI ex food and energy would be if one presumes that the energy futures markets are arbitraged against the TIPS. CHRG-111hhrg52261--64 Mrs. Dahlkemper," So what is your role then in this? " FinancialCrisisInquiry--737 THOMPSON: ... role here? CHRG-111shrg52619--142 Chairman Dodd," That could be one role. " FOMC20050503meeting--63 61,CHAIRMAN GREENSPAN.," The flattening of industrial production in March in that flow­ of-goods system seems to reflect a rather large liquidation, seasonally adjusted, of motor vehicle inventories. I was curious whether there was any awareness of that on the part of BEA, because clearly those data were available at the time when BEA made the GDP forecast. Do they show a May 3, 2005 24 of 116" CHRG-111hhrg56776--10 Mr. Bernanke," The Federal Reserve's involvement in regulation and supervision confers two broad sets of benefits to the country. First, because of its wide range of expertise, the Federal Reserve is uniquely suited to supervise large complex financial organizations and to address both safety and soundness risks and risks to the stability of the financial system as a whole. Second, the Federal Reserve's participation in the oversight of banks of all sizes significantly improves its ability to carry out its central banking functions, including making monetary policy, lending through the discount window, and fostering financial stability. The financial crisis has made it clear that all financial institutions that are so large and interconnected that their failure could threaten the stability of the financial system and the economy must be subject to strong consolidated supervision. Promoting the soundness and safety of individual banking organizations requires the traditional skills of bank supervisors, such as expertise in examination of risk management practices. The Federal Reserve has developed such expertise in its long experience supervising banks of all sizes, including community banks and regional banks. The supervision of large complex financial institutions and the analysis of potential risks to the financial system as a whole requires not only traditional examination skills, but also a number of other forms of expertise, including: macroeconomic analysis and forecasting; insight into sectoral, regional, and global economic developments; knowledge of a range of domestic and international financial markets, including money markets, capital markets, and foreign exchange and derivatives markets; and a close working knowledge of the financial infrastructure, including payment systems and systems for clearing and settlement of financial instruments. In the course of carrying out its central banking duties, the Federal Reserve has developed extensive knowledge and experience in each of these areas critical for effective consolidated supervision. For example, Federal Reserve staff members have expertise in macroeconomic forecasting for the making of monetary policy, which is important for helping to identify economic risks to institutions and to markets. In addition, they acquire in-depth market knowledge through daily participation in financial markets to implement monetary policy and to execute financial transactions on behalf of the U.S. Treasury. Similarly, the Federal Reserve's extensive knowledge of payment and settlement systems has been developed through its operation of some of the world's largest such systems, its supervision of key providers of payment and settlement services, and its long-standing leadership in the International Committee on Payment and Settlement Systems. No other agency can or is likely to be able to replicate the breadth and depth of relevant expertise that the Federal Reserve brings to the supervision of large complex banking organizations and the identification and analysis of systemic risks. Even as the Federal Reserve's central banking functions enhance supervisory expertise, its involvement in supervising banks of all sizes across the country significantly improves the Federal Reserve's ability to effectively carry out its central bank responsibilities. Perhaps most important, as this crisis has once again demonstrated, the Federal Reserve's ability to identify and address diverse and hard-to-predict threats to financial stability depends critically on the information, expertise, and powers that it has as both a bank supervisor and a central bank, not only in this crisis, but also in episodes such as the 1987 stock market crash and the terrorist attacks of September 11, 2001. The Federal Reserve's supervisory role was essential for it to contain threats to financial stability. The Federal Reserve making of monetary policy and its management of the discount window also benefit from its supervisory experience. Notably, the Federal Reserve's role as the supervisor of State member banks of all sizes, including community banks, offers insights about conditions and prospects across the full range of financial institutions, not just the very largest, and provides useful information about the economy and financial conditions throughout the Nation. Such information greatly assists in the making of monetary policy. The legislation passed by the House last December would preserve the supervisory authority that the Federal Reserve needs to carry out its central banking functions effectively. The Federal Reserve strongly supports ongoing efforts in the Congress to reform financial regulation and to close existing gaps in the regulatory framework. While we await passage of comprehensive reform legislation, we have been conducting an intensive self-examination of our regulatory and supervisory performance and have been actively implementing improvements. On the regulatory side, we have played a key role in international efforts to ensure that systemically critical financial institutions hold more and higher quality capital, have enough liquidity to survive highly stressed conditions, and meet demanding standards for company wide risk management. We also have been taking the lead in addressing flawed compensation practices by issuing proposed guidance to help ensure that compensation structures at banking organizations provide appropriate incentives without encouraging excessive risk-taking. Less formally, but equally important, since 2005, the Federal Reserve has been leading cooperative efforts by market participants and regulators to strengthen the infrastructure of a number of key markets, including the markets for security repurchase agreements and the markets for credit derivatives and other over-the-counter derivative instruments. To improve both our consolidated supervision and our ability to identify potential risks to the financial system, we have made substantial changes to our supervisory framework so that we can better understand the linkages among firms and markets that have the potential to undermine the stability of the financial system. We have adopted a more explicitly multi-disciplinary approach, making use of the Federal Reserve's broad expertise in economics, financial markets, payment systems, and bank supervision, to which I alluded earlier. We are also augmenting our traditional supervisory approach that focuses on firm by firm examinations with greater use of horizontal reviews and to look across a group of firms to identify common sources of risks and best practices for managing those risks. To supplement information from examiners in the field, we are developing an off-site enhanced quantitative surveillance program for large bank holding companies that will use data analysis and formal modeling to help it identify vulnerabilities at both the firm level and for the financial sector as a whole. This analysis will be supported by the collection of more timely detailed and consistent data from regulated firms. Many of these changes draw on the successful experience of the Supervisory Capital Assessment Program (SCAP), also known as the ``banking stress test,'' which the Federal Reserve led last year. As in the SCAP, representatives of primary and functional supervisors will be fully integrated in the process, participating in the planning and execution of horizontal exams and consolidated supervisory activities. Improvements in the supervisory framework will lead to better outcomes only if day-to-day supervision is well executed, with risks identified early and promptly remediated. Our internal reviews have identified a number of directions for improvement. In the future, to facilitate swifter and more effective supervisory responses, the oversight and control of our supervisory function will be more centralized, with shared accountability by senior Board and Reserve Bank supervisory staff and active oversight by the Board of Governors. Supervisory concerns will be communicated to firms promptly and at a high level, with more frequent involvement of senior bank managers and boards of directors and senior Federal Reserve officials. Greater involvement of senior Federal Reserve officials and strong systematic follow-through will facilitate more vigorous remediation by firms. Where necessary, we will increase the use of formal and informal enforcement actions to ensure prompt and effective remediation of serious issues. In summary, the Federal Reserve's wide range of expertise makes it uniquely suited to supervise large complex financial institutions and to help identify risks to the financial system as a whole. Moreover, the insights provided by our role in supervising a range of banks, including community banks, significantly increases our effectiveness in making monetary policy and fostering financial stability. While we await enactment of comprehensive financial reform legislation, we have undertaken an intensive self-examination of our regulatory and supervisory performance. We are strengthening regulations and overhauling our supervisory framework to improve consolidated supervision as well as our ability to identify potential threats to the stability of the financial system. We are taking steps to strengthen the oversight and effectiveness of our supervisory activities. Thank you, and I would be pleased to respond to questions. [The prepared statement of Chairman Bernanke can be found on page 66 of the appendix.] " FOMC20060629meeting--185 183,MS. BIES.," I was just suggesting a change owing to comments from some of the folks trying to interpret us. Whenever a piece of data comes out, the market reacts, and that reaction is part of the volatility. To the extent that the data are anticipated, they are implicit in our forecast, and we don’t want to imply that every piece of news changes that. I was just trying to respond to those comments." FOMC20060629meeting--49 47,MR. SLIFMAN.," Let me start, and then Dave may want to add a few comments as well. Clearly, we did revise down the forecast. The downward revision was based in part, as I said in my briefing, not only on the incoming data but also on some of the other factors that I highlighted in exhibit 2. But I also want to emphasize that the news wasn’t uniformly bad as it came in. Some good news came in as well, which I tried to point out. What we have done is to take down the rate of growth roughly ½ percentage point beginning in the third quarter and moving to the end of the projection period, in large part, I’d say, because of the disappointing developments in the housing sector but because of other things, such as weaker consumption news, as well. I would also say that we don’t see this cumulating. We’ve weakened the forecast, but we don’t see the economy falling apart. We continue to see an economy that, as I said, was in a transition to a rate of growth that will be below potential. We just marked it down further below potential than we had in the last Greenbook. But I don’t think that there’s a disconnect between what we’ve done and the news that we have received. I do not know, Dave, if you have additional comments." FOMC20050809meeting--159 157,MR. GEITHNER.," Thank you, Mr. Chairman. Like everyone else, we think growth has strengthened since our last meeting. We’re going into the second half with more forward momentum, and this has been accompanied by a broad-based improvement in confidence about the outlook. We expect a stronger second half of ’05 than we did at the last meeting. But our forecast for next year remains essentially unchanged, with real GDP growth still a bit above potential—we think around 3½ percent—and the core PCE deflator at around 2 percent. On the August 9, 2005 62 of 110 the risks around this forecast seem broadly balanced to us, with perhaps a slightly greater probability of outcomes on the higher side. As this implies, we’re very comfortable with the basic Greenbook view, the story behind that view, and the evolution in the estimated output gap the Greenbook expects. I guess the one qualification I’d mention is that we don’t see a strong case yet for as significant a downward revision in our estimate of potential growth or actual growth in ’06. The fundamentals supporting consumption and investment growth still seem intact. Underlying productivity growth still seems fairly good. Real yields appear to have increased materially, and equity prices, credit spreads, and risk premia generally suggest a pretty favorable view of this expansion and its durability. Our various surveys of sentiment, formal and less formal, support this more positive view of the national outlook. We think the underlying inflation rate is following a slightly higher trajectory than we thought at the last meeting, and we think a lot of the forces at work in the economy that we have discussed today will continue to put some upward pressure on the inflation rate going forward. But we don’t expect a significant acceleration in inflation above this 2 percent band, and that view, of course, is consistent with the moderation in inflation expectations we’ve seen since the start of the year. However, even this relatively modest path leaves us some margin above the 1½ percent pace for the core PCE that we believe should be our objective over time. And, of course, even this forecast of 2 percent could prove to be too benign. All of this suggests that we should try to design our monetary policy signal to achieve three objectives. These will be familiar objectives. First, we should reinforce the sense that the fed funds rate needs to move higher for us to achieve our price stability objective. Second, we August 9, 2005 63 of 110 evolves. We want to ensure that expectations of policy continue to be responsive to changes in the forecast, and we want to make sure that we have the flexibility to alter the trajectory as appropriate. It’s important in this regard that we not give the market more certainty about the future path of the fed funds rate than we can reasonably expect to have ourselves. I think we also want to avoid conveying the sense that our task is simply to get to neutral, that we’re confident in our estimates of what neutral is, and that we’re unlikely to need to move beyond that point. Even if the data continue to support this very favorable forecast we all seem to share, we may find it increasingly difficult to decide how far we’ll need to move. And, finally, given the move up since June in the market’s expectation of the fed funds rate path, I think we should try to leave the expected future path of the fed funds rate largely unchanged today—or perhaps a bit firmer. But I don’t see any reason now to try to induce, or to take the risk of inducing, a major shift in current expectations. Thank you." CHRG-111hhrg56776--119 Mrs. Maloney," It is interesting. I have received a number of calls today on this proposal, many from small banks who are concerned that they would not be part of the Federal Reserve supervisory system, that they want to be a part of it. Mr. Bernanke, could you comment on the Federal Reserve's supervisory powers over your member institutions on various financial activities in which they operate? What is your role with derivatives, lending and custodial services? Why is it important that you have a supervisory or role over these particular activities and what is your role in those activities? " CHRG-109hhrg28024--94 Mr. Bernanke," Congressman, first, you're absolutely right. We do look at a wide variety of indicators, and money aggregates are among those indicators. In particular, M2 has proven to have some forecasting value in the past, and I think the slowdown this year is consistent with the removal of accommodation that's been going on. In regard to your references to M3, a still broader measure of money, we have done, and I'm now speaking about the Federal Reserve before my arrival, but we have done periodic analyses of the various data series that we collect to see how useful they are. And our research department's conclusion was that M3 was not being used by the academic community, nor were we finding it very useful ourselves in our internal deliberations. Now it's not just a question of our own cost; although, of course, we do want to be fiscally responsible on our own budget, but it's also I think important for us to recognize the burden that's placed on banks that have to report this information. And so when we can reduce that burden, we would like to do so. And that was one of the considerations in the decision that was made about M3. Would we reconsider it? If there were evidence that this was an informative series and that it was useful to the public and to the Federal Reserve in forecasting the economy, naturally we would look at it again. There's nothing dogmatic going on here. Dr. Paul. If the Congress expressed an interest in receiving this information, would you take that into consideration? " CHRG-109shrg30354--127 PREPARED STATEMENT OF BEN S. BERNANKE Chairman, Board of Governors of the Federal Reserve System July 19, 2006 Mr. Chairman and Members of the Committee, I am pleased to be here again to present the Federal Reserve's Monetary Policy Report to the Congress. Over the period since our February report, the U.S. economy has continued to expand. Real gross domestic product (GDP) is estimated to have risen at an annual rate of 5.6 percent in the first quarter of 2006. The available indicators suggest that economic growth has more recently moderated from that quite strong pace, reflecting a gradual cooling of the housing market and other factors that I will discuss. With respect to the labor market, more than 850,000 jobs were added, on net, to nonfarm payrolls over the first 6 months of the year, though these gains came at a slower pace in the second quarter than in the first. Last month, the unemployment rate stood at 4.6 percent. Inflation has been higher than we had anticipated in February, partly as a result of further sharp increases in the prices of energy and other commodities. During the first 5 months of the year, overall inflation as measured by the price index for personal consumption expenditures averaged 4.3 percent at an annual rate. Over the same period, core inflation--that is, inflation excluding food and energy prices--averaged 2.6 percent at an annual rate. To address the risk that inflation pressures might remain elevated, the Federal Open Market Committee (FOMC) continued to firm the stance of monetary policy, raising the Federal funds rate another \3/4\ percentage point, to 5\1/4\ percent, in the period since our last report. Let me now review the current economic situation and the outlook in a bit more detail, beginning with developments in the real economy and then turning to the inflation situation. I will conclude with some comments on monetary policy. The U.S. economy appears to be in a period of transition. For the past 3 years or so, economic growth in the United States has been robust. This growth has reflected both the ongoing reemployment of underutilized resources, as the economy recovered from the weakness of earlier in the decade, and the expansion of the economy's underlying productive potential, as determined by such factors as productivity trends and growth of the labor force. Although the rates of resource utilization that the economy can sustain cannot be known with any precision, it is clear that, after several years of above-trend growth, slack in resource utilization has been substantially reduced. As a consequence, a sustainable, noninflationary expansion is likely to involve a modest reduction in the growth of economic activity from the rapid pace of the past 3 years to a pace more consistent with the rate of increase in the Nation's underlying productive capacity. It bears emphasizing that, because productivity growth seems likely to remain strong, the productive capacity of our economy should expand over the next few years at a rate sufficient to support solid growth in real output. As I have noted, the anticipated moderation in economic growth now seems to be under way, although the recent erratic growth pattern complicates this assessment. That moderation appears most evident in the household sector. In particular, consumer spending, which makes up more than two-thirds of aggregate spending, grew rapidly during the first quarter but decelerated during the spring. One likely source of this deceleration was higher energy prices, which have adversely affected the purchasing power of households and weighed on consumer attitudes. Outlays for residential construction, which have been at very high levels in recent years, rose further in the first quarter. More recently, however, the market for residential real estate has been cooling, as can be seen in the slowing of new and existing home sales and housing starts. Some of the recent softening in housing starts may have resulted from the unusually favorable weather during the first quarter of the year, which pulled forward construction activity, but the slowing of the housing market appears to be more broad-based than can be explained by that factor alone. Home prices, which have climbed at double-digit rates in recent years, still appear to be rising for the Nation as a whole, though significantly less rapidly than before. These developments in the housing market are not particularly surprising, as the sustained run-up in housing prices, together with some increase in mortgage rates, has reduced affordability and thus the demand for new homes. The slowing of the housing market may restrain other forms of household spending as well. With homeowners no longer experiencing increases in the equity value of their homes at the rapid pace seen in the past few years, and with the recent declines in stock prices, increases in household net worth are likely to provide less of a boost to consumer expenditures than they have in the recent past. That said, favorable fundamentals, including relatively low unemployment and rising disposable incomes, should provide support for consumer spending. Overall, household expenditures appear likely to expand at a moderate pace, providing continued impetus to the overall economic expansion. Although growth in household spending has slowed, other sectors of the economy retain considerable momentum. Business investment in new capital goods appears to have risen briskly, on net, so far this year. In particular, investment in non-residential structures, which had been weak since 2001, seems to have picked up appreciably, providing some offset to the slower growth in residential construction. Spending on equipment and software has also been strong. With a few exceptions, business inventories appear to be well-aligned with sales, which reduces the risk that a buildup of unwanted inventories might act to reduce production in the future. Business investment seems likely to continue to grow at a solid pace, supported by growth in final sales, rising backlogs of orders for capital goods, and high rates of profitability. To be sure, businesses in certain sectors have experienced financial difficulties. In the aggregate, however, firms remain in excellent financial condition, and credit conditions for businesses are favorable. Globally, output growth appears strong. Growth of the global economy will help support U.S. economic activity by continuing to stimulate demand for our exports of goods and services. One downside of the strength of the global economy, however, is that it has led to significant increases in the demand for crude oil and other primary commodities over the past few years. Together with heightened geopolitical uncertainties and the limited ability of suppliers to expand capacity in the short run, these rising demands have resulted in sharp rises in the prices at which those goods are traded internationally, which in turn has put upward pressure on costs and prices in the United States. Overall, the U.S. economy seems poised to grow in coming quarters at a pace roughly in line with the expansion of its underlying productive capacity. Such an outlook is embodied in the projections of members of the Board of Governors and the Presidents of Federal Reserve Banks that were made around the time of the FOMC meeting late last month, based on the assumption of appropriate monetary policy. In particular, the central tendency of those forecasts is for real GDP to increase about 3\1/4\ percent to 3\1/2\ percent in 2006 and 3 percent to 3\1/4\ percent in 2007. With output expanding at a pace near that of the economy's potential, the civilian unemployment rate is expected to finish both 2006 and 2007 between 4\3/4\ percent and 5 percent, close to its recent level. I turn now to the inflation situation. As I noted, inflation has been higher than we expected at the time of our last report. Much of the upward pressure on overall inflation this year has been due to increases in the prices of energy and other commodities and, in particular, to the higher prices of products derived from crude oil. Gasoline prices have increased notably as a result of the rise in petroleum prices as well as factors specific to the market for ethanol. The pickup in inflation so far this year has also been reflected in the prices of a range of nonenergy goods and services, as strengthening demand may have given firms more ability to pass energy and other costs through to consumers. In addition, increases in residential rents, as well as in the imputed rent on owner-occupied homes, have recently contributed to higher core inflation. The recent rise in inflation is of concern to the FOMC. The achievement of price stability is one of the objectives that make up the Congress's mandate to the Federal Reserve. Moreover, in the long run, price stability is critical to achieving maximum employment and moderate long-term interest rates, the other parts of the Congressional mandate. The outlook for inflation is shaped by a number of factors, not the least of which is the course of energy prices. The spot price of oil has moved up significantly further in recent weeks. Futures quotes imply that market participants expect petroleum prices to roughly stabilize in coming quarters; such an outcome would, over time, reduce one source of upward pressure on inflation. However, expectations of a leveling out of oil prices have been consistently disappointed in recent years, and as the experience of the past week suggests, possible increases in these and other commodity prices remain a risk to the inflation outlook. Although the costs of energy and other raw materials are important, labor costs are by far the largest component of business costs. Anecdotal reports suggest that the labor market is tight in some industries and occupations and that employers are having difficulty attracting certain types of skilled workers. To date, however, moderate growth in most broad measures of nominal labor compensation and the ongoing increases in labor productivity have held down the rise in unit labor costs, reducing pressure on inflation from the cost side. Employee compensation per hour is likely to rise more quickly over the next couple of years in response to the strength of the labor market. Whether faster increases in nominal compensation create additional cost pressures for firms depends in part on the extent to which they are offset by continuing productivity gains. Profit margins are currently relatively wide, and the effect of a possible acceleration in compensation on price inflation would thus also depend on the extent to which competitive pressures force firms to reduce margins rather than pass on higher costs. The public's inflation expectations are another important determinant of inflation. The Federal Reserve must guard against the emergence of an inflationary psychology that could impart greater persistence to what would otherwise be a transitory increase in inflation. After rising earlier this year, measures of longer-term inflation expectations, based on surveys and on a comparison of yields on nominal and inflation-indexed government debt, have edged down and remain contained. These developments bear watching, however. Finally, the extent to which aggregate demand is aligned with the economy's underlying productive potential also influences inflation. As I noted earlier, FOMC participants project that the growth in economic activity should moderate to a pace close to that of the growth of potential both this year and next. Should that moderation occur as anticipated, it should help to limit inflation pressures over time. The projections of the Members of the Board of Governors and the Presidents of the Federal Reserve Banks, which are based on information available at the time of the last FOMC meeting, are for a gradual decline in inflation in coming quarters. As measured by the price index for personal consumption expenditures excluding food and energy, inflation is projected to be 2\1/4\ percent to 2\1/2\ percent this year and then to edge lower, to 2 percent to 2\1/4\ percent next year. The FOMC projections, which now anticipate slightly lower growth in real output and higher core inflation than expected in our February report, mirror the somewhat more adverse circumstances facing our economy, which have resulted from the recent steep run-up in energy costs and higher-than-expected inflation more generally. But they also reflect our assessment that, with appropriate monetary policy and in the absence of significant unforeseen developments, the economy should continue to expand at a solid and sustainable pace and core inflation should decline from its recent level over the medium term. Although our baseline forecast is for moderating inflation, the Committee judges that some inflation risks remain. In particular, the high prices of energy and other commodities, in conjunction with high levels of resource utilization that may increase the pricing power of suppliers of goods and services, have the potential to sustain inflation pressures. More generally, if the pattern of elevated readings on inflation is more protracted or more intense than is currently expected, this higher level of inflation could become embedded in the public's inflation expectations and in price-setting behavior. Persistently higher inflation would erode the performance of the real economy and would be costly to reverse. The Federal Reserve must take account of these risks in making its policy decisions. In our pursuit of maximum employment and price stability, monetary policy makers operate in an environment of uncertainty. In particular, we have imperfect knowledge about the effects of our own policy actions as well as of the many other factors that will shape economic developments during the forecast period. These uncertainties bear importantly on our policy decisions because the full influence of policy actions on the economy is felt only after a considerable period of time. The lags between policy actions and their effects imply that we must be forward-looking, basing our policy choices on the longer-term outlook for both inflation and economic growth. In formulating that outlook, we must take account of the possible future effects of previous policy actions--that is, of policy effects still ``in the pipeline.'' Finally, as I have noted, we must consider not only what appears to be the most likely outcome but also the risks to that outlook and the costs that would be incurred should any of those risks be realized. At the same time, because economic forecasting is far from a precise science, we have no choice but to regard all our forecasts as provisional and subject to revision as the facts demand. Thus, policy must be flexible and ready to adjust to changes in economic projections. In particular, as the Committee noted in the statement issued after its June meeting, the extent and timing of any additional firming that may be needed to address inflation risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by our analysis of the incoming information. Thank you. I would be happy to take questions. FinancialCrisisInquiry--192 These reckless and irresponsible actions by a handful of managers with too much power nearly destroyed our equity, real estate, consumer loan and global financial markets and cost the American people some $12 trillion in net worth. This crisis also has pushed our nation to the brink of insolvency by forcing the federal government to intervene with trillions in capital and loans and commitments to large, complex financial institutions whose balance sheets were overlevereged, lacked adequate liquidity to offset the risks that they had recklessly taken. We’re at the point where some of the world markets are even questioning if the United States dollar should be retained as the world’s reserve currency. All of this was driven by the ill-conceived logic that some institutions should be allowed to exist even if they were too big to manage, too big to regulate, too big to fail, and above the law of the United States of America. By contrast, community banks like mine, highly regulated, stuck to their knitting and had no role in the economic crisis. Even though community banks did not cause the economic crisis, we have been affected by it through a shrinking of our asset base, heavier FDIC assessments, and suffocating examination environments. The work of this commission is important if Congress is already actively advancing dramatic financial sector reforms. The ICBA wants Congress to pass meaningful financial reforms to rein in the financial behemoths and the shadow financial industry to ensure that this crisis like this never happen again to the American people. We need a financial reform that will restore reasonable balance between Wall Street and Main Street. So where are we today? While the financial meltdown and deep global recession may be over, economic growth remains too weak to quickly reverse the massive job losses and asset price damage that is resulting. After more than a year and a half of economic decline, the United States economy grew by a modest 2.2 percent in the third quarter of 2009, unemployment is still at a 26-year high and new hiring remains elusive at this modest growth level. The long, deep recession has dramatically increased the lending risk for all banks, as individuals’ and business credit risk have increased with the declining balance sheets and reduced sales in most cases. FOMC20060920meeting--144 142,MS. BIES.," Thank you, Mr. Chairman. I want to start my remarks today by reflecting on some results of the latest Duke University CFO survey. This survey is only about six or seven years old, but the one that was just concluded on September 10 has CFOs’ optimism at the lowest levels in five years, and so it’s continuing to show an erosion of their confidence. I found the CFOs’ number 1 worry—weak consumer demand—interesting because it wasn’t there before, and that uncertainty is part of what the CFOs are worrying about. Their second biggest concern is rising labor costs, which they attribute primarily to the scarcity of labor. They are anticipating that the scarcity is going to continue to drive labor costs higher. In terms of their hiring plans, they are planning now to hire fewer people than they hired last quarter. They are expecting to increase employment over the next twelve months 0.8 percent; last quarter’s survey showed 1.3 percent, so that’s quite a slowdown. However, they’re going to increase outsourced employment 4.3 percent. Thus what is showing up is the uncertainty—wanting to use an adjustable labor force to get the flexibility because of the uncertainty. They are also trimming their capital spending plans over the next twelve months to 5.1 percent, compared with 7.5 percent last quarter. Thus the survey indicates that CFOs have growing concern; they are still optimistic overall, but I think that caution is there. Now, in looking at the numbers myself, I’m perhaps not quite as pessimistic. Again, as several of you have said—and Dave commented in his remarks—except for housing, the economy really does look good. As you know, I’ve been worried about the mortgage market and housing for quite a while. In an endeavor to find something good to say, I have noticed that, in the past couple of months, the Mortgage Bankers Association index of new loan applications for purchase mortgages looks as though it’s starting to level off. Very often that could be a leading indicator, so that could be a positive sign. However, as some of you have remarked, there’s a lot of speculation in the housing markets that has to unwind. All the folks who bought housing for investment have to do something as they see housing prices slowing and the financing costs to carry their investments going up. How that unwinding will occur, given the substantial size of the speculative positions in some markets, is something that will need very close monitoring. I know that our supervisory staff is focusing on that, too. People are focusing on the fact that delinquency rates in mortgages still look good. However, we’ve seen a very rapid increase in debt service ratios since 2004. I’m concerned, again, with the amount of adjustable-rate mortgages out there that will reprice in the months ahead. If, as we think, some of these loans, particularly subprime loans, were made mainly on the collateral value of the house and not on the affordability of the mortgage, we could see more distress in the borrowers’ markets coming forward. If that’s the case, it could have spillover effects on consumer spending more broadly. On the positive side, payroll growth has been good in the past three months—128,000. It has picked up a bit, and it is significantly above the Greenbook forecast, and that gives me some optimism. It’s putting more income in people’s pockets to spend, and the unemployment rate has been stable. Hourly earnings, however, are rising faster. While that acceleration can support consumer spending, it contributes to my concern about where we’re going in the long run on inflation. As I look at the Greenbook forecasts since May, we’ve been continuing to project more and more inflation going forward. The private sector has basically been doing that in their forecasts as well. When I look at those forecasts, I’m concerned that for various reasons we have reduced our estimates of the trend rate of growth. As we bring down the trend rate of growth— and I realize that, as several have said, we’re at the lower end of the private-sector growth forecasts—I worry about the disconnect. Are we seeing a slowdown in potential that others aren’t? Or if we’re right that potential growth is lower and the private forecasters are right that real growth is going to be faster, then we could have more inflation pressures going forward. For the first time, we are also looking at prices in 2008, and they continue to rise at over 2 percent. They’ve been over 2 percent for two years. I worry, from the standpoint of our credibility, about what having such a long period above 2 percent means. So I believe we will see moderation of inflation, but I think it’s important to preserve our flexibility and be able to respond if these worst-case scenarios that I laid out become more troubling to us going forward." FOMC20050630meeting--247 245,MR. OLINER.,"7 We have received a fair amount of data since we closed the Greenbook. Just this morning, BEA reported that real consumer expenditures, shown in the top left panel, were flat in May. This was actually a bit stronger than we had expected, but there was also a small downward revision to April. For the second quarter as whole, shown in the inset box, we project that real PCE increased at a 3.1 percent rate, unchanged from the Greenbook forecast. Meanwhile, housing activity continues to be robust, with sales of new and existing homes (shown to the right) having remained at historically high levels in May. Turning to business spending, we received new data on orders and shipments of nondefense capital goods after the Greenbook closed. As shown by the red line in the middle left panel, shipments edged up in May, while orders (the black line) softened a bit. These data were nearly spot on the Greenbook estimate and point to a moderate rise in real E&S [equipment and software] spending this quarter. Looking ahead, the results of the Reserve Bank queries on capital spending plans appear broadly consistent with a solid upward track for outlays. As shown in the panel to the right, 42 percent of the respondents expect to increase their spending over the next six to 12 months, while only 12 percent plan to decrease spending, similar to the results in January. Moving to the lower left panel, the data on initial claims released this morning showed that the four-week moving average (the red line) edged down to about 325,000, a level that we estimate to be consistent with moderate growth in payroll employment. Rounding out this review of recent indicators, we received new data this morning on PCE prices. As shown in the inset box to the right, the core index rose 0.2 percent in May, a tenth below our Greenbook forecast. Also, the increase in March was revised down a tenth, although that revision was confined to the nonmarket part of the index. The latest data leave the 12-month change in the core PCE index at 1.7 percent. Your next exhibit briefly describes the key background factors for our projection. As shown in the upper left panel, we assume that the federal funds rate (the black line) will gradually rise to 3¾ percent by the end of next year, very similar to the path June 29-30, 2005 80 of 234 in the April Greenbook. Long-term Treasury rates (the red line) are expected to hold about steady through next year, following a path just a shade below that assumed in April. As shown to the right, the impetus from fiscal policy steps down this year to ¼ percent of GDP and remains at about that level in 2006; these fiscal assumptions are essentially unchanged from the April Greenbook. Among the other key background factors, we have taken on board the upward surprises during the intermeeting period for equity prices (the middle left panel) and house prices (the panel to the right), which raised the assumed path for household wealth. In contrast, the higher oil prices in this projection (the lower left panel) and the recent appreciation of the dollar (shown to the right) were negatives for our growth forecast. On balance, the revisions to these background factors had little net effect on our projection of real GDP. The next exhibit summarizes our forecast of growth and inflation. As shown by the black dashed line in the top left panel, we project that real GDP will expand roughly 3½ percent this year and again in 2006, just a bit faster in both years than the growth of potential. As you can see in the table to the right, since January we have revised down the forecast of GDP growth about ¼ percentage point in both 2005 and 2006. On our current forecast of GDP growth, we expect that the unemployment rate (the middle left panel) will hold steady at its current level of 5.1 percent through the end of the forecast period. As shown to the right, the projected path for the unemployment rate has not changed much since the January Greenbook. With regard to inflation, the lower left panel shows that we project core PCE prices to rise a bit more than 2 percent this year and a tad less than 2 percent in 2006, up from the 1½ percent increase recorded last year. The table to the right shows that the projections for this year and next are each up half a percentage point from the January Greenbook. Dave Wilcox will now continue our presentation." FOMC20050920meeting--74 72,MS. JOHNSON.," Let me take it in two halves. I’ll talk a little about global energy use, and then we’ll come to the import price part. We model energy demand, energy consumption, energy production, and the implied change in inventories on a global basis. And we do it using all of the information we can muster. But it is understood by the people in that world that there is a lack of good information. There has been an outcry for more transparency about energy production and energy capacity than now exists. Some of the volatility that President Fisher was speaking to derives from the fact that when the IEA makes an announcement of a change in their estimate of what demand was last year it will move the market. So, the quality of the information that is available for the global market is certainly far from ideal. And some of the countries involved, of course, are in rather troubled political areas where being transparent about anything is not in their interest, so they don’t provide data. So that adds to the complexity. But we have an oil model and we use a lot of judgment—the add factors that David was talking about—and we attempt to account for total oil production in essence by country. It’s not that we think any individual number in that mix is going to be right in any sense, but we try to be consistent through the story. So we start with the futures curve for WTI, and we make some judgments about the spreads on things like Dubai and other oils that loom large in the global market, and we use the model to infer what the balance of supply and demand would have to be. And given that we have relied on the futures markets—basically for want of a view that we could do better than the futures market—supply becomes the residual. So we have forecasts of global demand of GDP. And we have different weights that apply to those that are the oil-using September 20, 2005 32 of 117 Now, part of your question was how often we change those weights and how sensitive we are to the shifts in production that are taking place in the world. I can’t speak to that specifically, but in general we revise our weights every year. It’s not as if we have weights from 1970 and we just keep cranking away using those weights. We’ve gone to this variable weight approach as in the GDP and everything else. So, we specifically do at least attempt to take account of how different countries use energy versus how other things happen. We have a set of energy-using weights that we apply to world GDP, and that gives us, in essence, a different aggregate for world growth than if we were doing it for some other purpose, which we do. So we’ve got a price and we’ve got demand, and we back out supply; supply becomes the residual. For example, two years ago when prices seemed to us to be rather high, we were inferring a need for supply to pull back in order to sustain those prices. And OPEC has played that role—Saudi Arabia, in particular. Go back and read Greenbooks from two to three years ago, and we had a story about expecting supply to contract in certain places in order for futures curve prices to be realized, as oil suppliers target prices, and so forth. That has not been so true lately. Indeed, we’ve been tapping capacity increasingly over the last two years. And the notion that global supply was more than enough to explain the prices we were seeing has flipped to become a question of where we are going to get the extra supply. For a time Russia and the FSU [Former Soviet Union] were a big source of extra non-OPEC supply. That seems to have changed more recently. So, there is a supply story that tries to take these things into account that matches demand and the futures curve to give a crude oil picture. September 20, 2005 33 of 117 contradiction there, we would have to go back and say something to ourselves about our assessment of demand. We take that picture, and for the United States—particularly this time more so than most—we have to ask questions about domestic capacity to supply the residual part. Would that have to be imported? And what would be the mix of those imports? So we try to make all of that fit. That leaves us then with an oil import price which can move differently than global crude prices because of the mix factor. And the oil import price is what feeds into the domestic economy and then drives the elements of pass-through and domestic production and so forth. Now, in our forecast of import prices the oil price portion is distinct from the non-oil portion, and it is non-oil import prices that in the projection come down. Those prices have been kicked around hugely by natural gas and by non-oil primary commodities. We have now internally, but we don’t put it in the Greenbook, import prices less natural gas as a check on whether we are fully incorporating what we think is happening to natural gas. But we don’t have a comparable setup for the supply and demand balance of natural gas that we have for oil, and the natural gas that would be relevant, obviously, is for North America as an almost isolated market. There is liquefied natural gas on the margin. There are some imports on the margin. But we are thinking that we might have to do something about the quantity of natural gas because it’s a hidden uncertainty in the overall non-oil import price, and it’s uncomfortable that we haven’t been able to have a better control over that. Even so, the non-oil, non-energy primary commodities have been the big story in import prices; they caused the import prices to move up. And the fact that those futures markets are September 20, 2005 34 of 117 that import prices are decelerating yet again—and to very low levels in 2006 and into 2007. That outlook is really a combination of what we think the non-energy futures markets are telling us about commodity prices and the maintained assumption we make about the dollar. Either of those things could change, and the forecast is completely conditional on them, with the added wrinkle of this role of natural gas that is embedded in non-oil import prices, but which probably should be separated out. Now, at least in terms of the work we do, we try to do that partially but maybe we should do it more explicitly." FOMC20060629meeting--17 15,MR. SLIFMAN.,"2 Thank you, Mr. Chairman. Many of the spending indicators that we’ve received over the past few weeks have been coming in to the weak side of our expectations. As you can see by comparing the red and blue striped bars in the top left panel of exhibit 1, in the Greenbook we responded to the weaker numbers by revising down our projection for second-quarter growth of real GDP to a 2 percent annual rate, about 1¾ percentage points less than in the May Greenbook. We interpreted some of the unexpected softness as reflecting weaker underlying demand, and we let that part feed through beyond the current quarter as well. But as I’ll discuss shortly, the softness of the spending data wasn’t the only factor leading us to temper our forecast for the out quarters. A key component of the downward revision to the current quarter has been a slower-than-anticipated pace of consumer spending—the panel to the right. Based largely on the available data for retail sales, motor vehicles, and the CPI, we estimate that real PCE in the second quarter rose at an annual rate of only 2.2 percent. The slowing reflects a step-down in purchases of light motor vehicles as well as essentially flat real outlays for goods other than motor vehicles in the first two months of the quarter. The other big surprise in the recent data is the sharper-than-expected drop-off in housing activity, as illustrated in the middle left panel. Despite the May uptick in 2 The materials used by Messrs. Slifman, Wilcox, and Kamin are appended to this transcript (appendix 2). housing starts, the levels of both starts and permits are well below where we thought they would be at the time of the last Greenbook. In contrast to the household sector, the business sector indicators generally have been favorable. For example, orders and shipments for nondefense capital goods, plotted to the right, continue to point to strengthening demand. In addition, business spending for new structures, not shown, appears to have posted another sizable gain this quarter. The scant data available for June do not suggest that the slowdown in spending earlier in the quarter has been cumulating. As shown in the bottom left, initial claims for unemployment insurance, after retracing the rise that was associated with the effects of the temporary government shutdown in Puerto Rico, have remained in a range consistent with further moderate employment increases. Meanwhile, as shown to the right, the Empire State and Philadelphia business surveys, which were less favorable in April and May, were considerably more positive this month. Thus, while many of the indicators of activity have lately been to the downside of our expectations, the news has not been entirely negative. All told, we still see economic growth as being in a transition—to a pace somewhat below that of potential. This can be seen in exhibit 2, which presents the longer-run outlook. We now think that real GDP, as shown by the striped blue bars in the top left panel, will increase at a 2¾ percent rate in the second half of this year and through 2007. As I mentioned earlier, several developments besides the incoming spending indicators influenced our thinking about the economic outlook. First, revised data from the BEA now put the 2005:Q4 change in wage and salary disbursements, plotted by the black line in the top right panel, considerably below the figure published at the time of the last Greenbook, the red dashed line. The reduction in labor income suggests less consumption going forward. Regarding our assumption for monetary policy, the funds rate is assumed to be increased to 5¼ percent at this meeting and to remain there through the end of 2007. As shown in the middle right panel, the Wilshire 5000 stock market index is about 7 percent below the level we had assumed in the May Greenbook. We assume that equity prices will rise at a 6½ percent annual rate going forward—a pace that roughly maintains risk-adjusted parity with the returns on Treasury securities. The latest reading on house prices from the OFHEO index, illustrated in the bottom left panel, was in line with our expectations. We continue to expect an appreciable deceleration in house prices over the projection period. Finally, after several Greenbooks in which we revised up our forecast of crude oil prices, this round we revised down our forecast. When we prepared the Greenbook, the spot price of WTI was just under $70 per barrel, about $5 less than at the time of the May Greenbook. And with futures prices also lower, we reduced the path of crude oil prices throughout the projection period. Exhibit 3 presents some details of the outlook for business fixed investment. As illustrated in the top left panel, total real outlays for equipment and software, excluding the volatile transportation equipment component, are projected to increase 7½ percent over the four quarters of 2006 and to grow nearly as fast in 2007. You can see from the red portion that the bulk of the support comes from spending for high-tech equipment. Much of the recent strength in the high-tech sector has reflected a spurt in capital spending for communications equipment by telecom service providers, whereas demand for servers and PCs, the top right panel, has faltered. However, our forecast calls for real outlays for computing equipment to pick up later this year and to be sustained in 2007. Industry analysts cite several upcoming technological developments that should boost demand for new servers and PCs. These are summarized in the middle left panel. With regard to servers, several manufacturers plan to offer new generations of servers this autumn that offer significantly faster computing power and, just as important, lower electricity consumption. In addition to ongoing demand for large-scale servers from financial services companies, demand for clusters of small-scale servers—so-called server farms—by Internet content providers, for example, also appears to be robust. With regard to PCs, Intel will be introducing a fundamentally new chip design in the second half of this year that reportedly will increase performance and significantly reduce power consumption. With the new generation of chips on the horizon, prices on old chips have been plummeting. We project that demand for PCs should step up later this year, spurred by the combination of the new generation of chips for high-end users and falling prices on old chips for middle- and low-end users. The table to the right presents our forecast for real spending on nonresidential structures. As shown in line 2, outlays for drilling and mining have been growing briskly. Reflecting the sharp increases in prices of oil and natural gas over the past few years, the number of drilling rigs in operation, the bottom left panel, has been climbing steadily, with much of the increase for the natural gas component. We see the growth of activity slowing somewhat next year as the prices of natural gas and crude oil begin to flatten. Outside drilling and mining, investment in new buildings has strengthened recently, as vacancy rates (illustrated for office buildings by the black line in the bottom right panel) have been trending down and rents received by building owners (the red line) have been climbing. That said, we think the current rate of investment growth is unsustainable, given our projection of decelerating employment and business sales, and consequently the growth rate of construction spending slows in our forecast. Turning now to the household sector, the subject of exhibit 4, we expect real PCE, the red bars in the top left panel, to increase at a rate of about 3 percent in the second half of this year and to stay close to that pace in 2007. The forecast reflects two important crosscurrents. On the one hand, real income growth, the blue bars, is projected to be robust reflecting, in part, a waning drag from higher energy prices. On the other hand, the wealth-to-income ratio, plotted by the black line in the top right panel, falls in our forecast as house prices decelerate. With slower gains in wealth and rising interest rates, we expect that spending will be restrained relative to income and, accordingly, the saving rate will rise. The remainder of the exhibit examines the housing market. Looking through the monthly volatility, you can see that sales of new homes and existing homes, the middle left panel, are well off their peaks, whereas backlogs of unsold homes, the panel to the right, have increased significantly. In putting together the forecast, we factored in the recent data on starts, sales, and inventories, which led us to mark down the profile of activity throughout the forecast period. All told, as shown in the bottom left panel, we expect that real residential investment spending will drop 5¼ percent this year and fall another 1¾ percent next year. Widespread anecdotal reports suggest that the drop in demand is being driven partly by a withdrawal from the market by investors and purchasers of second homes. Data on mortgage originations by investors and those purchasing second homes, which begin on a monthly basis in mid-2003 and are available only through March, are plotted to the right. The first thing to note is that these groups are a relatively small part of the overall market. Moreover, although the data are quite noisy, neither group, at least through March, was leaving the housing market in droves. Nevertheless, the recent spate of reports and a jump in the rate of contract cancellations for new homes, which homebuilders attribute largely to a retreat by investors, pose a downside risk to the housing outlook. Another risk to the forecast is the possibility of a pronounced deterioration in the financial conditions of some vulnerable households, which could cause them to retrench significantly on spending. As shown in exhibit 5 in the top left panel, the financial obligations ratio for homeowners has risen sharply over the past year or so. It reached a record high in the second half of last year, and we estimate that it rose further in the first quarter of this year. (As an aside, the rate for renters has actually been falling since mid-2001, though that could be changing.) Some analysts have expressed concern about the high level of the financial obligations ratio—especially in light of the potential for further increases in obligations related to variable-payment mortgages, which represent more than one-fifth of all outstanding first-lien mortgages. Nowadays, variable-payment mortgages typically carry a fixed interest rate for a few years before converting to floating-rate, and most aren’t scheduled for a payment change for some time. The top right table presents some evidence. As you can see in the last column, the bulk of variable-rate mortgages—both ARMs and interest-only—that have yet to reprice won’t begin to reprice until after 2007. Moreover, the end of the interest-only term for nearly all I-O mortgages that are awaiting the end of the I-O term is well in the future—line 3 of the table. Given these patterns, scheduled mortgage payment changes should have only a limited effect on the aggregate mortgage burden—adding just a few tenths to the homeowners’ financial obligations ratio this year and next. As a result, we have not seen—and don’t expect—a broad deterioration in mortgage credit quality. For example, as shown in the middle left panel, delinquency rates for prime borrowers, who account for 85 percent of the mortgage market, have been relatively flat for some time—as illustrated by the black line. That said, there are some indications of stress among subprime borrowers. This group presumably is at greater potential risk for financial stress generally: Note the higher levels of their delinquency rates, the red line, compared with the prime market. In particular, we are seeing a deterioration among subprime borrowers with variable-rate mortgages—the red line in the panel to the right. This type of loan is far more prevalent in the subprime market, representing about two-thirds of all subprime mortgages. The fixed-rate period for subprime variable-rate loans is considerably shorter than that for prime loans—typically one or two years versus five to seven years—so more subprime borrowers with variable-rate mortgages are likely to see their monthly payments rise over the projection period. And the increases for those subprime borrowers experiencing resets could be striking: We estimate increases of something like 25 to 30 percent of their original payment. More generally, households that are likely to be more financially vulnerable appear to have become decidedly more pessimistic. The bottom left panel plots the Michigan consumer sentiment index stratified by income. Consumer sentiment for both upper- and lower-income groups plunged last autumn. Currently, both groups appear more concerned than they had been before mid-2005, but the lower third appears especially nervous. Our baseline projection for the household sector incorporates these developments. Nevertheless, the greater stress evident among the most financially vulnerable segment of the household sector presents a downside risk to the forecast. David will now continue our presentation." FOMC20070628meeting--249 247,MR. MISHKIN.," Yes, I do have a question—just a clarification. One thing that we talked about early on when you gave us information was that there is the information regarding our views about whether risk was greater or less than usual and about the skewness of the risk. You might also want to include in the documents that would go out information to guide people on what is normal so that you would have the things that we actually sent out, which was either a picture or the table showing the forecast errors. Is it your view that part of it would be not only the charts that we actually responded to but also the background information?" FOMC20070321meeting--214 212,VICE CHAIRMAN GEITHNER.," It is what we think. The problem with it is that, as Don said, the reference to gains in income itself is empty, and putting so much emphasis on housing as part of our forecast for growth being basically fine going forward is a little awkward. My view is the corner solutions are more attractive than the intermediate, and they are either some modified version of what we have now or a return to minimalism with a stop after “quarters.”" CHRG-111shrg62643--117 Mr. Bernanke," Just to be clear, the Federal Reserve's forecast is for moderate recovery. But if, for whatever reason, there were a significant slowdown, then presumably Treasury yields would fall further. Senator Tester. OK. So, I mean, so Treasury doesn't--and I am happy to hear you say yes to this question--Treasury doesn't see another dip due to commercial markets? " FOMC20050630meeting--329 327,MR. OLINER.," Earlier this year, we were really concerned that the market was underpricing risk. If you look at the panel you referred to at the middle left of exhibit 8, when the gap narrowed June 29-30, 2005 105 of 234 defaults are going to rise somewhat. You can see our forecast in the black line in the middle left panel of exhibit 8. That’s our estimate of the compensation for both defaults and losses due to less- than-full recoveries that would be needed in the current environment. We have that drifting up some; we don’t have it rising dramatically. In our view what is different now from, say, the late ’90s is that a tremendous amount of balance sheet restructuring has occurred. That has left even high-yield issuers, on net, in a better position with regard to their interest service capabilities and their cash on hand than they were in that earlier period. We see them starting from a very healthy position after a tremendous amount of restructuring and turmoil in that sector. We think it’s downhill from here, but not steeply downhill in our judgment. So, we’re taking a middle-of-the­ road view in expecting things to worsen but not dramatically over the forecast period." CHRG-111shrg52619--143 Mr. Tarullo," That is one role. The second role, which you also identified, practices that are pervasive in an industry, no matter what the size of the entity, which rise to the level of posing true systemic risk--probably unusual, but certainly possible. " FOMC20081029meeting--187 185,MR. STOCKTON.," What we wanted to convey in the alternative scenarios that we showed this time--and we reduced the number because we thought the possible little risks that you might be facing were being swamped by some really big ones--was our sense that the likelihood function is pretty flat around the baseline and the two alternative scenarios that we show here in exhibit 5. I share your discomfort. As I was telling President Evans at lunch today, I feel a bit as though the forecast is going to depend a lot on when the clock stopped, given how much volatility there has been in the stock market and in corporate spreads. When the clock stopped, we had close to a 25 percent weaker level on the stock market, 200 basis points higher on the Baa spread, and a 7 percent higher dollar. There were a whole lot of negative forces operating on this forecast. Indeed, both the conventional wealth effect and cost-of-capital channels account for about one-third of the downward revision we made. The special nonconventional credit channel effects account for a third, and a third of the downward revision really is a combination of the stronger dollar and the weaker foreign outlook. The part that I feel most comfortable with in this forecast is that there has been a very significant negative shock to the economy and that it is difficult to imagine that activity will not be affected importantly by that. The part that I feel most uncertain about--and, as you point out, is relevant to the policy decisions that you are going to make over the next several meetings--is that I have no idea about the timing or the manner in which this will fade away. So we have it fading away gradually over the next two years. I think that a more rapid recovery is certainly a possibility. As you noted, even that scenario doesn't go back to where we were in September. One, the incoming data suggest that the underlying economy is starting out at a weaker place, and even if conditions were to improve very rapidly over the next quarter or two, you have still sustained a hit that is going to take some time to play out through the system. By the same token, I don't think that you can discount the more extended and deeper financial fallout here. We have certainly been surprised over the past year in many ways by just how virulent and persistent this shock has been. Two, looking at the current state of aggregate demand and aggregate activity, I think we are probably still just at the front edge of the credit constraint effects on actual spending. So you could still be faced with some very substantial restraint on spending--and more than we have built into the baseline forecast. So, and as you noted, the difference in the policy prescriptions there--the worse scenario is that the funds rate stays as low as it can stay for several years. The other would be--putting too fine a point on it--that optimal control, even with the more rapid recovery, goes down to 1 percent on the funds rate and then starts recovering to 1� percent. But that is obviously a very different policy picture. I just don't think that, at this point, science is going to allow us to put a lot of probability mass on one of those scenarios versus the other two. " CHRG-110shrg50409--55 Mr. Bernanke," Well, a part of what has been happening--and this goes back to Senator Menendez's question about the role of the subprime crisis and so on--is that there was, if you will, a credit boom or a credit bubble where there was an overextension of credit in a lot of areas. There has been a big reversal of attitudes. Banks and other financial institutions are scaling back on their credit risk. They are deleveraging. They are raising capital. And that adjustment process is part of what is happening now that is creating the drag on economic growth. So it is harder to get a mortgage, it is harder to get a business loan. And until we come to a more stable situation where banks are comfortable with their credit standards and their balance sheets, the leveraging process is going to continue and is part of what we are seeing here. Senator Tester. And very quickly, because my time is over, do you--I mean, we have heard figures of 150 banks potentially going down because, I assume, of this adjustment that you just talked about. Do you guys have any projections on what kind of impact banking institutions going down, how many there potentially could be in the next year or do you not want to comment on that? " FOMC20050503meeting--150 148,MS. YELLEN.," Thank you, Mr. Chairman. I support, of course, your proposal to raise the federal funds rate 25 basis points, and I think the strategy that you suggest with respect to the May 3, 2005 94 of 116 minimal changes in the statement, as alternative B does. I think market expectations are essentially entirely sensible, and it does not make sense today to do a great deal to perturb those expectations. I think the policy path we’re on, as Don put it, likely has a positive slope. I’m comfortable with the term “measured pace” because I think it continues to indicate that whether we call policy accommodative or somewhat accommodative, the likely direction of the federal funds rate is up, and I think we ought to be communicating that. I believe that we retain considerable flexibility to pause or to be more aggressive. We see that, as you pointed out, Mr. Chairman, in the futures path as the market responds to the news. So, I think we do have flexibility. But I agree with Governor Ferguson that we need an exit strategy from this exit strategy, and my proposal is to get rid of the balance-of-risk statement. Maybe today is not the right day to do it, but as part of our ultimate exit strategy, which we may well need at the next meeting, I would love to see that go. I feel that we do need to communicate something about the future, but in my view crafting a simple English sentence or two to describe the consensus on the Committee is the way to do it. To me the balance-of-risk statement was an attempt to give hints about the future path of policy without saying anything about the funds rate directly but instead about the determinants of policy. And I just don’t think that’s possible. I read President Poole’s memo and I understand the desirability of having standard language, but we have a Committee that hasn’t obtained a consensus on the determinants of policy. We don’t have a common definition of maximum employment or price stability. We don’t have a common view on the importance of forecasts or an agreement on relative values of gaps versus growth rates in making those forecasts. Without that kind of consensus, we just can’t come up with a formulaic assessment about the balance of risks. It might work for a couple of meetings, but then we’re going May 3, 2005 95 of 116 So, going forward, it may be that the time to change this language is when we do pause and no longer feel certain what the direction of policy is. Maybe at that time a simple statement that says something like this will be the sensible way to go: “Under current conditions, policy seems well positioned to achieve our dual goals and we will respond, as needed, to fulfill our obligations to foster price stability and sustainable economic growth.”" FOMC20060131meeting--104 102,MR. POOLE.," Thank you, Mr. Chairman. What strikes me from my conversations with my contacts is the growing confidence that they do not see major risks on either side, that there are reduced standard errors around their projections. Very few had comments or concerns about inflation outside of energy, which, of course, is on everybody’s mind. I’d like to make an analytical point that actually comes from my UPS contact. I think I mentioned at an earlier meeting that UPS is moving its business off the mixed rail—the piggyback. That move is a consequence of the fact that the railroads are unable to speed up delivery times, which in turn is a consequence of the railroads’ decision that it is not worth the capital investment that would be necessary for what for railroads is a relatively low-yielding business. UPS is also working to maximize the return on its own capital. The company is very disciplined about adding capital and is planning to price low-yielding business out of its network. That is, for the low-yield products, they’re going to raise prices expecting that the business will go away. My contact at UPS said that he thought that the strategy would not really be successful and that they will probably be looking at substantial increases in capital spending in ’07, once they find that they have optimized their existing plant, that the volume doesn’t go away when they try to raise the prices on it, or that not enough of it goes away. And I think that this phenomenon might be more general in our economy. Companies are very disciplined about their capital investment. But as the economy continues to expand, they’re going to run out of ways to optimize the existing capital plant, and we will see investment coming in stronger over the next couple of years. That’s an observation that may have more general application. I support the Greenbook’s forecast, plus or minus a quarter of a standard deviation. [Laughter] Not worth worrying about. Instead, what I’ve been trying to do is to make lists—and these could be much longer—of risks on the high side and the low side. On the high side, I would point to commodity prices, which are high and have gone up a lot, and growing strength—as I just commented—in business fixed investment. I mention high money growth, because I don’t think that the rapid money growth is fully explained, and it certainly has frequently been a precursor of higher inflation. Some indicators on the other side—we talked about housing, the possible reversal of the unusually low saving rate, the behavior of the yield curve, the risk of oil supply disturbances. Most of oil has been demand-driven, but supply disturbances because of the problems in the Middle East primarily—Africa as well—could certainly produce a significant downward shock on economic activity and upward shock on prices. No doubt these lists could be amplified, and I think it’s probably worth spending more time thinking through the risks and how to respond to various events than it is trying to optimize the forecast and get that last quarter of standard deviation exactly right. Mr. Chairman, many around the table have commented about their experience serving here. I will, of course, echo those. I would like to put a little different angle on it. Of the people who have had a major impact in my life, you are certainly one. I mark on the fingers of one hand the people who have had extraordinary influence on me. You have influenced me mostly in my professional life but also in many aspects of leadership that go beyond economics and policy in a narrower sense. So I thank you for that. I am also looking forward to continuing to learn from you. I understand that you have some books, at least in your head. And given my interest in making sure we have clear communication, I have a suggestion for a title for your first book. And it is in line with some books by your predecessors. So I suggest “The Joy of Central Banking.” [Laughter] And I suggest that your second book be “More Joy of Central Banking.” [Laughter]" CHRG-110shrg50410--127 Chairman Dodd," I understand that. In other words, if I am understanding you correctly, obviously the consultative role as I understand it--we all understand the word consultative role. But I also, I think I hear you saying you do not want veto power over OFHEO? " FOMC20070321meeting--59 57,MR. STOCKTON.," That’s possible. We have not taken that view. Overall housing construction had some unexplained strength over the past year, not from a bottom-up demographic addition but just in terms of what we would have expected given the growth in employment, income, and wealth. Admittedly, the evidence is still very tentative, but we think we see some signs of demand stabilizing around current levels so that, in our starts forecast, we’ll be able to drive the months’ supply of homes back down relative to the low level that it had actually been running from the mid-1990s to the middle of the housing boom. So I don’t think we’re seeing an excess supply of homes that people just won’t want at current prices, or roughly current prices, but that is a considerable risk. Adding up household formations and demolitions—there’s a lot of uncertainty about that, and there’s a lot of cyclical sensitivity as well to the overall household formation rates. So whether the housing stock outran the long-run determinants is kind of hard to nail down. We see that as a risk, but it’s not incorporated in this forecast. If that were the case, there could be a bigger drag on housing activity than we’re anticipating." FOMC20071211meeting--73 71,MR. EVANS.," As I was looking at the alternative simulations and the credit crunch scenario and trying to make sense of what financial markets are thinking about in terms of the expected fed funds rate path, it seems as though you need that credit crunch scenario to get to that type of path, and that’s not where you are. Then there are also other scenarios that are slightly stronger, which I think are in line with more Blue Chip types of forecasts, too. So there really is a disconnect in a lot of this." FOMC20050202meeting--100 98,MS. MINEHAN.," I was a little surprised at the forecast of no decline in the value of the dollar. Your alternative simulation seems as though it’s relatively close to what we’ve experienced since 2002. You had mentioned that the dollar is down 27 percent since the peak in 2002. That’s roughly three years, and that’s not terribly different from 10 percent at an annual pace, which is what I understood you to say in talking about the simulation. Maybe I understood you wrong." FOMC20050322meeting--37 35,MR. STOCKTON.," Thank you, Mr. Chairman. By virtually all measures, the economy has been humming along at a very solid pace in recent months. We are estimating that real GDP expanded at a 4¼ percent annual rate in the fourth quarter of last year and is likely to grow at about that pace in the first quarter of this year. March 22, 2005 9 of 116 Although the pace of the expansion in real activity is much the same as that of a year ago, the character of the expansion now feels different. While I can easily imagine looking back on these words with regret [laughter], the persistent and widespread improvements that we are now witnessing certainly leave the impression that the expansion is more firmly established and less fragile with respect to adverse shocks than it was in early 2004. As you know from reading the Greenbook, we think that the recent greater momentum in real GDP will carry forward for a while. That greater momentum in activity and heightened upward pressures on inflation led us to raise the assumed path of the federal funds rate by 50 basis points beyond the very near term. As in past forecasts, tighter monetary policy, diminished impetus from rising equity values and house prices, and fading fiscal stimulus are expected to gradually put a brake on the pace of activity. In our projection, the economy reaches the end of next year with the funds rate in the neighborhood of neutral, output close to potential, and core inflation running around 1½ percent. Were it to occur, such an outcome would be very pleasant indeed. Of course, we know that our point forecast, like any point forecast, will occur with probability zero. So what should we worrying about? While my colleagues who attend our lengthy forecast meetings were not exactly thrilled by it, the removal of my arm from its sling in the past few weeks has allowed me, once again, to bring my principal value added to the forecasting process, and that is copious amounts of hand- wringing. [Laughter] In the remainder of my remarks, I=d like to focus on three difficult questions with which we had to wrestle in assembling this forecast: First, what should we make of the recent strength in capital spending and what are its implications for the outlook? Second, how should we balance some powerful crosscurrents at work on the supply side of the economy? And third, what is happening with inflation? I=ll take them each in turn, although there are some common threads that tie them together. March 22, 2005 10 of 116 So, little remains of our elegant story. Our calibrated vintage capital models failed us, and clearly finger-crossing has not proven a terribly robust forecasting technique. We even tried an approach gently suggested to us by Governor Olson at the time of our last forecast—you know, had we thought about trying common sense? [Laughter] We tried, but even that didn=t seem to work. In a conversation with our colleagues at Treasury that they asked remain confidential, they indicated having been surprised that an appreciable number of firms with taxable income have simply not taken advantage of partial expensing. Moreover, some firms have taken it for purchases of longer-lived assets, but not for shorter-lived assets. This pattern of behavior might suggest that administrative complexity may have loomed larger as a discouraging factor than we or others imagined. But the facts are likely to remain obscure for a long time, while the IRS tabulates the corporate income tax forms for recent years. For now, we=re raising the white flag of surrender and chalking it up as a defeat for models, luck, and logic. I wouldn=t drag you through this discussion if it were just a sideshow in the forecast. But the changes that we made here were of policy significance. We revised up the growth in real equipment spending by 10 percentage points in the current quarter, from a decline of 5 percent at an annual rate to an increase of 5 percent. Moreover, we had previously interpreted some of last year=s strength in capital spending as resulting from firms pulling forward outlays to take advantage of the tax break. If that was not the case, then underlying demand was likely stronger than we had previously recognized. As a consequence, we are projecting some of that additional strength to carry over into the first half of this year. After accounting for follow-on multiplier–accelerator effects, the revisions to our forecast of equipment spending boosted growth of real GDP by nearly 2 percentage point this year and by ¼ percentage point next year. These adjustments more than offset the downward revisions to our projection that were necessitated by the higher expected path of oil prices, which we estimate will trim about ¼ percentage point off the growth in real GDP in each of the next two years. The faster pace of capital spending incorporated in this projection also had implications for aggregate supply through its contribution to capital deepening. But that was just one of a number of changes we made on the supply side of our projection. As I noted earlier, we have had to contend with two strong crosscurrents in this aspect of our forecast: faster-than-expected growth of labor productivity, on the one hand, and slower-than-expected growth of the labor force, on the other. March 22, 2005 11 of 116 As you know, the surprising strength of productivity over the past few years has required us to take a stand on how much of the recent gains has reflected structural improvements that will persist going forward and how much has reflected the cautious hiring stance of businesses and their ability, at least for a time, to elicit greater effort from their workforces. In other words, we have had to parse these innovations into trend and cycle components. With positive surprises to productivity continuing, the story about caution-induced effort seemed to us to have diminishing plausibility. Both our models and our best judgment suggested raising our estimates of the structural component of productivity in recent years and correspondingly lowering the cyclical component. In addition to raising the level of structural productivity through the end of last year, we also nudged up our estimate of the growth of structural productivity going forward by about ¼ percentage point per year to about 3 percent per annum. About half of that upward revision reflected the larger contribution from capital deepening that followed from our stronger investment forecast. The other half reflects stronger projected growth of multifactor productivity. Businesses have been making substantial gains in technological and organizational efficiencies in recent years, and we anticipate more of that to continue over the next couple of years than was assumed in our January projection. While the revisions that we have made to structural productivity, all else equal, would have resulted in a noticeable upward revision to the projected growth of potential output, all else was not equal. Just as we have been surprised to the upside by productivity, we have been consistently surprised to the downside over the past year or so by the weakness in labor force participation. We had been expecting that, as the labor market began to give clearer signs of sustained improvement, more workers would be drawn back into the labor force. We still think that is likely to happen. March 22, 2005 12 of 116 On net, the upward revisions to productivity slightly exceeded the downward revisions to potential labor input, and we revised up the growth of potential output by 0.1 percentage point this year and next. These upward revisions were smaller than those we made to actual GDP, and, as a consequence, the GDP gap is a touch smaller in coming quarters than was the case in our January projection. A slightly tighter economy has added to a growing list of worries that would make any compulsive hand-wringer proud. That list would also contain higher oil prices, larger increases in non-oil import prices, a steep rise in commodity prices, a reemergence of price pressures from intermediate materials, some deterioration in near-term inflation expectations, and a disappointingly large increase in core PCE [personal consumption expenditures] prices in January. To our relief, this morning=s PPI for February did not add to this list. The increase in core finished goods—at 0.1 percent—and the increase in core intermediate materials—at 0.5 percent—were right in line with the Greenbook projection. But taken together, price developments over the intermeeting period have been troubling. The effects of higher oil prices are already being felt at the pump, and headline inflation measures will be up noticeably in February and March. Moreover, higher energy and materials prices are adding to business costs, and higher prices for imports are lessening competitive pressures on the pricing decisions of domestic producers. In response to these developments, we have raised the projected increase in core PCE prices to 1¾ percent in 2005 and 1½ percent in 2006—about ¼ percentage point higher than our previous projection in both years. Still, the basic contours of the inflation forecast remain the same. Such a modest revision might lead some to wonder if the staff should be doing a little more hand-wringing if we wish to avoid an eventual neck-wringing! But at this point, we believe that only a modest revision is warranted. As you know, for the prices of oil and other commodities, we take our cues from futures markets. And, as they have for much of the past year, those markets are suggesting that a flattening out of prices is just around the corner and that declines will occur by next year. Futures markets have not proven to be terribly reliable guides to prices over the past year, but we simply aren=t confident that we can outguess the markets in these areas. March 22, 2005 13 of 116 Moreover, the labor cost picture remains quite subdued. Growth in hourly labor compensation has basically moved sideways in recent quarters. Our projection incorporates some acceleration in wage inflation in response to higher price inflation this year and a gradual tightening of the labor market. But the faster projected growth of actual and structural labor productivity holds down the overall increase in unit labor costs. Indeed, the combination of slightly higher price inflation and lower unit labor costs resulted in an upward revision to the price markup in this projection, which already was above historical norms. In effect, greater pricing power is implicit in this forecast. As I see it, the most disquieting development on the inflation front has not been the run-up in energy and commodity prices, but has been the apparent rise in inflation compensation over the next three years—at least as best as we can judge by readings from the inflation swaps market. Should a deterioration in inflation expectations eventually come to be reflected in wage- and price-setting decisions, you would be facing a more substantial, persistent, and ultimately costly acceleration of labor costs and prices. As we showed in an alternative simulation in the Greenbook, those difficulties are amplified if monetary policy is slow to respond to heightened inflation expectations, and real interest rates are inadvertently eased. On the other hand, the most comforting development on the inflation front has been the continued exceptional performance of productivity. Although we have revised up our forecast for actual and structural productivity, we are still betting on a substantial slowdown of structural multifactor productivity. As we showed in another simulation, if that doesn’t occur, cost pressures could be considerably less than we are currently anticipating and inflation could drop to the low end of your comfort zone. Karen will continue our presentation. March 22, 2005 14 of 116 No one factor explains the run-up in prices since late January, but a major reason seems to be stronger demand in global markets—currently and prospectively, in the eyes of market participants. This stronger demand is arising from a global economy in which continued expansion at a reasonably robust pace seems likely, albeit with some variation across regions. Also, there are currently some supply risks in the usual trouble spots among oil-producing countries. But over the longer run, the issue seems to be how projected increases in demand will be met by increased supply. Of the 2.7 million barrels per day that global consumption increased during 2004, 30 percent, or 850,000 barrels per day, was accounted for by increased consumption in China. China is now the second-largest oil consumer on the globe; the United States is first. The staff continues to rely on futures markets for our projection of the spot WTI price. After the first couple of months, the futures curve slopes down and is the basis of our forecast that, by the end of 2006, that price will be somewhat below today=s price. However, we also need to forecast the U.S. oil import price, and for us the challenge is to project the spread going forward between WTI and the import price. That spread was quite variable last year, and in January of this year it jumped up again, to over $9 per barrel. We currently expect that the spread will narrow, on balance, over the forecast period, with the result that the U.S. price for imported oil will decline only slightly from current levels—noticeably less than the decrease embedded in the futures curve for WTI—by the end of next year. However, we could be surprised, and the behavior of that spread is one of the risks to the forecast. The general increase in global oil prices has been cited by many as a reason for rising inflation expectations and the move up in long-term interest rates across the major industrial countries during the intermeeting period. Ten-year sovereign rates in the major foreign industrial countries generally rose about 20 basis points since your last meeting, somewhat less than the increase in the U.S. rate. The smaller rebound in rates abroad is consistent with the perception that recent economic indicators suggest a more vigorous pace of expansion in the U.S. economy than in the other industrial economies. And foreign rates declined more sharply than did U.S. rates from the end of last June, when you began your current tightening cycle, to the turning point for rates in early February. However, it may be that the stronger price performance of bonds denominated in the major foreign currencies reflects some shift in portfolio preferences away from dollar assets toward those denominated in the other major currencies. Such an interpretation is consistent with the 1 percent net nominal depreciation of the foreign exchange value of the dollar in terms of the other major currencies over the intermeeting period and the fact that stock market indexes in the foreign industrial countries generally outperformed U.S. indexes over the same interval. March 22, 2005 15 of 116 widened nearly $90 billion from the third-quarter figure, with about $60 billion of that change accounted for by the increase in the trade deficit. Of that $60 billion, more than half represents the deterioration in the oil import bill. Relative to the figures we put in the Greenbook, net investment income surprised us in the positive direction. That surprise was entirely in net direct investment receipts, as net portfolio income came in about as expected, around $25 billion weaker than in the third quarter. Direct investment receipts were particularly strong, with the increase more than offsetting a small positive surprise in direct investment payments. The fourth- quarter increment in the current account deficit was financed by somewhat larger foreign official financial inflows and substantially larger foreign private net purchases of U.S. securities, particularly of agency bonds and corporate stocks. The rise in foreign inflows was sufficient to finance a small rise in U.S. net private acquisitions of foreign securities and an unusual but sizable increase from the third quarter of U.S. direct investment abroad. Looking forward, we expect the trade deficit to widen further both this year and next. With little change projected in the U.S. oil import price, the oil import bill should increase only slightly, and most of the deterioration in the trade balance is expected to occur within the core goods categories—that is, goods less oil, computers, and semiconductors. Accordingly, in real terms we are looking for net exports to make a small negative contribution to GDP growth in each of the two years. We expect the widening of the nominal trade deficit to be nearly matched by further reduction in the net investment income balance, as the negative change to net portfolio income substantially outweighs projected gains in net direct investment income. Accordingly, the current account deficit should widen to exceed $850 billion, or 6½ percent of GDP, by the end of next year. We also received February prices of internationally traded goods late last week. Prices for non-oil core imports increased a bit more than we were expecting. February price rises were concentrated in foods, feeds, and beverages and in non-oil industrial supplies; but for January and February combined, all categories of non-oil, core goods other than autos registered significant upward moves. These developments leave us with a projection for inflation of the core import price deflator in the first quarter of nearly 5 percent at an annual rate, higher than the January Greenbook figure and higher than our equations by themselves would suggest. We do not yet have sufficient evidence to conclude that the decline observed in past exchange rate pass-through is being reversed. With the effects of dollar depreciation in the second half of last year and the recent run-up in commodity prices likely to be felt through the end of this year, we expect core import price inflation to be about 2 percent at an annual rate during the rest of this year before slowing noticeably next year, consistent with our outlook for flat commodity prices and only modest further dollar depreciation. March 22, 2005 16 of 116" CHRG-111hhrg54867--181 Mr. Manzullo," A lot of people believe that if the Fed had done its role, statutory role, which is to govern instruments and underwriting standards with regard to those mortgages, that we wouldn't have had this meltdown. In other words, the basic product that gave rise to the derivatives and the CDOs would have been sound. " CHRG-110hhrg46596--515 Mr. Cleaver," When we designed the Emergency Economic Stabilization Act, we expanded the scope of the definition for financial institutions, and it was my interpretation of that expansion that we went beyond traditional banks, beyond credit unions. And I believed at the time that the bill had been drafted to include the automobile financing arms. In my district, I have two automobile manufacturing plants. It makes no difference if they have capital to continue to operate if no one is buying the cars. I know in your role, and I am thankful, as I hope all Americans are, for your service and your willingness to serve in this capacity at a time like this, but I am somewhat disappointed, and hopefully as you look at this through the Oversight Committee that you would seek to determine whether or not, in providing oversight, that attention is being given to what I think is rather explicit in the language of the legislation. Is it your understanding about the expansion of the definition, the scope of the definition? Ms. Warren. I have to say at this moment, Congressman, that this is one of the questions we have addressed. I think members of the panel may have very different views on this. But it is certainly a question we will be exploring. And that is the best I can do at this moment. We have only been here 14 days. " CHRG-109shrg30354--50 Chairman Bernanke," Again, our forecasts have tried to incorporate those legs. If you were asking about even beyond the 2007 forecast horizon, my guess would be that we would see some further decline in inflation in 2008. Senator Sarbanes. I am concerned about this perception I quoted in my outset, ``To Pause or Not to Pause, That is the Conundrum,'' and that ``The Fed has managed to elevate a pause to something that is a pretty major event. What was normal in prior cycles, up or down, is now something that grabs headlines.'' And then the commentator noted ``The Fed paused twice in the 1999-2000 cycle, three times in the 1994 cycle. It elicited a yawn from the markets. This time it is attracting enormous attention.'' There is an article in this morning's Wall Street Journal in which they quote Alan Greenspan, who made this observation after a series of rate increases: ``There may come a time when we hold our policy stance unchanged or even ease despite adverse price data should we see signs that underlying forces are acting ultimately to reduce inflation pressures.'' He made that statement to the Senate days after the Labor Department had reported the biggest monthly increase in the core CPI since 1992. What is your reaction to that? " CHRG-111hhrg74855--95 Mr. Gensler," Well, I think that is what we are working with you and Chairman Markey and Chairman Peterson, hopefully productively on. I do think that the CFTC has an important role to play as a market regulator over derivatives products to ensure market integrity and market transparency and FERC has a very important public role to play. " FOMC20070628meeting--143 141,MR. REINHART.,"4 Thank you, Mr. Chairman. Two personal notes to start: First, I am the last person between you and British food, which means that I’m not sure whether it is in your interest for me to speak quickly or slowly. [Laughter] Second, this week marks the first anniversary of the Committee’s last policy action—the quarter-point firming that brought the federal funds rate to 5¼ percent. Paper is the traditional 4 Material used by Mr. Reinhart is appended to this transcript (appendix 4). present, and my gift to you is the material labeled “FOMC Briefing on Monetary Policy Alternatives.” The intermeeting period saw considerable upward revision to investors’ expectations for the setting of monetary policy. As the shift from the dotted to the solid line shows in the top left panel of the first exhibit, the path of the expected federal funds rate rotated up, posting increases of 15 basis points at the end of this year and about 50 basis points by the end of next year. The starting point for both the May 8 and the June 26 lines, though, is the same: Market participants continue to believe that you will keep the federal funds rate at 5¼ percent at this meeting. Judging by the Desk’s survey of primary dealers, you are also expected to keep the wording of the statement mostly intact. Not much of this rise in market yields occurred in narrow windows surrounding the release of economic data and speeches by monetary policy makers. Rather, the economic data, which ran somewhat stronger than anticipated, and Federal Reserve communications, with the steady repetition of the assessment that upside risks to inflation remained, seemed to induce a rethinking of the economy’s prospects and the attendant need for monetary policy support. This rethinking is most evident in the middle left panel, which shows that the latest primary dealer forecasts of the federal funds rate at year-end (the blue bars) have shifted notably compared with the survey forecasts just before the May meeting (the dashed line). The revision to investors’ views was associated with the increase of 20 to 50 basis points in the nominal Treasury yields plotted in the right panel (and seen as the shift from the top dotted black line to the solid black line). The pricing-out of near- term policy ease probably explains the now-shallow portion at the front part of the yield curve. The rise in nominal yields can mostly be attributed to an increase in real yields of 30 to 50 basis points, shown in the lower portion of the same panel. Our term-structure models suggest that virtually all the rise in real yields is due to fatter compensation for bearing risk. Because the shifts in the two sets of yield curves did not match, the spread between the nominal and the indexed yields, which measures inflation compensation, widened somewhat at longer maturities. Here, too, the models suggest that some of that larger gap reflects a higher risk premium—this time for bearing inflation risk—leaving their estimates of inflation expectations only modestly higher. In recent days, concern about risk-taking, brought into the spotlight by the problems of two hedge funds managed by Bear Stearns, reversed some of the upward tug of yields imparted by the revision to the outlook for the economy and policy. As can be seen in the bottom left panel, the cost of credit protection for subprime mortgage pools packaged over the past 1½ years has risen over the past few weeks as the fear of a fire sale of the collateral seized by lenders to the Bear Stearns funds depressed prices and raised concerns about a more general spillover to other entities and markets. These fears also seem to have set off flight-to-safety flows that pulled Treasury yields lower in recent days. As noted in the table at the bottom right, the ten-year Treasury yield had risen about 50 basis points from the May meeting to when we put the Bluebook to bed (the first column). The outbreak of skittishness in recent days trimmed several basis points off that run-up (the second column) and put equity prices into the red. I wonder if the recentness of these events, which unfolded after much of the staff briefing work was wrapped up and your own interventions were mostly written, means that they have not been completely incorporated into your outlook. If so, this nervousness in financial markets probably adds to the list of reasons for keeping a low profile in your policy action at this meeting by ratifying prevailing expectations—that is, to choose the unchanged policy stance of alternative B in the Bluebook. Some of the other reasons are the subject of exhibit 2. In the staff forecast, summarized in the top left panel, output growth runs a bit below that of its potential in the near term, and inflation settles in at 2 percent. If you find that both a plausible and an acceptable outcome, you might also align yourself with the policy assumption of an unchanged federal funds rate upon which that forecast is based. Moreover, you were satisfied with keeping the funds rate at 5¼ percent at your May meeting. If you have filtered the incoming economic information in a manner similar to the staff— seen in the Greenbook as a slight upward revision to the growth of real GDP and a slight downward revision to core PCE inflation—you probably also believe that circumstances have not changed enough to warrant a recalibration of policy. It is true that financial market restraint has ratcheted up somewhat as investors’ forecast of the federal funds rate path has risen—proxied in the top right panel by the year-end expected federal funds rate in futures markets—but the staff expected this to happen over the next year or so, which has been a sentiment shared by some of you at the past few meetings. The adjustment in financial markets over the intermeeting period now brings market pricing into better alignment with the Greenbook assumption— shown by the black dots—and that this adjustment took place on a more compressed schedule than expected should probably not make for a material change to the outlook. As seen in the middle panel, the current real federal funds rate, at 3¼ percent, matches the Greenbook-consistent estimate of its equilibrium level. That is, if maintained, the current real rate would be consistent with the output gap closing within three years, at least in the Greenbook outlook. An unchanged nominal funds rate at this meeting is also consistent with many policy rules, including an estimated one that captures your practice over the past twenty years and that is plotted as the solid line in the bottom left panel. Of course, if you take into account forecast uncertainty, as is done by the light and dark green regions, you can pitch a pretty large tent with such policy rules. There is less doubt about the course of monetary policy in financial markets. As shown by the red bars at the bottom right, options on Eurodollar futures imply a distribution for the federal funds rate six months from now that is tightly clustered around the current setting. Here might be another reason for keeping the fed funds rate unchanged today: For all this year you have been hinting that prevailing market expectations for the fed funds rate were too low. Now that market participants have adjusted in your desired direction, you might not want to surprise them. Many of you noted that problem with the version of table 1 that circulated in the Bluebook, a subject discussed in exhibit 3. In the May statement, inflation was characterized as “somewhat elevated,” as in row 3 of the left column. But favorable data since then have put the twelve-month change in core PCE inflation at 2 percent, a level that some of you might find tolerable. As yet the Committee has not spoken with one voice on the subject. We dropped that contentious phrase in the Bluebook and softened the balance-of-risks language as well. As a result, the release of the wording in the Bluebook version of alternative B would likely trigger a decline in money market yields. The new version of alternative B in the right column turns the heat back up somewhat by inserting in row 3 words to the effect that the Committee is not convinced that the present step-down in inflation will persist. This draft also makes clear in row 2 that the characterization of recent economic growth is based on the first half of this year and returns the language in row 4 to that used in the May statement. Even if you are willing to keep the funds rate at 5¼ percent for now, you might foresee policy action sometime soon, in which case the changes to the statement probably do not represent your views. In particular, as shown in the top left panel of exhibit 4, the unemployment rate (the red line) has bounced around 4½ percent for almost a year. If you believe that this represents a taut labor market, you may be concerned about inflation pressures, particularly given that the manufacturing sector seems to have gone into a higher gear, as shown by recent readings on the ISM’s new orders index, the black line. You might not be alone in being concerned about inflation prospects. As plotted in the middle left panel, five-year, five-year-forward inflation compensation has risen 30 basis points from its recent low. It might be noise, it might be a wider risk premium, or it might be increased inflation expectations. If it is the last, you may want to position yourself now for policy firming sometime soon on the theory that an early demonstration of your displeasure with a rise in inflation expectations will effectuate a less costly decline. Some suggestions for doing so were offered in alternative C in the Bluebook, a few highlights of which are given in the bottom left panel. In particular, the alternative C draft reverses the order of the description of economic activity in row 2 to downplay the qualification “despite the ongoing adjustment in the housing sector.” More important, it retains the judgment that “core inflation remains somewhat elevated” and gives more reasons that inflation many come under pressure. If you have a frame of mind favorable to finer shades of meaning, you can always try dialing down the modifier of elevated inflation from “somewhat” to “slightly.” More substantial changes might be required if you are inclined toward alternative A, arguments for which are shown in the right-hand column. Regardless of the reason behind the run-up in market yields, households borrowing to buy a house now face higher mortgage rates (as shown in the top panel). This may both dissuade potential new purchasers of homes and disappoint those households that were hoping to refinance on more-favorable terms as the lock-in periods on their extant ARMs end. Both will act as a drag on spending and perhaps more substantially so than in the staff forecast. Months’ supply of new homes, plotted in the middle right panel, has edged higher. The staff projection has the feature that the efforts of builders to bring inventories back into line will be a drag on production for some time but that residential investment will begin to turn up by the second half of next year. However, this is a projection, and if you are more pessimistic on that score or want to give greater weight to downside possibilities from a risk-management standpoint, you might want to show some leaning toward policy ease in the statement. The language of the draft statement in alternative A may do so. As summarized in the bottom right panel, that draft pointed to “ongoing weakness in the housing sector” in row 2, excises the reference to “somewhat elevated” inflation in row 3, and moves the risk assessment to balance in row 4. The pieces of what I have just been talking about have been put together in your last exhibit, which represents an ever-so-slightly revised version of table 1 that circulated on Monday. In particular, in row 3 of alternative B, the word “sustained” has been inserted in the middle sentence to raise the bar as to what it takes for the Committee to be convinced that inflation has moderated. That concludes my prepared remarks." FOMC20070628meeting--168 166,MR. POOLE.," Thank you, Mr. Chairman. I support alternative B, and I also support the slight revision in the wording that Governor Kohn recommended. One thing that I worry about and that I hope we can make clear in the minutes—clearly, we couldn’t do it in the statement—is that we have been in an unusual period. If you look at Greenbook Part 1, the evolution of the staff forecast, the staff forecast for both ’07 and ’08 has changed remarkably little since last September. There has been a 0.1, 0.2, or 0.3 here, but very, very little change. Ordinarily over this span of time you get some information that changes your outlook in some significant way. I would hate to see us encourage the market to think that our projected path of 5¼ percent for the fed funds rate is carved in stone. We need the market to respond to incoming data, as we will have to do when we have some data that really move us off dead center. So I hope that we would emphasize—and it has sort of drifted into insignificance here—that “future policy adjustments will depend on the evolution of the outlook.” I think it is very important that the market understands that. It gets into the broader discussion of communications, but I hope the minutes will emphasize the importance of that part of our statement. Thank you." FOMC20051101meeting--157 155,MR. MOSKOW.," Vincent, I had a question on a different part of this. You raised the issue of whether you should use the inflation projection in your calculation of the equilibrium federal funds rate instead of the backward-looking inflation numbers that you use. I was wondering if you could elaborate on that a bit. I certainly would think that the forecast would be a better measure to put in here than the backward-looking figures. What is the argument or the logic for putting the backward-looking inflation numbers in there?" FOMC20080430meeting--70 68,MR. FISHER.," Nathan, both you and Dave expressed the frustration that I think all of us have about relying on futures markets in terms of our forecast of lower prices. It just hasn't been very helpful. Do we know or have a sense of how OPEC itself forecasts? Do they just look at futures markets? Second, to what degree do you impute into your own calculations the income elasticity of demand for the rapidly growing countries such as China? We know it is above 1 on oil. Third, linking the two, to what degree would, say, the Saudi royal family or the al-Sabahs of Kuwait be thinking about those high income elasticities of demand with those high growth rates offsetting what used to be their fear of a slowdown in their markets? In 1978, for example, they had only three markets to sell into really: the United States, Japan, and what we used to call Western Europe. Now they have hedges against the weaknesses in those markets. So I'm wondering as we think about alternative ways to wrap our arms around this--and it is a very difficult thing as the current indicator we have has been shifting all over the place and has not been very useful--have we tried to learn how the swing producers look at this and how they calculate and think about where prices are likely to go or whether they just look at the futures markets as well? " CHRG-110shrg50410--131 Chairman Dodd," But not a veto role? " FOMC20070131meeting--373 371,MS. YELLEN.," If you look at this sheet—we might do this for all the variables—the bottom right panel shows the federal funds rate. These are obviously made-up numbers. But we have the history, and people would just add their own forecast for Q4 for the federal funds rate. We’d report a central tendency, and we would develop error bands around it resulting in the type of display you would see. So obviously it would be a range of opinions based on appropriate policies reported by the individual members." FOMC20060629meeting--46 44,MR. MOSKOW.," Thank you, Mr. Chairman. I have two questions. One is just a quick one on steel since President Fisher mentioned exhibit 12 and you showed this big increase in China’s steel capacity in ’05—much greater than the annual steel production increase—and I have heard about this a lot. But steel prices in the United States are staying surprisingly high according to industry observers, and they are expected to go higher this year. I was just wondering if you could shed some light on what’s happening to the price of steel. The other question I have is broader. It’s really about the overall forecast. This is one of the largest midyear revisions to the forecast that I remember seeing since I’ve been here, in the GDP numbers particularly. Clearly, some of the data that have come in have been softer, but it seems to be more than just that. There seems to be a change in the tone of the Greenbook that suggests some reassessment of the underlying strength of the economy. That is the way I read it. But you know, there is some good news here, too. Productivity growth remains solid. Real interest rates are just in the middle of the neutral zone. Anecdotes I hear are really quite positive. So I felt a disconnect when I read the Greenbook, and I was just wondering if you could elaborate on this a bit to help me understand this change in tone of the Greenbook." FOMC20060808meeting--18 16,MR. WILCOX.," So, they revised down. The implication of the NIPA revision is that, according to the latest estimates, those markups are a little lower than they were before. They are still noticeably above their historical averages. In the judgmental forecast, we have never placed an enormous amount of weight on those markup measures, and perhaps the chain of events during this intermeeting period illustrates why. Our FRB/US model does put a lot of weight on those markups, and it revised up its inflation projection 0.6 percentage point, something like that. Now it’s within spitting distance of the judgmental forecast. First of all, we have had a hard time getting those markups to enter reliably or robustly into an econometric equation. Second, we’ve been leery of the kind of revisions that took place in this year’s NIPA revision. We’ve certainly regarded them with some nervousness and refer to them as presenting a downside risk to inflation, if those profit margins should compress. But I’m not entirely sure how to respond to your question as to whether we should put less weight on them since we haven’t put an enormous amount of weight on them in our judgmental projection to date. They are a secondary determinant of our inflation outlook in the judgmental projection. As I say, to the extent that you were prepared to put some weight on them before and to see them as high before, you would still see them as high now, though less so." FOMC20060629meeting--73 71,MR. MOSKOW.," Thank you, Mr. Chairman. Since our last meeting, uncertainty about the outlook for both growth and inflation has increased. Clearly the inflation data are disappointing, but let me first focus on economic growth. Here the key question is how much of the second-quarter weakness is transitory and how much represents a more fundamental softening in activity. So with regard to the consumer, we share the Greenbook’s assessment that increases in consumer expenditures will recover somewhere close to a rate of 3 percent in the second half of this year. Qualitatively, this seems to be the assessment of our contacts as well. One, a major builder and operator of shopping malls throughout the United States, said that retailers at malls have been quite pleased with the first five months of the year. Although they are expecting slower growth in the second half, they did not think that the falloff would be very large. The automakers report that June sales are relatively soft but better than in May, and they kept their forecast for light vehicles for the year as a whole around 16.6 million or 16.7 million units, which means they expect the second half of the year to be similar to the first half. This was also the consensus of the twenty-four industry analysts at our annual Automotive Outlook Symposium that we held last month. Looking at the fundamentals, like the Greenbook we think that growth in real income will be adequate to support the projected pace of spending. Under the baseline path for oil prices, energy prices should turn from a negative to a neutral factor for real income growth, though this is certainly an area of great uncertainty. Also, tight labor markets should eventually generate somewhat larger increases in wages, which should help offset the effects on overall income growth of somewhat slower gains in employment. Here I should note that we do not think that the recent slowdown in job growth is the start of a deterioration in the labor market. Our contact at Manpower studied this issue recently in response to skeptical Wall Street analysts who thought that the labor market was softening and that this would be reflected in a weakening temp sector. He studied forty major markets and found no signs of cutbacks in hiring plans by his customers, and his business continues to grow at a modest pace. Given our view of the trends in participation rates and other factors, we think that the 100,000 per month gains in payroll employment that we have seen over the past couple of months are consistent with an economy growing near potential, hence with little change in labor market slack. Of course, housing markets are weakening. At the last meeting we were more pessimistic than the Greenbook. This time, with its large revision, the Greenbook is slightly more pessimistic than we are. However, the overall negative tone of the Greenbook seems a bit puzzling to me given the current conditions that we were discussing earlier. After all, mortgage rates are not that high. The rate of house-price appreciation has not come down more than we expected. Still, current conditions are softening. A contact from a major national builder, Pulte Homes, told us that their new orders had dropped sharply and that the current high level of construction is being supported by working off backlogs. Accordingly, he expected a more marked slowdown in building in 2007. In the business sector, the reports from the manufacturers outside autos were, in general, very upbeat. Most indicated that orders and backlogs for investment goods were quite high. One of my directors, who is from a large, diversified manufacturing firm and who has always been cautious about future capital spending, said that demand for long-lead-time capital goods now is as strong as he has seen in his thirty years in business. And the pickup in nonresidential construction is partially offsetting the weaker activity on the residential side. Finally, financial conditions continue to be favorable. Indeed, given the recent increases in inflation, real short-term interest rates are in the middle of the neutral range, as shown in the Bluebook. Long-term borrowing costs are relatively low, and we still hear that there’s a lot of liquidity flowing through the financial system. So we think the outlook for business investment looks solid and somewhat stronger over the course of ’06 than the Greenbook forecast. To summarize our outlook for real activity, we think that the economy has somewhat stronger underlying momentum than the Greenbook does, and we are looking for growth at a pace of around 3 percent in the second half of this year. With regard to inflationary pressures, many of our contacts expressed concerns about input costs. We heard numerous reports this round of manufacturers that were passing on material cost increases to their customers. In the Chicago Purchasing Managers Survey, which will be released this Friday, the prices-paid component shot up from 76.9 in May to 89.0 in June, and the overall index moved down from 61.5 to 56.5. Capacity constraints also appear to be more common. For example, given industry consolidation, airline load factors are very high, and one major carrier indicated that it had been able to increase prices more than enough to cover higher fuel costs. We also received some reports that shortages of skilled labor were holding back production. Still, there were few signs of accelerating wage pressures. Of course, the incoming data on consumer prices have been disappointing, as Jeff Lacker just said, and as a result our indicator model’s forecasts of core PCE inflation in ’06 were revised up about 0.3 percentage point, to between 2.4 and 2.6 percent. The higher projection is from the model estimated using data since 1967; the lower number is from the estimates using data only since 1984. We think inflation this year will come in closer to the 2.4 percent figure as some of the cost pass- through that has already boosted prices runs its course. Looking to ’07, the model’s projections rose a tenth or two from the previous forecasts. The prediction using the post-1984 sample is 2.1 percent, whereas the long sample projection is 2.6 percent. So in the absence of some good news on the energy or materials costs front, I do not think that inflation will be headed into the bottom half of that range unless growth next year comes in a good deal below potential. At 3 percent, my forecast for GDP growth in ’07 is a bit below potential. My forecast for PCE inflation is 2.3 percent. This outlook is conditioned on my view of appropriate policy, which is a slightly higher path for the funds rate than currently built into the Greenbook because I feel that 2.4 percent inflation is too high, so I assumed that appropriate policy should attempt to arrest this acceleration." FOMC20060629meeting--39 37,MR. KAMIN.," My pleasure. We’re keenly aware of the fact that the United States economy plays a leading role in the global economy. During the last downturn, at the beginning of this decade, when the U.S. economy started to slow, our European colleagues often said, “Well, we’re probably not going to experience a slowdown ourselves because our exports to the United States, as a fraction of our GDP, are relatively small.” But, in the event, they did slow down because the United States economy affects the world not only through direct trade links but also through indirect trade links. Europe may not trade as much with the United States, but it certainly trades with other economies that do trade with the United States. Their economies are also affected through financial channels. Clearly, many financial markets turned down at the beginning of this decade as they are turning down now, albeit now to a lesser degree. So we’re keenly aware that a slowdown in the U.S. economy would affect the world economy. Now, we are not building in a very sharp slowdown for the world economy because we think that the conditions don’t merit that at this time. In the emerging-market economies, the fundamentals are really quite strong except in certain economies that are under a lot of pressure. In the industrial economies, two of the main areas—the euro area and Japan—had been weak in the past and are strengthening now. So, as I say, we don’t see a sharp slowdown as the most likely outcome, although there is a risk of that. At the same time, it’s important to note that we are building in a moderate slowdown for the total world economy, from about 4 percent in the second half of 2005 and the first quarter of this year to about 3¼ percent by the end of the forecast period. It may not sound like a great deal, but when you aggregate the entire world economy, a percentage point change is more meaningful than it might be for an individual economy. So we’re very aware of the linkages between the United States and the rest of the world and feel we have taken those into account." FOMC20070131meeting--54 52,MR. WASCHER.," The top panel of exhibit 5 summarizes our assumptions about the supply side of the economy. As indicated in line 1, we assume that potential output growth will edge down over the forecast period, from 2.7 percent in 2006 to 2.5 percent in 2008. This slowing primarily reflects our assumptions about trend hours growth (line 2), which steps down from about ¾ percent last year to ½ percent in 2008 because of a steepening downward trend in the labor force participation rate and a gradual slowing of population growth. Although we are comfortable with these assumptions—and, indeed, have not made any changes to them in this projection— we do see risks on both sides of our point estimates. For example, as shown in the middle left panel, many outside forecasters are basing their projections on a significantly higher estimate of potential output—in some cases above 3 percent per year. We suspect that these differences, at least in part, reflect different views about the underlying trend in the labor force participation rate. The participation rate and our estimate of its trend are shown in the middle right panel. As indicated by the black line, labor force participation has risen about ½ percentage point since its trough in early 2005. Some forecasters appear to have taken this increase as a signal of faster labor force growth going forward. However, we see it as largely a cyclical response to steady employment growth and a tighter labor market, and we expect it to be reversed in the near future as the pace of hiring slows and the underlying demographic forces show through. In part, our view reflects the fact that the participation rate tends to rise above its trend when the unemployment rate is low. Periods in which the unemployment rate was below the staff’s estimate of the NAIRU are denoted by the yellow shaded areas in the chart, and the current gap between the actual participation rate and our estimate of the trend does not appear to be outsized relative to historical norms. In addition, as shown in the bottom left panel, the increase in the participation rate over the past couple of years has been fueled by a rise in the percentage of individuals who moved directly from out of the labor force to a job; this flow also exhibits noticeable sensitivity to labor market tightness. That said, some groups have behaved differently than our models would have predicted. On the one hand, the participation rate of older individuals, shown by the red line in the bottom right panel, has risen steadily for some time, presenting an upside risk to our forecast. On the other hand, participation among teenagers (the black line) has remained surprisingly low, and there are undoubtedly downside risks to our forecast of an upturn for this segment of the population. Exhibit 6 describes another source of tension in the recent data that may have implications for our estimate of potential output. As shown in the top left panel, our standard Okun’s law simulation (the red line) suggests that the unemployment rate (the black line) fell more last year than would have been expected given our current estimate of real GDP growth in 2006. In the baseline forecast, we assume that an increase in the unemployment rate causes that gap to disappear gradually, an assumption that does not seem unreasonable given that the error in Okun’s law at the end of last year was within the bounds of historical experience. However, other interpretations are possible as well. One possibility is that current estimates of real GDP understate economic growth last year. One piece of evidence in support of this hypothesis is shown in the top right panel. We currently estimate that real gross domestic income rose 4 percent in 2006, about ¾ percentage point more than real GDP. As shown by the green line in the top left panel, if we replace real GDP growth with our estimate of real GDI growth over the past year and re-run the Okun’s law simulation, the actual unemployment rate in the fourth quarter lines up very closely with its simulated value. An alternative interpretation of the recent error in Okun’s law is that potential output growth was weaker last year than we have assumed—perhaps because of a downshift in structural productivity growth. The middle and bottom panels address this possibility. As shown by the difference between actual productivity growth (the black line in the middle left panel) and a simulation from our standard model (the red line), labor productivity decelerated much more last year than the model would have expected. As shown in the panel to the right, a purely statistical model based on a Kalman filter would have responded to the incoming data since March of last year by cutting its estimate of structural productivity growth by a full percentage point. In contrast, because we place less weight on the recent data that have not yet been through an annual revision, we have reduced our own estimate by only 0.6 percentage point. The bottom panels provide a couple of reasons for our reluctance to lower our estimate of structural productivity growth as much as the statistical model would have lowered it. First, as shown on the left, labor productivity in the nonfinancial corporate sector was quite strong last year. In part, the better performance of productivity in this sector reflects the fact that its output is measured from the income side of the accounts and thus incorporates the difference between GDI and GDP noted above. In addition, this component omits some sectors that are notoriously difficult to measure. Second, as shown on the right, a measure of productivity that excludes the residential construction industry also held up fairly well last year, suggesting that much of the deceleration in nonfarm business productivity may be cyclical. As shown in the middle panel, all told we expect actual labor productivity growth to step back up to an annual rate of about 2½ percent by the middle of this year as businesses reduce the pace of hiring in lagged response to the slower rate of output growth in recent quarters. The implications of this forecast for the labor market are shown in the top panels of exhibit 7. In particular, gains in nonfarm payroll employment—shown by the black line in the top left panel—are projected to slow to about 60,000 per month by the second half of this year. This pace is somewhat below our estimate of trend employment growth—the red line. As a result, the unemployment rate—shown in the top right panel—drifts up to just under 5 percent, our estimate of the current level of the NAIRU. To help gauge whether the estimated gap between the unemployment rate and the NAIRU is sending an appropriate signal about the degree of tightness in the labor market, I have included some other measures of slack in the remaining panels of this exhibit. As shown in the middle left panel, the job openings rate from the BLS’s JOLTS (Job Openings and Labor Turnover Survey) rose over the second half of last year to its highest level since early 2001. Because the job openings rate has such a short history, its equilibrium level is difficult to estimate. However, we can learn something by combining the openings rate and the unemployment rate to form the Beveridge curve shown to the right. The curve is estimated using data from the first quarter of 2001 through the fourth quarter of 2006, with the openings rate on the vertical axis and the unemployment rate on the horizontal axis. The relationship between job openings and unemployment appears to have been fairly stable in recent years, which suggests that the NAIRU has not changed materially over that period. Moreover, the latest data point is in the far upper left portion of the graph—the segment of the curve indicative of a tight labor market. Two other margins of slack are shown in the lower two panels. The bottom left shows the percentage of employed persons working part time because of slack work at their firm or because they couldn’t find a full-time job. This measure has moved down over the past couple of years and is currently below its average level in the second half of 1996— an earlier period when we thought that labor markets were roughly in equilibrium. Also, as shown to the right, the capacity utilization rate in manufacturing remains a little above its long-run average level. Exhibit 8 presents the inflation outlook. Despite our view that labor and product markets are tight, other influences on our inflation projection have been more favorable than we were expecting at the time of the last Greenbook. Perhaps most notably, the recent data on core consumer prices—shown in the top left panel—have been lower than expected. Core PCE prices were about unchanged in November and, based on the latest CPI reading, we expect an increase of only 0.2 percent in December. As a result, as shown in the second column of the table, we have marked down our estimate of core PCE inflation in the fourth quarter by ½ percentage point, to an annual rate of 2.1 percent. As shown in the top right panel, the lower path of oil prices led us to revise down our projection of consumer energy prices. These lower prices directly pull down our forecast for total PCE prices; they also imply somewhat smaller indirect effects from energy costs on core prices over the forecast period. As shown in the middle left panel, a higher exchange value of the dollar in this forecast led us to reduce the projected path of core nonfuel import prices. The combination of these various influences led us to shave our projection for core PCE prices—line 4 of the middle right panel—by 0.1 percentage point in both 2007 and 2008, to 2.2 percent and 2.0 percent respectively. As before, the slight downward trajectory to core inflation reflects our projections of waning indirect effects of the earlier increases in energy and other commodity prices, declining relative import prices, and a deceleration in shelter costs. In light of my earlier discussion of the risks to our assumptions about potential output growth, the bottom panels present one alternative simulation from the Greenbook, in which we assume both a higher trend for the labor force participation rate and slower growth in structural productivity. Specifically, we calibrated the simulation so that overall potential output growth was essentially the same as in the baseline forecast, but with structural productivity growth ½ percentage point weaker and trend hours growth ½ percentage point stronger. As shown in the bottom left panel, this change to the composition of potential output growth has little effect on aggregate activity and the unemployment rate. However, the implications for inflation—the middle panel—are noticeable, with core PCE inflation moving up toward 2½ percent next year because of the effects of lower structural productivity growth on trend unit labor costs. Joe will now continue our presentation." FOMC20080130meeting--135 133,MR. MADIGAN.," Maybe I can respond to that. It is very inferential, and it is based partly on the two-tenths' difference from the October exercise when it was actually clear--I think clearer at that time--from participants' forecasts that many participants characterized their NAIRU as being in the vicinity of 4� percent. Unfortunately, the writeups this time were not all that explicit on this point, but it is the comparison with October that I was leaning on fairly heavily. " FOMC20081029meeting--168 166,MR. STOCKTON.," That's how we were thinking of it. The 50 basis points, however, was not done on the basis of any deep analytical analysis of whether that, in fact, is the zero bound, and I think that's an issue that the staff will need to address pronto. But the message in the forecast with that funds rate path was that we think this shock is large enough that you will need to lower the funds rate as low as you think it can feasibly go. " FOMC20070918meeting--66 64,MR. STOCKTON.," Therefore, in some sense, to be consistent with the forecast, we would have to continue to expect that consumers are going to be worried and more downbeat. Again, while I would say that’s obviously a significant source of uncertainty, I don’t think that’s necessarily unreasonable in an environment where there will continue to be a lot of bad news and where the bad news is compounded with a weakening labor market and some things that could lead to some extra-model type of restraint." CHRG-111hhrg53248--61 Secretary Geithner," But I think they did play a fragile role. " CHRG-111hhrg55811--235 Mr. Ellison," So what should we do about those firms that do have those multiple roles they play? " CHRG-110hhrg34673--28 Mr. Kanjorski," What role should Congress or the government play in that? " FOMC20061212meeting--145 143,MR. FISHER.," Mr. Chairman, I spoke of my concern about the fattening of the tail in economic weakness and my continuing concern about the already fat tail of inflationary pressure. However, if I come around to the view of the staff and the view that seems to be expressed by many at this table—that growth is likely to return to its long-term potential in the forecast period, inflation risks remain either at elevated levels or at less-elevated levels, and liquidity is somewhere in the range between healthy and ubiquitous [laughter]—then the first thing I do is decide that I wouldn’t want to increase rates but I also wouldn’t want to decrease them. The question is how we express ourselves. Like President Hoenig—I don’t want to take words out of his mouth—I’d be happy if we just included the opening policy decision and then the assessment-of-risk statement and took out much of the verbiage we have as a sort of Christmas surprise to the market, since they don’t expect a whole lot. But I know that’s not a serious proposal. Therefore, I come down on the side of alternative B, as amended by the Christmas colors. I’d take out the words “than anticipated”—I think President Minehan has a very good point—and the duplication of the word “pace” that you pointed out. I worry, because I cannot make an argument for decreasing the rate, about being careful that we don’t signal to the market that we might be tending in that direction. Although I think alternative A not inaccurately expresses what’s been said at this table, I worry that it may be sending the wrong signal. Therefore, I come down on the side, as President Hoenig does, of alternative B as amended by Cathy and the suggestion in the Christmas colors, even though I think the verbiage is excessive. I know that sounds odd coming from a Texan." FOMC20060808meeting--50 48,MS. YELLEN.," Thank you, Mr. Chairman. So far the economy has stuck pretty close to the script of the soft landing sketched out in the June Greenbook. Real GDP growth slowed markedly in the second quarter. Housing construction has declined sharply, and house prices have decelerated; this situation suggests that our policy actions have taken hold in this interest-sensitive sector. The recent sharp rise in oil prices should also put a damper on growth of real income and consumer spending. Most forecasters now expect below-trend growth in the current quarter. Nonfarm payroll employment has shifted down to a more-sustainable pace, and the unemployment rate has risen to 4.8 percent, just a bit below standard estimates of the NAIRU. Core inflation, although uncomfortably high, came in 0.2 percentage point below the June Greenbook’s forecast in the second quarter. In addition, despite further large increases in the price of oil, inflation expectations held firm. In light of these developments, a reasonable forecast is for growth to continue to run slightly below its potential rate, the unemployment rate to edge up, and core inflation to recede gradually. At our last meeting, I laid out some of my concerns about downside risks to the outlook for growth and upside risks to inflation. Quite honestly, I cannot say that the recent data have done much to assuage my angst on either account. The recent falloff in housing activity and the deceleration in house prices have been faster than expected. The current Greenbook has residential investment falling at an annual rate of 14 percent in the second half of this year, nearly twice as fast as projected in June. These surprises intensify the risk of a sharper slowdown as the lagged effects of our past policy actions come fully into effect. For example, the housing slowdown could become an unwelcome housing slump as envisioned in one of the Greenbook alternative scenarios. A large homebuilder in our District summarized the views of many of our contacts when he recently commented that “the housing market has not yet popped, but a hissing sound is now clearly audible.” [Laughter] He pointed to rapidly rising cancellations as a particularly ominous sign. I will be watching the incoming data closely for signs as to whether the housing slowdown remains orderly as hoped or takes a steeper downward slide, posing a greater risk to the economy. My concerns about inflation have also been somewhat heightened by the recent data or, more precisely, revisions to past data. Core measures of inflation continue to be well above my comfort zone. Of course, after the experience of last year, when core inflation was revised up by a considerable amount, I approached this year’s annual NIPA revision with some considerable trepidation. I was relieved to see that the core PCE price inflation data came out of the revision relatively unscathed, revised up just 0.1 percentage point for 2005; but other aspects of the report were somewhat less reassuring for the inflation outlook. First, the rate of labor productivity growth over the past three years has been a bit slower than we thought, primarily because of downward revisions to the rate of capital accumulation, so that the Greenbook now projects structural productivity growth of 2.7 percent, about ¼ percentage point slower than we thought back in June. This revision suggests somewhat less downward pressure on inflation emanating from cost reductions and, therefore, greater upside risks to inflation. But that wasn’t the only surprise tucked away in the annual revision. The upward revision to compensation growth over the past four quarters implies that growth in unit labor costs over the past year has been more rapid than we had believed. I had thought that there was a good chance that compensation per hour and unit labor costs would increase relatively moderately going forward, helping to contain inflationary pressures. The data revision was thus a bit of a wake-up call for me, and I have revised upward my views on the outlook for compensation and unit labor costs. My reading of the report is that the revised data provide a clearer and less sanguine picture of the trend in this measure of compensation. However, the employment cost index was in line with expectations in June and continues to show moderate growth. Moreover, even with revisions to productivity and compensation, the markup in the nonfarm business sector remains very high by historical standards, suggesting that firms do have room to absorb costs. Overall, I view the inflation outlook as highly uncertain, with a pronounced upside risk. As I mentioned at the last meeting, we just don’t have a good handle on why core inflation has risen of late or how persistent this rise will be. While it is comforting to attribute the increase to energy and commodity-price pass-through, empirical evidence suggests that pass-through effects have been quite modest since the mid-1980s. If so, the door is open for other explanations that may have a more lasting influence and require a more aggressive policy response. Something that makes me even more uncertain about the inflation outlook is that standard backward-looking Phillips curve models of inflation appear to be breaking down. It has been widely noted that the estimated effect of resource utilization on inflation in such models has become much smaller over time. But equally striking is the finding that the sum of coefficients on lagged inflation when freely estimated appears to have fallen as well, suggesting that inflation has become far less persistent. In fact, our staff finds that, in looking over the past ten years, it is better to assume that core inflation will return to its sample average over the next four quarters than that it will remain in its recent range or follow a standard Phillips curve model. Interestingly, this decline in the persistence of core inflation has occurred at roughly the same time that long-run inflation expectations, as measured by the Survey of Professional Forecasters, appear to have become well anchored, and this may not be a coincidence. Economic models with forward-looking inflation expectations tell us that, if the central bank has credibility and holds to a fixed long-run inflation target, then inflation will be less persistent than is implied by the standard backward-looking Phillips curve model. Indeed, the puzzle for macroeconomists has been why we see so much inflation persistence. Perhaps we no longer do. If that is true, inflation may decline faster than the Greenbook expects. Admittedly, the past ten years form a relatively small sample from which to draw definitive conclusions. But the inflation process may have changed in a fundamental way, and we should be open to that possibility. I would like to stress that this evidence and the analysis concern the simple correlations of the inflation data that are used for forecasting. The evidence does not relate to structural relationships, and therefore it does not necessarily inform us about how our policy decisions affect the economy or about the best course for policy. In summary, although my modal forecast is relatively benign, I remain very concerned about risks to both growth and inflation." FOMC20060510meeting--193 191,MS. BIES.," Mr. Chairman, in number 5, I always felt it was redundant when we had clearly communicated we were on this long trajectory. But when we are near a turning point or a pausing point, it is probably more important to remind the market that things can happen that we do not expect, that it is not a precise forecast, and I find that this sentence is more useful at turns than it is when we are on a long-run trajectory. So I just do not feel good about taking it out now when we have had it when it was really redundant." CHRG-111hhrg48674--206 Mr. Price," Thank you, Mr. Chairman. I appreciate your coming again and being with us. You have described your role in the current challenges in many ways. I think I wrote these down correctly. One of them was to stabilize systemically critical firms and that you felt that the sooner you could leave that role, the better. Is that accurate? " FOMC20060629meeting--151 149,MR. GUYNN.," Thank you, Mr. Chairman. Given our recent disappointing inflation experience and, more important, our forecast that suggests that inflation is likely to move at least somewhat higher over the forecast period, I’m solidly in favor of a 25 basis point move today. Like some others, I am less sure about the need for further increases at subsequent meetings. As yesterday’s discussion highlighted, our near-term policy decisions look to have become somewhat harder. There is the possibility that output may be slipping to below potential, and inflation has yet to respond in any convincing way to the tighter policy. Like others, even given that possible problem, I am more concerned about the upside inflation risk, given what I consider to be the greater consequences of an unwelcome development on the inflation side. Despite that leaning, I would emphasize the increased uncertainty we now face and the need to maintain some flexibility with regard to our subsequent policy actions. I want to go back to the last point I made, or tried to make, in yesterday’s discussion—the possible policy corner into which we may have unwittingly painted ourselves. Let me explain what I mean by that. In an effort to underscore our individual commitments to low inflation, many—and I think perhaps most—of us have over the last couple of years expressed a numerical range of price inflation that we would consider acceptable over the longer term. While those ranges have not all been the same, 1 to 2 percent on the core PCE price measure has been the most often mentioned and the range many outside commentators have picked up as what they believe us to consider as our informal target. The problem that we now face in my view is that our forecast for inflation over at least the near term, and perhaps extending into the intermediate term depending on how one defines that time period, does not have inflation moving down even to the upper end of that range. I was struck by the tabulations of the forecasts we turned in for the upcoming congressional testimony. Those showed a central tendency of 2¼ to 2½ percent core PCE inflation this year and 2 to 2¼ percent next year. The staff forecasts were even higher, at 2.4 percent this year and 2.2 percent next year. Using the confrontational language of one of my grandkids, I will say, “So?” In other words, what are we going to do about it? I think it’s reasonable to expect that people are going to be asking that question of us more and more. More important, we should be asking that question of ourselves. I find it interesting to think back as to how we may have individually hit upon 1 to 2 percent core PCE inflation as reasonable and achievable. I think it was substantially influenced by our very favorable experience during the 1996 to 2003 period, when we did have the measure comfortably within that range. But a decomposition of core PCE inflation for that period suggests that such a benign experience may have been an aberration. During that period, we experienced significant declines in goods prices, due largely to sharply lower worldwide demand and the persistent downward pressure on goods prices resulting from the emergence of China and other developing economies as goods producers. That pattern of goods price deflation has now changed, and goods prices in the aggregate are now not making a large negative contribution to overall inflation. In other words, it’s hard to attribute that brief historical period of low core inflation to our domestic monetary policy—it may have simply been good luck—and I think it’s a weak reed upon which to base our longer-run policy response and preference. The scenario in the Greenbook that has below-trend growth, unemployment above 5¼ percent, and near-term inflation accelerating underscores the difficult policy choices we may face. And the Bluebook’s modeling of what will be required to get inflation back under 2 percent is sobering. Yet if we continue to espouse a target range of 1 to 2 percent and do not behave in a way that seems to move us decisively in that direction, then I think we run the risk of a substantial loss of policy credibility. Finally, alternative C in today’s Bluebook table 1 hints at the kind of action and statement language that would seem to be consistent with a commitment to get back well within a range of 1 to 2 percent. I would not advocate that we go there today, but I think that construct serves to remind us of the need to begin to have such a discussion around this table. With regard to today’s statement, I like the way the various drafts have evolved, and I am generally comfortable with the latest alternative B language that we have before us. I was very uncomfortable with earlier language that toyed with the notion of commenting on and forecasting several very specific variables. I would urge us not to use the statement to elaborate on a rationale for our actions or to highlight a particular data series. I believe that’s best left to the minutes. Thank you, Mr. Chairman." FOMC20081029meeting--272 270,MR. ROSENGREN.," Like the Greenbook forecast, our forecast predicts a significant recession. Further easing will likely help mitigate the severity of the recession. Coupled with improvements in short-term credit spreads, a reduction in the federal funds rate should lower rates on home equity lines of credit as well as business and consumer rates tied to LIBOR, easing cash flow for consumers and businesses. We are facing problems of historic proportions, both here and abroad. A 50 basis point easing, as in alternative A, is both necessary and appropriate. Even with the easing assumed in the Greenbook, the unemployment rate remains too high for too long. The inflation rate falls enough to be well below my target. To avoid a severe and prolonged recession, we will very likely need further monetary easing and a significant fiscal package, even after this 50 basis point reduction in the federal funds rate. I would just note in terms of the language that, although I am comfortable with the alternative A language, my actual views would be closer to saying ""the predominant concern of the Committee is the downside risk to growth"" rather than ""nevertheless, downside risks to growth remain."" " FOMC20050202meeting--151 149,MR. LACKER.," Thank you, Mr. Chairman. Economic growth in the Fifth District has been a little stronger in recent weeks. Retail revenues seem to have picked up. According to our survey, seasonally adjusted shopper traffic was stronger in January than in December, and big-ticket sales February 1-2, 2005 104 of 177 continues to be brisk. District manufacturing activity generally firmed in January, following some softness in December. And although our survey showed manufacturing shipments down somewhat recently, new orders strengthened and factory hiring was higher. In labor markets, we’re seeing some indications of a pickup in job growth in recent weeks. Data for December had shown only modest gains in our area. Business contacts reported that prices rose at a somewhat quicker pace in January than in December, though increases for final goods and services were generally less than 2 percent. We continue to hear of sharp increases in prices for some categories of raw materials. Some District manufacturers indicate that higher costs are squeezing their margins, but an increasing number of producers indicate that they are passing through cost increases by raising their prices. Pass-throughs are easier, some say, because raw material prices are affecting their competitors as well, though it isn’t clear why this wasn’t true with the earlier cost increases. Other contacts note that the stronger economic outlook makes their customers less resistant to higher prices, and this sounds a bit more persuasive to us. Turning to the national picture, the data we’ve received since the December FOMC meeting suggest that the recovery is on track. The forecast for inflation and economic activity in this Greenbook is little changed from December, and I haven’t seen anything that contradicts that view. In particular, core PCE inflation is projected to remain around 1½ percent, inflation expectations appear to be contained, and the Greenbook continues to project a healthy real GDP growth of between 3½ to 4 percent over the next two years as the output gap gradually closes. To my mind, the most intriguing development since December is the flattening of the yield curve. Despite a 26 basis point increase in the two-year Treasury rate since the December FOMC meeting, the 10-year rate barely moved and the 30-year rate actually declined by 17 basis points. This was clear in Dino’s charts yesterday. The behavior of the term structure is just what one would expect if the public has confidence that we’re going to conduct monetary policy in a way to keep inflation premiums stable and, thus, keep long-term interest rates low over the long run. The fact February 1-2, 2005 105 of 177 supports this interpretation. I read these facts as evidence of the credibility of our low-inflation commitment, as was commented on at length yesterday. Of course, as we go forward, I think we’re going to have to watch the term structure carefully for evidence of emerging market concerns about either inflation or deflation. For now, however, the yield curve evidence, together with overall economic conditions, suggests that the policy path we are assuming for this outlook is nicely balancing the upside and the downside risks." FOMC20070509meeting--175 173,VICE CHAIRMAN GEITHNER.," I think we’re in a fairly good place in terms of the policy and the signal. The language in March and in alternative B today preserves a nice balance between the need to signal concern that we may not get as much moderation in inflation as we’d like and acknowledgement of some of the dispersion of views around the Committee on what our ultimate objective should be, what our preferences are, and over what period we’d like to see inflation come down to whatever level. It also gives us more flexibility. I would not want to jeopardize that balance today. I don’t see any compelling need to alter market expectations today, and as I said, I am quite comfortable with alternative B. Just on the latter, deeper conversation about where we’re going in June—things will change between now and June. June will be interesting, I suspect, even if it unfolds in the way the forecast implies. But ultimately our judgment is about whether we have an acceptable forecast for inflation. It’s whether the path going forward is acceptable to us in some sense, and that’s what our discussion should be about. Of course, you can’t separate that from where inflation is today because that’s where you’re starting. But as Rick and many others have consistently reminded us, the language is about the forward-looking effects of policy today, or as they are built into market expectations, or as we assume today for the expected path of inflation going forward. But I like B and would be averse to changing it." FOMC20070321meeting--157 155,MS. YELLEN.," Thank you, Mr. Chairman. I support the Bluebook alternative B, both leaving the federal funds rate unchanged and also the language basically as it stands. I think the current stance of policy is likely to foster an economy that gradually moves toward a soft landing of the type portrayed in the Greenbook forecast, but obviously I have become much more focused on the downside risk to economic activity since we met in January. On the inflation front, the news hasn’t much altered my view. I still think core inflation is likely to edge down this year and next, but I certainly think it’s too soon to conclude that any new lower trend has set in. And I do definitely see upside risks, given that labor markets are still somewhat tight, oil prices have risen, and the dollar has fallen. So for me, the risks do seem more balanced in the sense that there are downside risks to real activity and upside risks to inflation; and I think it is appropriate—I agree with Cathy’s comments—to reflect that in the statement. For a minute I contemplated supporting the language about the risk assessment in alternative A; but really, upon further reflection, I like alternative B very much. The shift to “future policy adjustments” from “firming” appropriately hints at downside risk, as we all recognized in our discussion yesterday. I agree with Vince that it creates greater policy flexibility for us and lets the market work in this stabilizing manner. Even so, it does retain an asymmetric bias, which I think markets expect; and I consider it reasonable because, on the whole, I do remain somewhat more concerned about inflation risk, and it is wise for our message on that to be consistent over time." CHRG-111shrg54789--56 Mr. Barr," The States would have a quite important role. States have been at the forefront in many ways of consumer protection. States would be able to enforce Federal law. States would have a strong role with respect to their own examination and supervision processes. Senator Tester. Would they be able to go beyond the Federal? " FOMC20080625meeting--34 32,MR. FISHER.," If I may, I would like to ask Nathan, Mr. Chairman, about exhibit 4 and exhibit 5. Particularly noteworthy is that exhibit 4 is the forecast period showing a significant decline in inflation in the emerging market economies. I am wondering what that is based on. Do we have a sense of capacity utilization or slack, if it is all reliable, or is it based on a sense of commodity prices? What is that noticeable down-swoop? " FOMC20060131meeting--85 83,MS. YELLEN.," Thank you, Mr. Chairman. Recent data on economic activity, as summarized by the fourth-quarter GDP figure, have been surprisingly weak. But there are good reasons to believe that much of the softness will prove temporary, so I tend to agree with the Greenbook and other forecasts in expecting a rather sharp rebound in the current quarter. That said, I want to sound a note of caution. This view is based on incomplete data for the fourth quarter and a paucity of information concerning activity in the first quarter. It is not inconceivable that the weak numbers for the fourth quarter could presage a more-prolonged, sluggish phase as the lagged effects of past policy tightening and higher oil prices take effect. This caution is heightened by my concern that the economy faces some pretty big downside risks, especially having to do with the interrelated issues of possible overvaluations in housing markets and low term premiums in bond markets. These risks are highlighted by the alternative simulations in the Greenbook concerning a rise in the saving rate and a higher term premium. In summary, I see the Greenbook’s view of real activity for this year as very reasonable, but downside risks to that forecast give me pause. Turning to inflation, core PCE inflation over the past twelve months—at 1.9 percent—has come in higher than I would like to see. But assuming that growth slows to trend later this year, my outlook for inflation in 2006 is more optimistic than the Greenbook. One reason stems from work our staff has done on the extent of pass-through from energy prices to both labor compensation and core price inflation. As I’ve said before, the evidence suggests to us that there has been relatively little pass-through since the early 1980s, perhaps due to the credibility of our commitment to the stability of core inflation. Under our assumption of very little pass-through, we expect the core PCE price index to rise around 1¾ percent, both this year and next. The Greenbook shows an increase of 2¼ percent this year, presumably reflecting larger energy-price pass-through, and then a drop to about 1¾ percent in 2007 as the effects of energy prices subside. So though I differ with the Greenbook on inflation in 2006, over the longer period I think we’re about on the same page. So as I look at the total picture, I would say that the overall outlook is quite positive. The economy is near full employment with real GDP tending toward trend-like growth. Core inflation is within a reasonable range but a bit on the high side. Needless to say, it’s fitting for Chairman Greenspan to leave office with the economy in such solid shape. And if I might torture a simile, I would say, Mr. Chairman, that the situation you’re handing off to your successor is a lot like a tennis racquet with a gigantic sweet spot. [Laughter] Positive though the situation is, it also obviously raises the issue of how much higher the funds rate needs to go to keep the economy on this desirable trajectory. There are a number of ways of looking at this question, all yielding similar answers. First, a funds rate of 4½ percent rests right near the center of the range of estimates for the equilibrium funds rate. Along the same lines, our staff ran simulations of FRB/US to calculate the net effect of monetary policy actions over the past several years on real GDP growth. The results are that, after adding importantly to growth over the last few years, past policy accommodation is roughly neutral in terms of growth this year and next. A second approach is to compare a funds rate of 4½ percent with the recommendations of Taylor- type rules. Such calculations suggest that a 4½ percent funds rate this quarter is a bit on the tight side now but should be about right later this year under the Greenbook forecast. The long-run simulations in the Bluebook are a third method to judge the stance of policy. These simulations show the funds rate optimally peaking at a little over 5 percent, well above where we are now. But a major factor accounting for this relatively high peak is the Greenbook’s assumption, incorporated in the Bluebook simulation, that energy pass-through pushes up core PCE inflation to 2¼ percent this year. And as I’ve emphasized, we’re not convinced that this much pass-through is likely, and our lower inflation forecast implies a lower peak for the funds rate along an optimal path. Taken together, then, these approaches suggest to me that if we tighten policy at this meeting, as I think we should, we will be close to the appropriate peak in the funds rate based on what we know now. As for the future path of the funds rate, I believe it should be highly dependent on unfolding events and cannot be prejudged with any degree of confidence. So the bottom line is that we need to position ourselves for flexibility in our policy choices going forward." FOMC20070628meeting--315 313,MR. REINHART.," Yes, the appendix to Debbie Danker’s memo is the draft that Jim Clouse prepared. I think the Vice Chairman is correct in that, of course, there would be some repetition in the discussion of the minutes just because the sector-by-sector discussion of the near-term conjuncture is going to be somewhat similar to the longer- term structure of the three-year or the three-to-five-year forecast. But they would serve different purposes, and that repetition might not be unhelpful." CHRG-109hhrg22160--65 Mr. Greenspan," No, we did. We recognized that starting in the year roughly 2010, which you must have realized was a quarter-century later, we perceived that there would be a significant buildup and indeed our mandate was to create over a 75-year period, through 2058, a set of receipts and potential benefits, a tax rate, which is now the 12.25 percent rate, which according to the actuaries of that time would have been enough to carry us through 2058. We are still on track for that forecast. " FOMC20070628meeting--82 80,MR. STOCKTON.," We do indeed forecast it to continue to decline over the next year or so, in large measure because, as David shows in his chart, we still think this house price adjustment has to proceed further before we get into a better equilibrium. Our assumption on the stock price, of course, is pretty neutral because we have it going up pretty close to the overall rate of nominal income, so I think the downward tilt is being driven mostly by the house price story." FOMC20080130meeting--276 274,MR. ROSENGREN.," Thank you, Mr. Chairman. I support alternative B, though I think a case can be made for alternative A. The Boston model indicates that even after a 50 basis point reduction, we still need more easing to return to an economy with both full employment and inflation below 2 percent. Taking out insurance against more-severe downside risks would imply even more easing than our baseline forecast. Given our recent move and the additional easing in alternative B, I am comfortable waiting to take more aggressive action only if incoming data warrant it. However, I will not be surprised if we find further action is indeed needed. What would be the arguments against taking an aggressive tack? Certainly, one argument might be that elevated oil and commodity prices and core inflation currently above 2 percent warrant a more restrained approach. However, I would note that in previous recessions the inflation rate has declined significantly, even in the 1970s, in the midst of historic surges in energy and food prices. Whether we skirt a recession or experience a recession, I expect core inflation to trend down. A potential second argument is that we have responded too slowly to the need for tighter policy in the past, so we should be more reluctant to ease in the present. While it may be true that we raised rates too slowly at the onset of previous expansions, I see no reason for this Committee to behave in a manner that it believes is suboptimal. As a Committee, we seem to have consensus on the importance of maintaining low inflation rates, and I am confident we have the will to raise rates with the same alacrity that we reduced them, should economic conditions warrant such action. " FOMC20070131meeting--188 186,MR. STOCKTON.," That’s basically half of our GDP miss. The other half is on the inventory investment side. Just like with Karen, about half of our miss on inventory investment has to do with a difference of opinion about what the December book value figures will turn out to be. So it’s just a difference between the BEA’s estimate for December and our estimate for December. I don’t think we’d be inclined to alter our December estimate, so we’d write off roughly half of that miss on nonfarm inventory investment. We don’t do that great a job of forecasting those book value inventory figures either. It is not as though we have lots of information or a good reason for staking ourselves to our forecast versus the BEA’s, but I don’t think they have any more information than we do. As for private domestic final purchases, which we have been emphasizing, even given some of the recent noise in net exports and government, there we were, in fact, almost exactly right; we were off by 4 basis points in terms of its contribution to overall GDP. In terms of the composition, consumption was a bit weaker, and equipment spending a bit stronger, probably because of BEA’s estimate of the share of autos being sold to businesses versus households. So we don’t really see very much information there. On net, government was a bit weaker: The federal side was weaker by more than the state and local side was stronger." FOMC20070807meeting--104 102,MR. MISHKIN.," Thank you. Well, except for the fact that we have had a benchmarking of potential GDP downward and greater weakness in housing, my forecast is basically similar to my forecast at the last FOMC meeting and is consistent with the Greenbook forecast—that we would have a return to trend growth a bit later than we had expected but by mid-2008 and 2009. In regard to the issue of inflation, let me just provide a little information on the model that I’m thinking about. You know that I think a key driver of inflation, of course, is inflation expectations, and that there are good arguments to say that they are grounded around 2 percent. We have been seeing numbers continually coming in that are very consistent with that, which gives me more and more confidence that, in fact, inflation is gravitating strongly to this 2 percent level. But I want to talk a bit about the issue of output gaps because I think that it is important, even if you think that inflation expectations are extremely important, not to have a deus ex machina view of the inflation process, which is that inflation is caused by expected inflation and then where does that come from? So I think that resource utilization is important. However, the problem is that what is really important is not just current resource utilization, which is what we tend to put in our econometric specifications, but also the future expected path of resource utilization and output gaps. Of course, one problem here is that it is hard to measure. Also, if you are doing monetary policy right, then there is an expectation that you are going to do the right things to eliminate those output gaps. In fact, that is exactly what is in our forecast and exactly what our policies have been doing. So one reason I think, in the current juncture, that it is not critical to talk about output gaps a whole lot is that basically we are doing the right thing. That context gives me further reason for saying, given our forecast, that a 2 percent inflation number is where we are heading, just not now, and that the trend is solidly in place. But we are going to stay there for the foreseeable future, unless we screw up somehow, and we are not going to do that. [Laughter] One key point that makes me a little different from the Committee on inflation is that I do not see the upside risks as being greater than the downside risks. I really do see the risks as being quite balanced on inflation—again around this 2 percent number. Yes, we do have some temporarily good news, and it is going to be unraveled a bit, but it is still consistent with the 2 percent overall trend. In terms of output gaps and future expectations, I don’t see those getting people thinking that we’re going to have too tight resource utilization. Let me turn to the issue of the financial markets because, obviously, that is the big gorilla sitting at the table. I don’t see what is happening now as a direct spillover from the subprime market. It is very consistent with the way that Bill was talking about this issue. Of course, the media are making the subprime market into the whole story, but I think it is just not the right story. The subprime market is really a very small percentage of the total credit markets. What I think is much more important is that people are questioning and reassessing the quality of the information that exists in financial markets. The point of the subprime market is just that we now trust the credit-rating agencies less. Basically what I think is happening in a way is quite a good thing: We were concerned that the markets were a little too optimistic, that there was too much opacity, and that people weren’t worried about it. Now, in fact, they are worried about it, and I think that is fundamentally a healthy situation. Also, the parts of the market that are having the problem are the most opaque parts, it is not clear that they are particularly important to the things we really care about in terms of our policies, which is what will happen to aggregate demand and, therefore, to both inflation and output. So at this point, I take the view that this could all end very well and could in the long run make the situation healthier, and this view is consistent with what Governor Kohn was pointing out. But I do worry that this reassessment could actually find more—what’s the right word?— skeletons in the closet or bad things happening than were expected. In the past, we’ve seen that, when the quality of information gets questioned and people don’t think the marketplace is providing the right information, headwinds in the economy can become quite significant. The most recent episode that I am thinking about, of course, is the episode of Enron and its aftermath, in which a key reason that the economy was so slow to recover was that the quality of information was impaired. Then, people realized that the markets in fact did have some slight elements of financial instability—again, not too serious because the banking system was in such good shape. We could have a similar situation occurring now. So the sort of bad scenario that I see is an Enron-type scenario, not something much worse than that. But we really have to keep on top of this. It means, I think, that there are greater downside risks to the forecast. The survey of all of us indicates that people are now much more worried about downside risks than they are about upside risks. I think that is absolutely right, and, in fact, it could get a lot worse. So the way I would view the situation is that right now we should be pretty calm, but we want to monitor it very carefully and be ready for some potentially bad things to happen and just hope that they don’t. The kind of scenario that we’re seeing in the Greenbook is one that is going to play out. Thank you." FOMC20061025meeting--123 121,MS. MINEHAN.," Just to follow up on that, when we were experiencing rates of PCE and CPI core inflation below 2 percent and there was considerable concern about the level of disinflation, what were market expectations saying about inflation at that time? What were measures of inflation expectations saying? My sense is that the professional forecasts have been 2½ percent since time began. But were any other measures suggesting at that time that they expected inflation that low going forward?" CHRG-110hhrg34673--30 Mr. Kanjorski," So you see a very positive role for government to play? " CHRG-110shrg50416--113 Mr. Kashkari," That is why we started there. But we think that they all have a complementary role to play. " FOMC20080625meeting--48 46,MR. STOCKTON.," From a forecasting perspective, President Evans, I think you're right. I don't think models that rely simply on labor costs to predict prices are very sound in terms of their forecasting ability versus just a plain old price�price type of Phillips curve or a price type of Phillips curve augmented with price expectations. Part of the reason may be that the compensation data themselves are just so poor that, in fact, it's really a measurement problem. It's not that you would argue that labor costs, which are a very significant chunk of overall business costs, don't matter. I do think you can probably take, and we certainly have taken, some limited comfort from the fact that we have not yet seen an acceleration of labor costs. That likely indicates that you are not seriously behind the curve already or that something is baked in the cake. I don't think you can necessarily take comfort from the well-behaved compensation thus far that you are not going to confront some inflation problems going forward. It's more that the compensation data don't suggest that you've fallen seriously behind the curve. In some sense we see the higher inflation expectations readings themselves, or at least some of the mixed-to-slightly-higher inflation expectations data, as suggesting that you're facing a bit more of an inflationary difficulty over the next two years than we thought two months ago would be the case. " FOMC20050202meeting--86 84,MR. POOLE.," Thank you, Mr. Chairman. I spoke very briefly earlier and made just a few February 1-2, 2005 58 of 177 them. I believe this issue about succession—which I think you can argue either way, but I don’t intend to argue it one way or the other—is important. The new Chairman might want to put his or her stamp on this issue of inflation targeting and communication. So that’s something we should be clear about. As for point versus range, I think in principle the long-run average should be a point or a very narrow range. There should be a broader range for the year-by-year number on the short run. It does make a difference in the long run, however, whether the average inflation rate is 1½ or 2½. That’s 100 basis points and that is quantitatively significant. If there were any quick transition of expectations from one to the other, it would be a source of disturbance. So I think that range ought to be narrow. There are various ways we could narrow it, but I think a range of 100 basis points is troublesome. Lastly, I think there’s a way of showing proper deference to the Congress on this and making some progress. We could note the fact that the CBO’s [Congressional Budget Office] economic assumptions, which underlie the budget, include a CPI forecast of 2.2 percent in the out years. I think it has just been reduced to 2.2 percent; it had been at 2.5. I think we could say that our expectations and our policy direction are intended to be fully consistent with that long-term outlook. We could say that without getting ourselves tangled up into precisely what price index we’re talking about. So, we could note that the Congressional Budget Office, an agency of Congress, has this rate of inflation underlying all of the long-term budget projections." FOMC20061025meeting--53 51,MS. PIANALTO.," Thank you, Mr. Chairman. For a while now, I’ve been somewhat more pessimistic than most of the Committee about the downside risk to the real economy. I was beginning to get worried that this might be the perpetual disposition of someone from Ohio. [Laughter] As a prominent member of our business community said to me not too long ago, it’s not the weather, it’s the climate. [Laughter] Since our last meeting, I’ve become more comfortable with the idea that substantially weaker-than-forecast growth is less probable—partly because we’re now a little further down the road without any signs that the worst-case scenarios are materializing and partly because my directors and my business contacts seem more positive about the economic outlook. Specifically, as I listened to some of my business contacts in construction, retail, and even real estate, the expectations that things will get substantially worse just aren’t there. Also, the demand for labor seems to be growing at a moderate pace. On the price side, my contacts are not indicating much of an impetus for higher final goods prices. Although projected compensation growth seems to be firming just a bit, my contacts are telling me that they think productivity gains will keep costs in check. With the declining energy and material costs, I don’t hear much about the potential for accelerating pressures on prices. When I combine what I’m hearing from my District contacts with the aggregate data that have come in since our last meeting, I sense that we have weathered the worst in softness on the real side for now. In September I noted that my biggest concern was the possibility that the inflation trend would worsen. It does not appear that this is happening at this point. However, we have yet to see lower rates of core inflation, and I’m sensitive to the fact that core measures of inflation are being held up by the contribution to owners’ equivalent rent from the rising rents and falling utility bills. Although more-stable energy prices will make the latter effect go away, it’s not clear that the rent part of the picture will quickly fade, as rents continue to converge toward still high housing prices. When we look at the distribution of prices in the CPI, excluding energy, food, and owners’ equivalent rent, prices seem to be either rising rapidly or falling. There isn’t much in the middle, and that makes the underlying movements in the inflation trend hard to interpret. It seems to me that the key risk on the real side of the economy has been that the housing market would decline much faster and more deeply than we had forecast and that the effect on consumption spending would be greater than we anticipated. So far, as others have commented, the collateral effect on consumption appears to have been contained. Furthermore, we expected that other forms of spending would hold up as the housing sector slumped, and those expectations appear to be on track for now. I recognize that we’re not out of the woods yet, but the downside risks to the real economy appear somewhat more benign than they did at both the August and the September meetings. In regard to the inflation risks, the probability of accelerating inflation has decreased, in my opinion, but the risk that inflation will remain higher than I personally desire hasn’t really changed. Thank you, Mr. Chairman." FOMC20060510meeting--116 114,VICE CHAIRMAN GEITHNER.," Thank you, Mr. Chairman. The basic contours of our forecast are essentially unchanged since March and are very similar to the Greenbook’s. However, the balance of risks has changed a little in our view, somewhat to the upside on inflation. But as in March, we expect core PCE inflation to run a little over 2 percent in ’06 and to moderate slightly below that in ’07 as tighter policy works to slow overall demand growth. We expect real growth to rise in the vicinity of its potential rate— 3¼, 3½ percent—throughout ’07. So we are a little higher than the Greenbook in that sense. As before, this forecast rests on some important assumptions: that little or no slack is left in resource utilization, that inflation expectations are held in check, and that term premiums remain relatively low by historical standards. The recent moves in medium-term inflation expectations and the rise in the other components of forward interest rates cast some doubts on these last two assumptions. For these and other reasons, we see a little more uncertainty around our central forecast than we did in our last meeting. However, on the growth outlook, on balance the recent data seem to confirm the picture of real GDP moderating toward potential. We face the familiar sources of risk to the downside, but not all the risks are to the downside. We may be underestimating the momentum in final demand growth. I think it is important to note that it is hard to find evidence in credit spreads or in equity prices of a substantial growth slowdown in prospect. On inflation, recent developments are not all that dark, but neither have they been entirely reassuring. Let me just go through the factors that we think are critical to the outlook on the inflation side. Almost every measure of underlying inflation that we look at is now above the level we generally associate with price stability. Headline inflation has been running and is still running substantially above core, and even with interest rates close to long-run measures of equilibrium, the staff forecast does not anticipate much moderation in core inflation over the two-year or even three-year or four-year period. Compensation growth does not yet appear to have accelerated significantly, and the growth of unit labor costs has remained reassuringly moderate. However, compensation to us seems likely to strengthen, and it is unlikely that productivity growth is going to accelerate significantly from current levels. Demand growth is still probably running a bit above potential here and in large parts of the world economy; with real short-term rates still quite low around the world and monetary policy only just beginning to tighten in many of those economies, global pressure on resource utilization may intensify or at least continue at its current intensity rather than moderate. And the rise in energy prices and commodity prices, of course, suggests a fair amount of strength in global demand. Our assumption that energy prices follow the futures curve means that our forecast is, of course, still vulnerable as it has been over the past three years to further upside surprises. It would be easier to discount this risk if we could determine with confidence the extent to which temporary supply factors rather than unrecognized or unanticipated strength in global demand have accounted for the trajectory of energy prices over the past few years. We face a lot of uncertainty about the likely path of the dollar, and the prospect of a significantly weaker dollar adds another source of upside risk to inflation and expected future inflation. We obviously have some uncertainty about the extent to which margins will prove flexible in the face of higher cost pressures. Finally, we have seen a material rise in long-term inflation expectations in the United States over the past several months, and this should make us somewhat less confident that we can assume that the gap between headline and core will be closed with headline moving down to core. Inflation expectations seem to have risen more here than in other countries, and the recent changes in the relationship between changes in short-term expectations about U.S. monetary policy and changes in breakeven inflation rates is somewhat disconcerting, with expectations deteriorating when statements by Committee members were interpreted as lowering the probability of moves beyond our meeting today. This pattern is more troubling than the size of the rise in medium-term inflation expectations. And I just want to make one comment in response to something Janet said. Even if we could tell with confidence how much of this rise in breakeven inflation was about uncertainty or inflation risk premiums and how much was actually about future expectations about inflation and even if we thought a substantial amount of that was uncertainty, it is not clear that that would be particularly reassuring in terms of credibility or in terms of its implications for monetary policy. So underlying inflation is less contained than we would like it to be, and it is expected to moderate less than we might hope. Both short-term and long-term measures of expectations have moved up uncomfortably, and we see somewhat greater upside risk to our inflation forecast than we did in March. Now, what might we learn over the next six weeks that would change our view about the outlook and its implications for monetary policy? We actually think it is unlikely that data are going to provide us with very strong signals that policy is markedly off track, but there are two important things to watch. One is the behavior of long-term inflation expectations. If those expectations were to continue to rise, that would obviously be a source of concern; and if inflation expectations were not responsive to changes in expectations about the path of the funds rate, that would also be troubling. On the data front, we at least will want to watch to see if the expected moderation in manufacturing activity in the United States materializes. If, in contrast, manufacturing activity here sustains its recent pace, it might suggest that growth abroad has picked up more than we thought or that the dollar is having a bigger effect in stimulating exports than we anticipated. These conditions would increase concern about upside risks to our central forecast because, of course, that forecast relies on a slowdown in overall domestic demand growth mitigating upward pressure on inflation over the forecast period. Just a few points to end on the topic of uncertainty: Even though the fundamental news is pretty positive and reassuring, we are now at the point where the limits of our knowledge about the underlying forces that affect the outlook for aggregate demand, supply, and inflation matter more than they have in the recent past. Relatively small differences, differences well within the limits of our knowledge about trend growth and productivity or employment or other factors, have more impact on our choices about monetary policy in the near term than they would have had over the past two years. What should we conclude from the substantial rise in real forward rates that we have seen over the past few months? This move, which has occurred across the major economies, brings expected real rates more in line with long-term averages, reducing, if not eliminating, the anomalistic line we had such trouble understanding. Now, does this mean we have less to do in terms of future tightening than we thought? Maybe. Or it might mean that monetary policy has been more stimulative than we thought and that we will have to do more to make up for that going forward. The fact that we cannot fully explain why these measures of expected real rates have moved around as much as they have just adds to the uncertainty we face today about how tight policy actually is. It is also a bit of a puzzle that measures of uncertainty about future interest rates have not increased very much, and I do think it is important that we try to continue encouraging—it is uncomfortable to say this—or to at least avoid discouraging an increase in uncertainty that is more commensurate with what we are experiencing ourselves. [Laughter] Monetary policy works through expectations, but our job is harder when we are not truly sure what we want to do to those expectations. Trying to make sure that we are not pushing down uncertainty as we continue to make sure that the markets understand that we’re going to work to keep inflation low and stable remains our principal challenge. Thank you." FOMC20060328meeting--37 35,MR. STOCKTON.," Thank you, Mr. Chairman. I thought that I would address three related questions in my remarks this afternoon. First, how much momentum is there in current economic activity? Second, how close is the Committee to having put in place sufficient restraint to prevent output from overshooting its potential, with attendant consequences for inflation? And finally, how do we view the current state of resource utilization, and what are the implications of that assessment for the inflation outlook? Let me turn first to the question of momentum. At the last FOMC meeting, I indicated that the staff was in a state of denial concerning the meager 1 percent rate of increase in real GDP that the BEA had just published as their advance estimate for the fourth quarter of last year. We were skeptical that the growth of output had actually been that weak, and we thought that growth, to the extent it had been soft, would bounce back sharply in the current quarter. I am relieved to report that subsequent developments appear to have supported that interpretation. We now estimate that growth of real GDP was about 1¾ percent at an annual rate in the fourth quarter— noticeably above the advance reading and about halfway back to our January Greenbook projection. Moreover, activity appears to be snapping back in the current quarter. We estimate that real output is growing at a pace of more than 4½ percent this quarter. Although, in broad strokes, those developments paint a picture close to that which we envisioned in January, we have had our share of surprises to contend with. Most notably, consumer spending and business spending have been considerably stronger than we had projected. Real PCE is projected to have advanced at an annual rate of 5¼ percent this quarter. Some of that strength reflects a bounceback in motor vehicle purchases. But even setting that aside, real PCE appears on track for a 4¼ percent increase in the current quarter, nearly a percentage point faster than we had projected in the January Greenbook. In the business sector, we are projecting an increase in real outlays for equipment and software of nearly 15 percent at an annual rate in the first quarter. Like consumer outlays, real spending for E&S has been boosted by motor vehicle sales this quarter, and it has received a further bump-up from a recovery in aircraft deliveries. But even abstracting from the jump in spending on transportation equipment, real E&S is expected to increase at a 10 percent annual rate in the current quarter, nearly 3 percentage points faster than we had previously projected. Our surprises have also extended beyond the spending data. Gains in private payroll employment were revised up in the fourth quarter and averaged about 200,000 per month in January and February—a bit above our expectation. Those job gains, coupled with a higher-than-expected workweek, raised the growth in hours worked in the current quarter to more than 3 percent at an annual rate, nearly 2 percentage points faster than we had anticipated in January. The readings on manufacturing industrial production have also exceeded our expectations. Factory output is now estimated to have increased at a 9 percent annual rate in the fourth quarter and is projected to increase at a 6 percent rate in the current quarter; those increases are, respectively, 1 percentage point and ½ percentage point greater than we had written down in January. This rather lengthy litany might suggest that the answer to the first question that I posed should be that there is a great deal more momentum to activity than we had earlier expected. But, in fact, for two reasons, I’d characterize the situation as one in which we perceive just a little more momentum. First, we have had some downside surprises as well upside ones. For example, construction activity in the business sector and by state and local governments has fallen short of our expectations. The biggest downside surprise, however, has come from the external sector, where a surge in imports in the first quarter suggests that some of the additional strength in domestic spending was met by foreign rather than domestic producers. A second reason for not interpreting all the recent strength as added momentum is that we can already see evidence, admittedly tentative, that some of the strength in the first quarter will be transitory. For one, the jump in federal spending in the first quarter mostly reflects a rebound from a low level of outlays in the fourth quarter, and given this year’s federal budget, real purchases should only edge up over the remainder of the year. In addition, some of the strength in the current quarter reflects the effects of favorable weather in January and February on housing construction. And, finally, the data on retail sales, shipments of capital goods, and industrial production suggest that most of the impetus to rapid first-quarter growth in these areas occurred early in the quarter; recent readings have been more subdued. A bit more momentum in private domestic demands, coupled with higher prices for equities and houses and lower prices for imported crude oil, led us to revise up the growth of real GDP by a tenth both this year and next. But these are really just minor tweaks to an outlook that is much the same as it was seven weeks ago. If our forecast for the current quarter is close to the mark, the growth of real GDP over the past four quarters will have been 3½ percent—about the same pace that we have averaged over the past two years. To me, that seems like a very reasonable estimate of the current underlying pace of the expansion. The gradual decline in the unemployment rate and the rise in capacity utilization over the past year suggest that this pace has been above the sustainable trend rate of growth, but just by a little. That assessment helps to explain our answer to the question of how much more restraint will be necessary to head off the inflation pressures that could follow from a serious overshooting by output of its potential. Our answer is not much more restraint—in part because we don=t think that the pace of activity will, in fact, need to slow much. We are assuming that the funds rate is raised to 5 percent by May and then is held at that level through the middle of next year. In our view, that will be sufficient to slow the growth of real GDP from its current pace of 3½ percent to a 3 percent rate next year and to tip inflation down. As growth slows slightly below potential and core inflation edges down, the federal funds rate is assumed to be lowered a bit in the middle of next year. As has been the case for some time, housing is central to our forecast of some modest deceleration of activity. Residential investment has been contributing about ½ percentage point to the growth of real GDP over the past few years. So a flattening out of activity in this sector would, by itself, be sufficient to bring about the necessary slowing in aggregate production. And, roughly speaking, that is what we are forecasting. A few months ago, the deceleration in housing activity that we were projecting was not yet evident in the data. But since then, the data have been providing increasing support for our view that housing is in the process of softening. On net, both new and existing home sales have retreated from last summer’s peaks, household sentiment toward homebuying has turned down, and builder attitudes have deteriorated. Even house-price appreciation appears to have slowed in recent quarters—to be sure, not quite as much as we thought it would, but at least it now seems to be moving in the anticipated direction. About the only housing indicator not signaling some softening is the starts figures themselves. However, as I noted earlier, we think that starts were boosted considerably by favorable weather in January and February, and building permits, which are less affected by weather, are pointing to some fallback in starts in the months ahead. I’m tempted to chalk this situation up as a victory for the staff projection, where victory is defined as any aspect of our forecast not immediately contradicted by the data. But I’m afraid that there is still plenty of scope for surprise in the housing sector. Last week=s reports for February showing an increase in existing home sales and a decline in new home sales certainly highlight contrasting risks. And although we have been encouraged by the recent slowing in home prices, those data hardly confirm that a deceleration in house prices is under way. Nor, for that matter, do they rule out that we are at the front edge of a more abrupt collapse in prices. Right now, it feels a bit like riding a roller coaster with one’s eyes shut. We sense that we=re going over the top, but we just don’t know what lies below. It is, of course, an oversimplification to suggest that housing is the only risk to achieving our forecast of a slowdown with only a minimal amount of additional tightening. But housing is prominent because we are forecasting it to break from its steady uptrend of the past few years. In contrast, the growth of consumption and the growth of business fixed investment are projected to slow only a bit between 2006 and 2007 and to remain on solid upward trajectories. Growth in real PCE is projected to average about 3½ percent over the forecast period. Higher interest rates and waning wealth effects from earlier increases in equity and house prices should act to damp the growth in consumer spending. But a pickup in the growth of labor income and a diminishing drag from higher energy prices on the growth of purchasing power nearly offset those influences. In the business sector, the growth of fixed investment is projected to average about 6½ percent over the forecast period. It slows a bit in response to the deceleration of output and final sales. But a low cost of capital and healthy balance sheets should provide support to equipment spending; declining vacancy rates and ongoing gains in employment are expected to lift office construction; and high energy prices should provide some continuing stimulus to drilling activity. So housing takes center stage in our projected slowing in aggregate activity, and consumption and investment play small supporting roles. We expect the growth of real GDP by early next year to run about 3 percent, a bit less than our estimate of the growth of potential output. Consequently, by the end of the forecast period, the unemployment rate edges back up toward 5 percent, our estimate of the NAIRU. This brings me to the third question: How do we assess the current state of resource utilization? In setting our forecast, we are required to take a stand on a point estimate for the NAIRU and potential output. But we recognize, as I’m sure you do, that we are being forced to split hairs here. In reality, the confidence interval around our estimate of the NAIRU is very wide. A 70 percent confidence interval is roughly plus or minus ¾ percentage point, and a 90 percent confidence interval is about plus or minus 1 percentage point. Moreover, Board staff members have done considerable research that highlights just how tentative real-time estimates of the NAIRU and potential output can be. At this point, all we can say is that you are well within a wide zone of uncertainty as to whether the economy is approaching, has reached, or has already overshot the NAIRU. Some recent developments could be read as pointing to greater slack than we are currently estimating. The relatively small gains in the employment cost index (ECI) over the past couple of years have been well below that expected by our models, offering the strongest evidence in favor of a lower NAIRU. Other wage and price measures, however, offer a more mixed assessment. Hourly labor compensation, as measured in the national accounts, also decelerated last year to a modest pace of 3¾ percent, slower than the rate predicted by our models. But that came on the heels of a 6 percent increase in 2004 that was above the models, with the pattern between the years likely affected by some large swings in stock option exercises. On average over the two years, this measure of hourly compensation has run a bit above model predictions. As for price developments, our core PCE equations employing a 5 percent NAIRU were on track until recently. But in the last few quarters, core PCE price inflation has come in a bit below those equations. Thus far, these residuals are small. Moreover, interpreting the reasons for the recent misses is not straightforward. The misses may reflect a lower level of the NAIRU, but they could also be signaling a smaller pass-through of higher prices for energy, imports, and other commodities. And, of course, they could simply be noise. In the end, we thought that we had not accumulated enough evidence against our 5 percent NAIRU to make a change at this point, but we will certainly be monitoring this aspect of our forecast closely in the months ahead. To be sure, an overshoot of the NAIRU of modest dimensions, even if sustained over a couple of years, would likely result in only a small and gradual updrift in the underlying rate of inflation, given how flat the aggregate supply curve appears to be. Of course, the flip side to a shallow aggregate supply curve is that it would also be more costly to reverse whatever inflation might build up over that period. All told, we made only minor adjustments to our inflation forecast in this Greenbook, as neither the price data nor the major determinants of price inflation presented major surprises. On net, core PCE appears to be coming in close to our earlier expectations. However, that reflected some small offsetting errors. The nonmarket component of core PCE was higher than we had expected, whereas the market-based component was lower. Because we give a bit more weight to the high- frequency movements in the market-based measure, we are inclined to interpret recent consumer price developments as being a touch more favorable than we had expected. Projected oil prices also have been marked down, especially in the near term, reducing some pressure on business costs. Working in the other direction has been the reacceleration in the prices of materials and imported goods since last autumn, a further rise in capacity utilization, and a lower unemployment rate. Taken together, these developments caused us to trim a tenth from this year’s core PCE inflation and to add a tenth to next year’s rate, putting our projection at 2 percent this year and 1.9 percent next year. In sum, our outlook is for pretty stable inflation. I’ll conclude my remarks this afternoon by pointing out some changes that we made in the Greenbook this round, starting with our presentation of the financial assumptions. It has now been seventeen years since the fall of the Berlin Wall and fifteen years since the end of the old Soviet regime, so it didn’t seem like rushing things for the staff to engage in little glasnost ourselves. Therefore we have now laid out the details of our financial assumptions in the Greenbook. As you know, we had already been moving in that direction, and doing so seemed like a logical and useful step toward greater transparency on our part. We have also made some important changes in our construction of the alternative simulations and confidence intervals. We are now reporting only the versions of the simulations that employ the Taylor rule. This has the virtues of reducing the number of permutations that we present and of focusing on the ones that seem most relevant—that is, on the simulations in which policy begins to react to the shocks within the simulation period. To further facilitate their interpretation, we have added a chart that presents the baseline path for the funds rate, an accompanying confidence interval, and the policy paths that are generated by the Taylor rule for each of the alternative scenarios. Finally, we shortened the sample period over which we generate confidence intervals for the Greenbook forecast and those that are generated by stochastic simulations of the model. We now start those calculations in 1986, rather than in 1978. When we first started reporting these confidence intervals four years ago, we choose the longer sample on the concern that we couldn’t rule out shocks like those experienced in the 1970s. Subsequently, we have had shocks similar to those in that period, and the Great Moderation still appears to be holding. So we think a stronger argument can now be made for using the more recent period. All in all, we hope these changes make the document a little clearer and a little more useful. Karen will continue our presentation." FOMC20070807meeting--17 15,MR. DUDLEY.,"1 Thank you. As you all know, there has been considerable financial market turbulence since the last meeting: Problems in subprime mortgage credit have persisted and intensified; credit-rating agencies have begun to downgrade asset-backed securities and CDOs (collateralized debt obligations) that reference subprime debt; the problems in subprime have spread into the alt-A mortgage space and into parts of the prime mortgage market; corporate credit has been infected, with high-yield bond and loan spreads moving out sharply; and stock prices have faltered. Although markets generally have been functioning well in terms of liquidity and the ability to transact, there have been some important exceptions. The nonconforming residential mortgage market and the structured-finance product markets—especially the CDO and CLO (collateralized loan obligation) markets—have been significantly impaired, and there are concerns about the ability of some asset-backed commercial paper programs to continue to source funding via that market. As a consequence, market expectations with respect to monetary policy have shifted sharply, with market expectations consistent with considerable monetary policy easing over the next year. Market participants are worried about the effect of tightening credit standards on housing and about the deterioration in the market function in structured finance, which could broaden and be self-reinforcing, ultimately damaging the macroeconomy. I am going to be referring to this handout as we go through these comments. In tracing the source of the turmoil that we have experienced recently, we find that the deterioration of the subprime mortgage sector continues to play an important role in several ways. First, the deterioration in underlying credit quality continues unabated. As shown in exhibit 1, delinquencies of more than sixty days for recent ABX index vintages have continued to move higher, and the pace of deterioration—measured by the steepness of the curves—has, if anything, worsened. Note that the newest vintage—07-2, so the second half of 2007—does not show any benefit from improved underwriting standards. That stems mainly from the fact that the pipeline to build these securities is relatively long—with the average loan referenced by this index more than six months old at this point. It also may reflect the fact that this newest vintage gets—in contrast to earlier vintages—less benefit from earlier home- price appreciation. As a consequence of this poor credit performance, ABX spreads have continued to widen sharply. This is shown in exhibit 2, which shows the performance for ABX BBB- tranches across vintages, and exhibit 3, which shows the performance for the various tranches of the 07-1 vintage. The deterioration in the 1 Materials used by Mr. Dudley are appended to this transcript (appendix 1). higher-rated tranches has been much more severe than earlier in the year. In part, this greater deterioration reflects the fact that loss estimates have been trending higher, putting the higher-rated tranches more in harm’s way. It also reflects efforts to hedge subprime risk by going short these indexes by people who can’t liquidate securities easily. Translating these ABX spreads back into price, July was a very rough month for ABX. Price declines of 20 points or more occurred in the ABX BBB- tranches of some more-recent vintages. Second, the disturbing delinquency trajectories shown in exhibit 1 have caused the rating agencies to downgrade a significant number of residential asset-backed securities and CDOs that have exposure to the subprime sector. However, most of the downgrades apply to vintages before 06-2. For more- recent vintages, the loss experience is worse but still hard to estimate. This means that many more downgrades lie ahead. Third, some of the credit-rating agencies have made changes to their structured-finance rating models. That, combined with huge marked-to-market losses even in highly rated subprime tranches, has led to a fundamental reevaluation of what a credit rating means and how much comfort an investor should take from a high credit rating on an opaque structured-finance CDO or CLO product. The problems in subprime have spread into other mortgage markets, including alt-A, certain types of prime residential mortgage products, and commercial mortgage-backed securities (CMBS). Countrywide, for example, announced a deterioration in its second-lien prime mortgage book. Meanwhile, American Home Mortgage, which had operated primarily in the alt-A and nontraditional prime mortgage space as both a large monoline mortgage issuer and a REIT investor, was forced to shut down its operations last week and filed for bankruptcy yesterday. Market liquidity for nonconforming residential mortgage products is poor, and this has contributed to a further tightening in underwriting standards. For example, a number of mortgage originators indicated that they will no longer offer 2/28 and 3/27 adjustable-rate mortgage products, and some have indicated that they will not buy any alt-A mortgages originated by brokers. At the same time that we have seen turmoil in the subprime market, it has spread into the corporate sector as well. Credit spreads in the corporate sector have also widened sharply. For example, in July, high-yield corporate bond spreads widened about 150 basis points (see exhibit 4). Similarly, the spreads on key hedging indexes that reference credit default swaps on corporates have also gone up sharply. For example, in July the spreads on three of these major indexes rose nearly 200 basis points. This is illustrated in exhibit 5. The ITRAXX crossover index references fifty European nonfinancial names with ratings below BBB- or at BBB- and on negative watch. The high-yield CDX index references credit default swaps on 100 high-yield U.S. names. The LCDX index references credit default swaps on 100 U.S. leveraged loans. In contrast to the residential mortgage sector, corporate credit fundamentals still look good. In particular, as shown in exhibit 6, corporate default rates for both investment-grade and below-investment-grade borrowers have been at very low levels. Of course, as we saw in the subprime market, readily available credit can depress default ratios. One should expect that the tightening of credit standards in the corporate sector would generate some rise in default rates independent of other developments. Nevertheless, other measures also underscore the positive fundamentals of the corporate sector—in contrast to the poor fundamentals in residential mortgages. For example, global growth has been unusually strong with little volatility, and corporate profit margins are unusually wide, both in the United States and elsewhere. Moreover, the slowdown in profit growth expected for the United States has been milder than anticipated. This can be seen in the rise in the median equity analysts’ bottom-up earnings forecasts for the S&P 500 companies for 2007, which is shown in exhibit 7. It was falling through about April. Since then, expectations for this year have actually increased, and they have been increasing recently, even over the past month. So how does one explain the contagion to corporate credit from the subprime market given the disparity in fundamentals between these two sectors? Although the answer is complex, one factor stands out: There has been a loss of confidence among investors in their ability to assess the value of and risks associated with structured products, which has led to a sharp drop in demand for such products. The loss of confidence stems from many sources, including the opacity of such products; the infrequency of trades, which makes it more difficult to judge appropriate valuation; the difficulty in forecasting losses and the correlation of losses in the underlying collateral; the sensitivity of returns to the loss rate and the degree of correlation; and the problem that the credit rating focuses mainly on one risk—that of loss from default. The CLO and CDO markets have facilitated the transformation of low-rated paper—for which there is a limited investor appetite—into a high proportion of high- grade-rated debt. For example, in a typical CLO structure, the underlying loan quality averages a rating of about B. Yet through the magic of structured finance and the corporate rating agencies, the resulting CLO tranches are rated predominately investment grade. Exhibit 8 shows the structure for a representative CLO: More than two-thirds is AAA-rated debt, and 87 percent is investment grade. The loss of confidence among investors in the ability to assess the value and risks associated with this structured product has led to a sharp drop in CDO and CLO issuance. As shown in exhibit 9, CLO and CDO issuance plummeted in July. This is very important because the CLO and CDO markets represent the bulk of the demand for non- investment-grade debt. With this demand falling away at a time when the forward supply of high-yield corporate loans and debt exceeds $300 billion by some measures, a huge mismatch between demand and supply has developed. The underlying problem is that the depth of the market for non-investment-grade rated loans and debt—excluding CDO and CLO demand—is far shallower than the market for investment-grade products. Where do we go from here? Presumably buyers and sellers in the corporate sector are in the process of finding appropriate market-clearing prices. But it may take time for the market to settle down, especially given the August doldrums that are upon us. Moreover, we still may have further scope for market dislocations. After all, some single-strategy hedge funds that emphasize corporate credit may have been caught out by the sharp widening in spreads that has occurred over the past few weeks. When such results become known, investor redemptions could follow— leading to forced selling to generate the cash to fund these redemptions. In addition, the asset-backed commercial paper market is very skittish in two areas—structured investment vehicles and extendable commercial paper programs. Yesterday at least two commercial paper programs were subject to extension. It is not clear whether or to what degree these extensions will further unsettle the commercial paper market, but that is clearly a risk. The effective shutdown of the CDO and CLO markets has, in turn, raised questions about the sustainability of the strong bid by private equity firms to conduct leveraged buyouts. This uncertainty has undoubtedly been a factor behind the recent weakness of the U.S. stock market. The importance of the buyout bid can be seen in the relative underperformance of the Russell 2000 index compared with the S&P 500 index during the past few weeks (see exhibit 10). The problems in corporate credit and the virtual shutdown of the CLO and CDO distribution mechanism have caused investors to reevaluate both the business opportunities and the risks associated with large investment and commercial banks. Investment bank and commercial bank shares have underperformed the broader stock market indexes. In addition, as shown in exhibit 11, the CDS spreads for the major investment and commercial banks have widened considerably over the past month. The CDS spreads for financial guarantors have widened as well, even though the exposures of these firms appear to be concentrated in the most senior portions of the subprime and structured-finance debt structures. Perception of the strength of the financial guarantors could prove important given the key role that they play in some markets, such as the municipal debt sector, that lie far afield from either the subprime mortgage market or the corporate debt markets. Only in the past few weeks have the problems in the subprime and corporate debt markets led to broader risk-reduction activities. These risk-reduction efforts are similar to the adjustments that we saw in late February and early March. A matrix that shows the correlation of returns across different asset classes over the past few weeks (see exhibit 12) looks very similar to the correlation matrix that we saw following the late February risk-reduction period (see exhibit 13). It looks very different from the very calm period we had from late March through the first part of July, which is shown in exhibit 14. But the adjustments are not uniform across markets. In some ways, the risk reduction that we are seeing this time is a little more U.S. specific, a little more corporate credit specific, and a little more mortgage specific. For example, as shown in exhibit 15, implied volatility in interest rate swaps—the SMOVE index—and in equities—the VIX index—has climbed well above the late February peak. In contrast, the foreign exchange markets have experienced a less-pronounced rise in volatility. In the United States, the turmoil in financial markets has been accompanied by a shift in monetary policy expectations. Exhibit 16 illustrates the Eurodollar futures strip. As can be seen, the futures curve has shifted down about 40 basis points since the last FOMC meeting. We are back where we were before the May FOMC meeting. Currently, market prices imply a bit more than 50 basis points of easing by year-end 2008. The shift in expectations appears to reflect, in part, a revival of the “downside risks to growth” idea rather than that the Federal Reserve will absolutely cut interest rates. This can be seen in several ways. The shift in market expectations implicit in Eurodollar futures yields has not been accompanied by a substantial change in dealer forecasts. As shown in exhibits 17 and 18, which show the federal funds rate projections of the primary dealers before the June and the current FOMC meetings, the average dealer forecast and the range of dealer forecasts have not changed much over the past six weeks. Instead, a gap has opened up between the average dealer forecasts, represented in the exhibits by the green circles, and the forecasts implicit in market yields, represented by the horizontal black lines. The most recent dealer survey does not capture the minor forecast changes that occurred late last week. For example, two dealers with tightening forecasts pushed back the timing of the first tightening, and one dealer with an easing forecast moved it closer and increased the magnitude (not shown in exhibits 17 or 18). The dealers’ forecasts are modal forecasts. In contrast, the expectation embodied in market yields represents the mean of the distribution of expected outcomes. Presumably, it includes some possibility that the current market turbulence could lead to a weaker growth outcome and a reduction in the FOMC’s federal funds rate target. Options on Eurodollar futures contracts 300 days forward show a sharp downward skew in the distribution of rates (see exhibit 19). Although the mode is at 5.25 percent, the same as it was before the June meeting, the probability distribution has shifted down drastically below that 5.25 percent mode. So it may not be correct to say that market participants now expect much more monetary policy easing. Instead, a more proper characterization might be that the perceptions of downside risks have reemerged, and this characterization is reflected in the downward skew below what is still a 5.25 percent modal forecast for the Eurodollar rate. There were no foreign operations during this period. I request a vote to ratify the operations conducted by the System Open Market Account since the June FOMC meeting. Of course, I am very happy to take questions." FOMC20081216meeting--106 104,MR. AHMED.," I will be referring to the exhibits that follow the blue International Outlook cover page. Financial markets in foreign economies remain stressed but have not suffered further pronounced deterioration since the October FOMC meeting. As shown at the top of your first exhibit, government bond yields in major industrial economies have dropped, likely reflecting further expected monetary policy easing, lower inflation expectations, and a firming of the belief that economic recoveries are not around the corner. Equity markets, shown in the middle left, have changed only moderately, on net, since your last meeting, compared with large declines in previous months. The emerging-market aggregate CDS spread, shown in the middle, has been volatile but remains elevated. As shown to the right, gross private capital inflows to emerging markets through debt and syndicated loans have continued to trend downward. The exchange value of the dollar against the major foreign currencies (the black line in the bottom left panel) has moved down a little since the last FOMC meeting. Some bilateral exchange rate movements were substantial, however, with the dollar appreciating markedly against the pound and depreciating against the yen. As shown to the right, the dollar has appreciated somewhat against the currencies of our other important trading partners, driven by movements in the Mexican peso and the Brazilian real. Earlier this month, the dollar registered one of its biggest daily increases against the Chinese renminbi in recent years, although this shows up only as a tiny blip in the chart. We believe that Chinese authorities will allow the renminbi to depreciate somewhat in the coming months; NDF (nondeliverable forward) contracts also imply an expected depreciation of the renminbi against the dollar over the next year or so. Incoming evidence on economic activity abroad continues to be grim. As shown in line 1 of the table in exhibit 2, we now estimate that foreign economic growth was below 1 percent in the third quarter. Although growth in Canada (line 7) and Mexico (line 12) surprised on the upside, readings elsewhere were generally weaker than expected, with real GDP contracting in the United Kingdom, the euro area, and Japan (lines 4 through 6). As shown by the red bars in the middle left panel, net exports made significant negative contributions to growth in these three economies. Domestic demand (the blue bars) was also soft. Growth in emerging Asia (line 9) was barely positive in the third quarter, reflecting subdued growth in China (line 10) and substantial contractions in most of the newly industrialized economies (shown in the middle right). With data from the current quarter pointing to greater weakness than we expected and a substantially more pessimistic U.S. outlook, we have further slashed our forecast for total foreign growth to minus 1� percent in the current quarter and minus 1� percent in the next, before a recovery to a positive but still relatively weak average pace of about 1 percent through the remainder of next year. The widespread nature of the economic slowdown in large part seems to reflect trade linkages. As depicted at the bottom, in recent years U.S. economic growth (the black line) and the growth of total real exports of our major trading partners (the green line) have been significantly related. Although foreign exports are affected by many factors in addition to U.S. GDP, the relationship shown and the gloomy outlook for U.S. economic activity through next year paint a bleak near-term picture for foreign exports. Your next exhibit focuses on the advanced foreign economies in more detail. Data from Europe point to a sharp slowing in the current quarter. The timeliest indicators are PMIs (purchasing managers' indexes), which, as shown in the top left panel, have plummeted in recent months in both the United Kingdom and the euro area, reaching levels well below those observed during the 2001 downturn. As depicted to the right, in Japan, exports (the black line) and industrial production (the blue line) have contracted during the current quarter, and conditions in the labor market have deteriorated further, as manifested by the decline in the ratio of job openings to applicants (the red line). Indicators from the current quarter in Canada, shown in the middle left, point to weakness in real exports and a continued drop in housing starts. Authorities in advanced foreign economies are attempting to shore up aggregate demand through fiscal stimulus. As listed in the middle right panel, many countries have announced stimulus packages, including Germany, France, and the United Kingdom. We estimate that the actual stimulative content of the packages announced so far is likely to be small but expect that additional measures will be introduced next year. The total fiscal stimulus that we are assuming should boost growth in the advanced foreign economies by � to � percentage point at an annual rate from mid-2009 through 2010. The possibility of bigger fiscal initiatives is an upside risk to our outlook for foreign growth. Many of the foreign central banks have become more aggressive in easing monetary policy, as can be seen at the bottom left. Since the last FOMC meeting, the Bank of England and the ECB have slashed policy rates by a total of 250 basis points and 125 basis points, respectively, and the Bank of Canada and the Bank of Japan have lowered rates by smaller amounts. More rate cuts are expected in all of these economies, which could bring rates in Japan back down to the zero lower bound. As shown on the bottom right, inflation in the advanced foreign economies is now expected to recede at a faster rate than previously projected, reflecting sharp declines in commodity prices as well as diminished resource utilization. Turning to emerging-market economies, as shown in the top left panel of exhibit 4, the recent behavior of Chinese industrial production, total exports, and imports from Asia is now reminiscent of developments during the year 2001. The plunge in imports from Asia casts doubt on the notion that China has become an independent engine of growth in the region. As depicted to the right, Korean exports and aggregate industrial production in Korea, Singapore, and Taiwan are plummeting. In Mexico, third-quarter output was bolstered by expansion in the agricultural sector, but as shown in the middle left, exports have moved down sharply, and consumer confidence has dropped below 2001-02 levels. In Brazil, too, shown on the right, there has been some softening in exports (the black line), which had been supported by high commodity prices, although industrial production (the blue line) has held up a bit better. With prospects for exports in the doldrums, policy stimulus has become all the more important to the outlook for emerging-market economies. As noted in the bottom left, monetary easing has continued, with interest rate cuts in many emerging Asian economies, including China and Korea. China, Malaysia, and Brazil have also lowered bank reserve requirements. In addition, fiscal stimulus packages have been announced in a number of economies, most notably China. China's 16 percent of GDP spending package considerably overstates the ultimate effects on growth as it includes some previously announced projects, its implementation may take longer than announced, and the federal government is slated to pay for only 30 percent. Discounting the headline number, we estimate that the Chinese package could boost growth 1 to 1� percentage points per year. Other countries, such as Korea and Mexico, have introduced smaller but still sizable packages, which we expect will give some impetus to growth. In sum, our near-term forecast calls for total foreign growth to be the weakest since 1982, and as sketched out in our alternative simulation in the Greenbook, there would appear to be downside risks even to this forecast. Your final exhibit focuses on the U.S. trade outlook. Weak global demand has contributed to falling prices for food and metals, which have led a sharp decline in nonfuel commodity prices (the blue line in the top left panel). Oil prices (the black line) also have continued to move down rapidly, but futures prices project some recovery ahead. The fall in commodity prices has exerted downward pressure on U.S. trade prices (shown in the top middle panel); both core import prices and core export prices dropped markedly in October and November, which for import prices were the largest monthly declines in the fourteen-year history of the index. A sense of the extent of weakness in global demand can also be seen in shipping rates (shown to the right), which have taken a nosedive. As in the 2001 recession, U.S. real exports and imports of goods (shown in the middle left) are now trending down. Imports (the red line) have been moving down all year. The falloff in exports (the black line) is a more recent development and, in part, reflects hurricane-related disruptions and the strike at Boeing. As shown in the table, growth of both real exports of goods and services (line 1) and real imports (line 3) was noticeably weaker in the third quarter than we had previously estimated. For the current quarter, we see both real exports and real imports contracting sharply, reflecting the slowdown in global demand. Looking ahead, our projections for a stronger broad real dollar (shown in the middle right) along with our weaker outlook for foreign growth have led us to revise down sharply our forecasts for exports, especially in 2009. In the near term, our projections for imports have also been marked down considerably. As shown in line 5, the contribution of net exports to U.S. growth is expected to swing slightly negative in the current quarter, following large positive contributions earlier this year. The current quarter's contribution is considerably weaker than projected in both the October and the December Greenbooks, as last week's export data surprised us on the downside. Next quarter, with a substantially greater step-down in imports than in exports, we expect the contribution of net exports to U.S. growth to jump back up, before returning to negative territory for the remainder of the forecast period. That concludes our presentation. " FOMC20060920meeting--175 173,MR. PLOSSER.," Thank you, Mr. Chairman. At our last meeting, my inclination was to favor an additional 25 basis point increase in the fed funds rate. In my view, there has been very little change in the economic case for some additional policy firming. The incoming data have not persuaded me to think that growth would be considerably below trend in ’07, although I do think that there will be moderation over the next couple of quarters. I do not think that a 25 basis point change in interest rates one way or the other will have much effect on the housing market at this point, and I do not believe that we should stand in the way of the adjustment to the housing sector to move to a more sustainable level of activity. Thus far the Committee has maintained its credibility, and long-run inflation expectations have been stable. That is very good. My concern, however, is that the longer we tolerate inflation above our comfort zone, the more risk we have that those expectations will become unhinged. Their becoming unhinged, as I noted in my earlier comments, could lead to some very unpleasant outcomes, and we would find regaining our credibility very difficult. Because of the weakness in residential investment, a rise in the fed funds rate could be viewed as potentially costly; but that potential cost increases the value of the actions as a signal of the Fed’s commitment and its effectiveness in keeping inflation expectations firmly in check. As the discussions around this table in August and today show, reasonable people doing sound economic analysis can have different views about whether further policy firming will be needed. I understand and respect both sides of that argument. My goal at this point is to stress, as many people have stressed, that we shouldn’t lose sight of the importance of our credibility and to state that I am unhappy with the level of core inflation and with the pace at which it seems to be declining, at least in the staff’s forecast. Credibility is difficult to acquire and easy to lose. If we convince ourselves at each juncture of the decisionmaking process that at the margin we can risk sacrificing a little credibility to achieve some other loosely defined and perhaps illusive objective, we may find our capital significantly depleted. Once that is obvious in the data, it is too late. The decision to pause in August was a close call, but the pause cannot be ignored, I think, in deciding the appropriate action for today. While I believe the language we used in our August statement gives us the flexibility to raise rates, I think doing so today would pose a very different and difficult communication challenge. I argued last time that, if the data for August and September continued to evolve as they had in June and July, it would be hard to change our policy stance if we paused in August. That seems to be exactly where we are. I might argue that another six weeks of inflation above our comfort zone has increased the risk to our credibility, but I think that initiating a rate increase so soon after pausing, given the data we have received, could be misinterpreted and pose its own risk to our credibility for sound monetary policymaking. Thus, I come down on the side that it would be better to remain on hold for this meeting but to have strong enough language in today’s statement to enable us to initiate rate increases in the near future unless the incoming data are significantly different from what we’ve expected. The language in alternative B+ comes close to doing that. It is important that we continue to say, as in section 4, that inflation risks remain. I would not like to cite factors restraining aggregate demand in the list of things that would potentially help moderate inflation. I do not think we can measure the tradeoffs between growth and inflation precisely enough to depend on a moderate deceleration to bring inflation down over the forecast period. Moreover, and even more important to me, such language fosters a belief among the public and others that we have a desire and an ability to engage in fairly precise fine-tuning. I am opposed to alternative A language. First, I do not think that we can say with any great confidence that inflation risks appear to have diminished. Second, I do not think that saying “downside risks to growth have become more significant” is helpful at this point. Saying that is likely to lower the expected path of future interest rates, as has been pointed out, and to reinforce the idea that interest rates are likely to come down sooner than is built into our forecast. To the extent that the assessment-of-risk language is supposed to help with the public’s understanding of the monetary policy process over the coming months, I think the language in alternative A would be counterproductive. Finally, I would like to reiterate a point that has been made around the table several times. When we look at the longer-term survey data and at what the markets are saying, they seem to be reading the fact that we do not actually have a target zone of 1 to 2 percent. The target zone is really maybe 1 to 3 percent or 2 to 3 percent. If in fact our comfort zone is 2 to 3 percent, then we should communicate that fairly directly rather than speaking one way and acting another way. Of course, as Governor Kohn and several others mentioned, that point brings us right back to the communication issue, which I think will be a very important agenda item in the coming meeting. Thank you, Mr. Chairman." CHRG-109shrg26643--103 Chairman Shelby," Mr. Chairman, the January survey of senior loan officers indicated that 40 percent of respondents felt that the outlook for delinquencies and chargeoffs of nontraditional mortgages was likely to deteriorate somewhat. Would this type of credit quality deterioration be consistent with the forecast that you outlined for a soft landing in housing markets? And do you believe that bank regulators including the Fed, yourself, acted quickly enough in putting out supervisory guidance regarding these types of nontraditional mortgage products? " FOMC20070321meeting--37 35,MR. REINHART.," No, no, no. Because primary dealers’ economists, quite often, probably are reporting their modal forecast because they’re telling a story about where the Committee was going forward and painting an overall picture of the economy, whereas the Eurodollar contracts reflect averaging across all the states of nature. What we see when we look at options is a growing downside tail. So it could be the emergence of that significant downside tail, which economists will talk about as a risk to their outlook but traders actually have to price, as another reason that those two things are diverging." CHRG-109shrg26643--32 Chairman Shelby," The hearing will come back to order. Mr. Chairman, some Fed watchers speculate that the Federal Open Market Committee may--may--continue to increase its Federal funds rate target to 5 percent while others seem to believe that 5.5 percent may be likely. Do you regard either of these speculations regarding the level as more likely than the other giving the FOMC forecast that you have outlined today? " FOMC20080130meeting--152 150,MR. STOCKTON.," We just had a really big drop in the stock market, and that is the biggest piece of what is going on. But we have also marked down considerably our housing forecast. That is in an exogenous shift in aggregate demand, the IS curve. That is another chunk of what is going on here. We have had some increase in risk spreads, not just in the equity premium. Despite the fact that Treasury rates have fallen, corporate bond yields have not as much, and we don't have as much there, so there is in general a widening of risk premiums. " FOMC20081216meeting--112 110,MR. AHMED.," Looking at the policy that is going forward, first of all, we are forecasting here what we think they will do, not necessarily what we think they should do. Given their past behavior, we think that they will be ratcheting up the rates the first chance they get. The timing is a bit different, but the rates are broadly in line with market participants' expectations. In the case of the euro area, for example, at the end we are even a little lower than the market participants are expecting. " FOMC20070131meeting--118 116,MS. YELLEN.," Thank you, Mr. Chairman. Recent data on economic activity have been loaded with upside surprises for most spending categories and also for labor markets. Our response, like the Greenbook, has been to boost our estimate of growth last quarter and our forecast for growth this quarter. For 2007 as a whole, we have revised up our projection for real GDP growth about ¼ percentage point, to about 2¾ percent, which is just a bit below our estimate of the trend, which is a bit higher than the Greenbook. This performance continues to reflect the so-called bimodal economy with weakness in housing and autos coupled with strength almost everywhere else. Looking beyond the first quarter, we interpret recent data as suggesting that the drag from both weak sectors is likely to diminish, providing impetus for an acceleration of activity later this year. Even so, the Greenbook forecasts, and we agree, that other factors will likely offset this acceleration so that GDP will grow slightly below trend in 2007. In particular, the Greenbook hypothesizes that the growth of consumer spending will slow, with the saving rate rising from minus ¾ percent at the end of last year to plus 1 percent at the end of next year. This forecast strikes us as quite reasonable. House-price appreciation has slowed dramatically, and the impetus it has given consumption should diminish over time. In addition, the Greenbook notes, and Larry emphasized, that consumer spending has grown more rapidly than fundamentals can explain, and it’s sensible to predict some unwinding of this pattern. Such an outcome, however, would represent a noticeable change in the trend of the saving rate. So to me the possibility that the saving rate will not, in fact, rebound to the extent anticipated in the Greenbook constitutes a serious upside risk to the outlook. Of course, the staff has emphasized this. An alternative simulation in the Greenbook illustrates that if spending instead advances in line with income, the unemployment rate would decline noticeably further from a level that is already low. It is precisely because we are starting from a situation in which labor markets are already arguably tight that the upward revisions to growth during the intermeeting period particularly concern me. Some period of below-trend growth may ultimately be necessary to address inflationary pressures emanating from the labor market. In December, I emphasized the puzzle presented by the combination of an apparently sluggish economy and a robust job market. Upward revisions to estimated growth in the fourth and first quarters resolve a portion of that discrepancy. Even so, Okun’s law still suggests that the excess demand in labor markets as reflected in the low unemployment rate is abnormally large relative to that in goods markets as reflected in estimates of the output gap. The current low unemployment rate may turn out to have benign implications for inflation. For example, labor market tightness may well diminish somewhat over time, given that the lags between output growth and labor market adjustments can be quite variable. Another benign possibility is that the unemployment rate may be overstating the tightness of labor markets. For example, some indicators of labor market conditions, like the Conference Board index for job market perceptions, suggest a bit of softening. Indeed, available indexes of labor compensation do not provide compelling evidence of cost pressures emanating from the labor market. However, compensation data are mixed, and I must admit that the signal from them is somewhat confusing. While I remain concerned about the risk that labor market pressures could boost inflation over time, I’m still fairly optimistic about the outlook for inflation overall. Core inflation has come down in recent months, which is welcome, although we must be careful not to overreact. Recent favorable data could reflect the dissipation of pressures from energy prices and owners’ equivalent rent; these sources of disinflation are inherently transitory, and once they are fully worked through the system, we will be left with the influence of more-enduring factors, such as the extent of excess demand or supply in labor and product markets. If these markets are, in fact, unduly tight, we could eventually see rising inflation. Inflation expectations also matter for the inflation outlook, and I see the stability of inflation expectations as contributing to a favorable inflation prognosis. As I previously mentioned, my staff and other researchers find some evidence that inflation has become less persistent over the past decade, a period during which inflation and inflation expectations have been low and stable. Both survey and market-based estimates suggest that longer-term inflation expectations remain stable and well anchored. So to sum up, I continue to view a soft landing with moderating inflation as my best-guess forecast, conditional on maintaining the current stance of policy. We expect core PCE price inflation to edge down from 2¼ percent last year to about 2 percent in 2007. While there are risks on both sides of the outlook for growth, I’m a little more focused on the upside risks after the recent spate of strong data. It’s encouraging that the recent inflation news has been good. However, there’s a great deal of uncertainty about inflation going forward, and to me these risks remain biased to the high side." CHRG-110hhrg44901--172 Mr. Ellison," What role does stagnant wages play, Mr. Chairman? " FOMC20070509meeting--3 1,MR. DUDLEY.,"1 Thank you, Mr. Chairman. I’ll be referring to the handout with the blue on the front. The market turbulence that began in earnest on February 27 is now a distant memory. Risk appetites have recovered, volatility in the fixed income and equity markets has declined, and the U.S. equity market has climbed to a new high. Exhibits 1, 2, and 3 show the correlation matrices for the daily price and yield movements in the fixed income, equity, and currency markets. The blue-shaded boxes indicate correlations with an absolute value greater than 0.5. As shown in exhibit 1, until February 27, the correlations across most of these asset pairs were low. However, beginning on February 27 through mid to late March, correlations rose sharply as risk-reduction efforts dominated financial markets. This shift can be seen in exhibit 2, where all but one of the boxes are shaded blue. Since the March FOMC meeting, calm has returned, with asset-price movements again becoming mostly uncorrelated. The matrix shown in exhibit 3, which shows the correlations since the March FOMC meeting, looks similar to exhibit 1. As I mentioned in my briefing at the March meeting, although the turmoil in the markets was related mostly to risk-reduction efforts, in certain areas—the subprime mortgage market is the best example—the deterioration in performance was related mostly to fundamental developments. As can be seen in exhibits 4 and 5, which plot delinquencies and losses for the notorious 2006 subprime vintage, the deterioration in performance has continued apace. Exhibit 4 shows that delinquencies of more than sixty days for the 2006 vintage are even higher than those for the 2001 vintage. This is noteworthy because in 2001 the U.S. economy experienced a mild recession and payroll employment was declining. Even more noteworthy is the trend of losses for the 2006 vintage. As shown in exhibit 5, losses for the 2006 vintage are running at about triple the rate of the 2001 vintage. This poor loss experience appears due both to deterioration in underwriting standards and to less-favorable underlying conditions—for example, the softening trend of home prices in many local markets. The fundamental deterioration in the subprime mortgage sector can also be seen in other measures of performance. For example, exhibit 6 illustrates the behavior of BBB-rated spreads for the ABX, CDS, and cash markets. The ABX represents an index of twenty credit default swaps on twenty BBB-rated asset-backed securities, and the BBB cash index represents the yield spread on the BBB-rated tranches of the asset-backed securities. Thus, the ABX index references, via the credit default swap market, the underlying asset-backed securities market. As can be seen in this exhibit, although all three spreads have recovered somewhat over the past few weeks, spreads 1 Material used by Mr. Dudley is appended to this transcript (appendix 1). remain much wider than earlier in the year. Also, note that ABX spreads remain considerably wider than the CDS and cash spreads that they reference. This situation underscores the illiquidity of the ABX market and may partially reflect the lack of a natural constituency of investors who might wish to take the long side of this index, especially when the subprime market is under stress. The problems in subprime mortgages have spilled over into the collateralized debt obligation (CDO) market. As you may recall, many CDOs have a substantial proportion of their assets in lower- rated subprime asset-backed security tranches. After widening sharply in late February, the yield spreads on mezzanine structured-finance CDOs have shown no recovery. In fact, as shown in exhibit 7, the spreads on these CDOs have continued to widen. At the last FOMC meeting, I argued that the selloff in the equity market that began in late February had at least one fundamental component—the reduction in earnings expectations for 2007. Yet the equity market has recovered quite strongly. I think that this can be explained by three factors. First, earnings in the first quarter were stronger than expected. The Board staff estimates that first-quarter earnings for the S&P 500 will have increased about 9 percent on a year-over-year basis. Second, perhaps as a result, earnings expectations have stabilized. As shown in exhibit 8, the median bottom-up equity analyst forecast for S&P 500 earnings growth in 2007 has stopped falling and remains above 6 percent. Third, buyout and buyback activity continues unabated. Exhibit 9 shows the flow of funds data on net equity issuance. As can be seen, the outstanding supply of U.S. equities is shrinking rapidly, in contrast to the increase in net supply that occurred over the 2000-04 period. Buyouts and buybacks may also be a factor explaining the recent behavior of corporate credit spreads. As shown in exhibit 10, high-yield and emerging-market debt spreads have mostly recovered since the late February widening. However, investment-grade debt spreads remain wider than in early 2007. Investment-grade debt performance may be lagging because investors fear that the credit quality of this debt will be undermined as buyouts and buybacks result in increased leverage. Turning now to the currency markets, an emerging story is the weakness of the U.S. dollar. As shown in exhibit 11, the dollar has fallen about 3 percent against the euro since the start of the year and is virtually flat against the yen over this period. The weakness against the euro appears to reflect mostly changing interest rate expectations. Exhibit 12 plots the spread between the June 2008 Eurodollar contract and the euribor contract. As can be seen in this exhibit, the expected interest rate differential has fallen about 40 basis points this year. As this has occurred, the euro has strengthened. To date, the dollar’s weakness has not been of much concern to market participants. The decline has been gradual, and investors perceive that global imbalances are unwinding smoothly. Nevertheless, the subprime debacle points to another source of risk for the dollar. In recent years, the net acquisition of dollar- denominated financial assets by foreign investors has shifted to private flows from public flows and to corporate bonds, including asset-backed securities and CDO obligations, from Treasury and agency debt. This shift is shown in exhibit 13. My worry here is that the problems in the subprime and alt-A mortgage market could ultimately affect foreign investors’ appetites for U.S. asset-backed securities and CDOs. For example, a particularly poor performance of lower-rated ABS and CDO tranches, coupled with the widespread corporate rating downgrades that might be associated with such poor performance, could cause foreign investors to lose confidence in investing in dollar-denominated debt. In terms of U.S. interest rate expectations, investors expect no near-term change in policy. However, market participants continue to expect significant easing late this year and in 2008. Interest rate expectations for the remainder of 2007 are back where they were at the time of the January FOMC meeting. Looking at the federal funds rate futures market in exhibit 14, we can see that only about one 25 basis point rate cut is expected in 2007. In contrast, expectations for 2008 more closely resemble expectations at the time of the December and March FOMC meetings, not the January meeting. As can be seen in exhibit 15, which plots Eurodollar futures contract yields, investors expect substantial monetary policy easing in 2008. Why this delayed pattern of easing? There are three potential explanations. First, as I have noted before, futures market yields reflect the mean, not the modal, forecast. To the extent that investors perceive a moderate risk of significant economic weakness that could lead to pronounced monetary policy easing, then the yields in the futures market could be well below the modal forecasts of investors. Second, some investors may disagree with the FOMC about the outlook. In this case, they might anticipate that it will take time for the FOMC to come around to their way of thinking—leading to rate cuts that occur only later. Third, some investors may anticipate that inflation will moderate. As this happens, the FOMC might gradually reduce its nominal federal funds rate target following lower inflation—essentially keeping the real federal funds rate constant. Finally, the survey of the primary dealers shows little change in interest rate expectations since the last FOMC meeting. Exhibits 16 and 17 compare dealer expectations with market expectations before the March FOMC meeting and before this meeting. The horizontal bold lines represent market expectations. The blue circles represent the different dealer forecasts, and the size of a circle represents how many dealers have that forecast. The green circles represent the average dealer forecast for each period. The average of the primary dealer forecasts is consistent with only slightly more than 25 basis points of easing through the end of this year— not much different from what is priced into the federal funds futures market. As can be seen, the dispersion of the dealer forecasts over the next few quarters has narrowed a bit. However, considerable disagreement remains about whether short-term rates will be higher or lower a year ahead. Also, the average of the dealer forecasts for 2008 remains considerably above market expectations. This presumably reflects mainly the “downside risks” notion, which should cause the modal forecasts of dealers to be higher than the mean expectations represented by futures prices. I’ll be happy to take any questions. I will need approval for domestic operations; there were no foreign operations. Also, I circulated a memo asking you to vote to approve renewal of the swap lines to Canada and Mexico." CHRG-111shrg62643--172 Mr. Bernanke," Again, forecasts are very uncertain, but I do not view deflation as a near-term risk for the United States. If you look at inflation expectations as measured by Government bond markets or by surveys, there has not really been much decline in expected inflation, and that stability of inflation expectations is one important factor that will keep inflation from falling very much. So, again, the forecasts of the FOMC are for a gradual increase of inflation toward a more normal, say 2-percent level, and there is not at this point, a very high probability that deflation will become a concern. I think there are very important differences between the U.S. and Japan. Some of them are structural. The Japanese economy has been relatively low productivity in recent years. It has got a declining labor force, and so its potential growth rate is lower than the U.S., and it has been a less vibrant economy in that respect. Also in Japan are much longer-lived problems with their banking system, which were not addressed for some years. For better or worse, we were very aggressive in addressing our banking system issues, and I think, as I mentioned to a couple of folks our system is strengthening and looks to be doing much better. So I do not think that will be a source of long-term drag either. And, finally, I would comment that I think the Federal reserve does have the capacity, the tools, should deflation occur--which I do not believe is very likely--to reverse it, and we would be assiduous in doing that. So I do not consider this to be a very high risk at this point, but, of course, we will continue to monitor the economy and the price level. " CHRG-111hhrg53234--3 Mr. Bachus," I thank the chairman. Mr. Chairman, I don't think there is anything that is in such sharp contrast as the Administration's proposal for the Fed's role and that of the Republicans in the House. We particularly object to what we see is allowing the Fed to become a permanent bailout agency. We believe that is most troubling, and we believe if that is allowed to happen, they will sacrifice their independence. It is absolutely impossible to make them an independent agency and allow them to function as they are and yet give them the opportunity to guarantee or loan billions of dollars without substantially increasing their accountability and transparency. But I do thank you for holding this hearing. Whether regulatory power and sweeping new powers really should be centralized and given to the Federal Reserve at a time when our country is facing unprecedented fiscal, economic, and monetary policy challenges, we believe, is very problematic. We have some foremost experts, Governor Kohn and our second panel, so we look forward to the testimony. During the past 2 years, we watched as the Federal Reserve has responded to dislocations in the financial markets with far-reaching interventions in virtually every corner of our economy. To confront the crisis, the Fed has used its emergency authority to bail out failing institutions--we believe, particularly with AIG and others, but particularly with AIG and with some of the auto companies, this was unwise--to provide loans and loan guarantees; to revive the credit markets, which I think has had success; and lowering the target Fed funds rate almost to zero; and more than doubling its balance sheet. Regardless of how one views these extraordinary Fed actions, I think we all agree that as we go forward, we do need a more transparent institution with a more clearly defined role. Republicans believe that the Fed's core mission--and I stress this--is to conduct monetary policy and that mission will be seriously undermined if its supervisory responsibilities are dramatically expanded, as proposed in the Obama Administration's White Paper. Indeed, the proper role of the Fed represents, as I said, the critical difference between the Administration's proposal, which would statutorily bless what we consider an unwise cycle of bailouts, picking winners and losers, and obligating the taxpayers from our plan, which does none of those things. The Administration would reward past regulatory and monetary policy mistakes by giving the Fed the preeminent role in regulating the financial system and determining which financial institutions are ``too big to fail.'' This stretches the Fed's resources; I think we all agree on that. It complicates its ability to carry out monetary policy functions at a time when our country faces crippling--well, let me say this: I believe if we continue to do these things, continue to have stimulus packages and deficits, we are going to have crippling inflation. And I think the Fed will have its hands full dealing with inflationary pressures without being distracted and overextended by these new powers. The Republican plan would therefore relieve the Fed of some of its current regulatory responsibilities and allow it to focus on monetary policy missions. So thank you very much, Mr. Chairman. But most importantly, I am going to close by saying we need to end the bailouts in which the Fed has been instrumental, I think, in carrying out over the last 18 months, and I mean the ad hoc bailouts of individual institutions. Thank you. " FOMC20081029meeting--227 225,MR. LACKER.," If I could, Mr. Chairman, in the dynamic stochastic general equilibrium models, one of which I understand has been adopted by the staff for use in forecasting, employment fluctuates with shocks to productivity, and it's the natural correspondent to that. So in some sense the unemployment rate rises because the natural rate rises, but that's a way of saying that the natural rate goes up in recessions. I'm not sure if proponents of the natural rate view that as consistent with that old model, but that's what happens in these models. " FOMC20080916meeting--130 128,MS. PIANALTO.," Thank you, Mr. Chairman. The recent financial market news is shaking people's confidence dramatically. But even before recent events, the evidence was already pointing to more effects of the financial crisis on the real economy than I had built into my projection at our last meeting. The reports from my District contacts and the incoming data caused me to revise down my near-term output projection even before the latest round of financial market troubles. The improvement in net exports that was reflected in the second-quarter GDP growth has not encouraged manufacturers in my District to revise up their export projections. They are still holding firmly to the opinion that the global economy is slowing and that export growth will slow with it for several quarters. Of course, manufacturers are concerned about weakness spreading further within their domestic customer base. The ongoing turmoil in financial markets continues to affect businesses in my District. Some of the banks in my District are finding it very, very difficult to attract new capital and to manage their way out of trouble. I am hearing that credit is harder to come by for many borrowers who in the recent past would not have thought twice about their creditworthiness. Last week I met with a business contact with a very long and successful track record of buying and operating private companies. He reported that he had reached a deal with a bank to finance a project at a 7 percent interest rate with the loan amortized over a fifteen-year term. On the morning of the close just three days later, the bank faxed him the paperwork, which reflected a 12 percent interest rate on a nonamortizing loan with a 10-year term. So the deal obviously is not going forward. One of my directors, who heads a very large regional banking organization, reported at our board meeting last week that many banks are shedding assets and that in some cases they are walking away from longstanding customer relationships in order to do so. He said that investors are very skeptical about putting new equity into banking deals and that those who have done so in the past vow not to be burned twice, let alone a third time. Of course, inflation remains an important issue as well. My contacts, as Dave mentioned in his report, are not so confident that a broad array of intermediate and retail prices are actually going to move back down as a result of the recent decline in energy and other commodity prices. Several of my contacts report that major suppliers are trying to maintain their prices despite the decline in raw material costs just to make up for a long period of absorbing price increases. Nevertheless, most of my contacts agree that the commodity price environment has stabilized considerably, making me more confident that core inflation will gradually slow over the next couple of years. At our last meeting, my forecast was broadly consistent with the Greenbook baseline. Today my forecasts for output and prices are broadly similar to the Greenbook's for 2009 and 2010, although I am expecting more weakness in economic activity in the second half of this year than the Greenbook is forecasting. My contacts in the manufacturing sector have persuaded me that exports are going to be weaker in the short term than I had previously thought, and I have also revised down my consumption path on the basis of the credit constraints on households. Although I am more encouraged about the recent decline in energy and commodity prices, I would like to see further evidence of price stability in these markets and also continued stability in inflation expectations for a while longer before I reduce the upside risk that I place on my inflation outlook. However, a growing risk to my outlook is that the short-term weakness that I have now built into my outlook extends further out into the forecast period. I worry that my outlook doesn't fully capture all of the many ways in which financial forces at work in the economy are actually going to restrain spending. On Friday, I was convinced that the best course of action was to keep an even keel in these rough seas--to be flexible, of course, but to look beyond the latest wave crashing over the bow. Only six weeks ago, inflation risks were on the verge of being unacceptable, and today the troubles of Wall Street are the focus. I was sure that we were going to be in for many more surprises; I just didn't know when and from where they would be coming. So I supported not only keeping our policy unchanged but also keeping our language changes to a minimum even if that language missed some nuances of the outlook. Given the events of the weekend, I still think it is appropriate for us to keep our policy rate unchanged. I would like more time to assess how the recent events are going to affect the real economy. I have a small preference for the assessment-of-risk language under alternative A. I think it captures my concern that the downside risks have intensified. However, I can support some of the comments and changes to highlight the financial market strains that were made by President Lockhart and President Stern. So I can support the language under alternative B with some additional comments about the financial strains that we are facing. Thank you, Mr. Chairman. " CHRG-109shrg30354--89 Chairman Bernanke," Senator, the two interact because if there was just a one-time pass-through and the public were completely convinced that the Fed would keep inflation low and expectations were low and the Fed were perfectly credible, then that inflation would be just a temporary thing and would come back down. So the risk is the interaction of the two. The risk is that inflation will go up because of energy prices, because of greater pass-through, and that will feed into inflation expectations, which then will feed into a round of additional price increases and the like. You really cannot get a permanent increase in inflation unless people increase their inflation expectations. That is why the Fed's credibility is, I think, such a major asset of the United States. Senator Sununu. It seems to me to the extent that you are in the midst of a little bit of a dilemma it is as follows. Right now, inflation is above what has been stated in different ways your target range. We have still got high energy prices. So that would suggest that the absolute level of inflation remains a concern. On the other hand, you have a forecast for moderating growth. You have a slowdown in the housing industry. So while the inflation numbers may push you toward a rate increase, the moderating growth that has been forecast might encourage you to pause or to forgo further rate increases. That is a dilemma. I think we all understand that. To what extent is the fact that you now find yourself in this dilemma the result of a slowness or a delay to action in beginning this cycle of rate increases? " FOMC20070628meeting--154 152,MR. KOHN.," Thank you, Mr. Chairman. I think what I heard yesterday was consistent with what I was thinking myself. We are in a pretty good spot, macroeconomically and policywise. We have moderate growth; low core inflation, which is not rising and could possibly be falling, suggesting an underlying balance of demand and potential supply that is in pretty good shape. Total inflation is high, but unless the futures markets are wrong again, total inflation should come down to core, and core is telling us that the balance is about right. I didn’t hear anything yesterday in the forecast or in the anecdotes—some were strong and some were weak—to contradict this picture or to suggest that we have any need to adjust policy. So I strongly support alternative B. Markets now roughly agree with our outlook, at least in terms of their expectations for the federal funds rate and judging from our submissions on the forecast process. I don’t think we should be trying to change those expectations. I share everyone’s concerns around the table about the risks on inflation. Even if I don’t always share everyone’s goal for where we might be going in the next few years, I think the risks are clearly pointed to the upside given the tightness of domestic and foreign markets and the increase in headline inflation, which could feed through to inflation expectations. I like the alternative B language as it was handed out by Vincent yesterday. It is consistent with yesterday’s discussion that focuses on the forecast of inflation in sections 3 and 4. It reflects our unease about whether recent improvements will be sustained. I think it should leave expectations approximately where they were, although I don’t have any confidence whatsoever in that judgment—I have been wrong too often for too many years on these things. I do think it has the virtue of reflecting our discussion yesterday. I have one suggestion for sentence 3 in section 3, which I think makes it a little closer to last time in terms of wording. In the second sentence—“however, a sustained moderation in inflation”—well, is that core or total? What is that about? I think we should go back to “inflation pressures”: “However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated.” That is what we talked about last time—inflation pressures. Then, “moreover, the high level of resource utilization has the potential to sustain those pressures.” I don’t think we need the word “inflation” twice. So with that small amendment, I think alternative B language should do the trick. Thank you, Mr. Chairman." FOMC20070918meeting--103 101,MR. ROSENGREN.," Thank you, Mr. Chairman. Most of the economic data we have for this meeting reflect the economy before the liquidity issues in August. The employment report, while probably not wholly reflective of the problems and affected by some anomalous seasonals, nonetheless provides evidence that labor markets were slowing at the outset of the financial problems. Given the layoffs that are being announced by financial services firms and the potential for continued difficulties in construction, some further easing of labor markets seems quite likely. Although we do not have housing starts and permits for August, the outlook for the second half of 2007 is likely to deteriorate further than forecasters had predicted before the liquidity issues. There is good reason to believe the staff forecast that residential investment will remain weak well into 2008. Stock prices of all the major homebuilders have continued to decline since our last meeting, and the credit derivative swaps for several of the largest homebuilders are at levels that reflect a very high probability of default. The news from the financial markets has improved marginally from the last meeting, but I still have some significant concerns. Certainly, some of the financial anomalies have abated, such as the extremely low rates for short-term Treasury securities, and there are some tentative signs of improving liquidity. However, these improvements are tenuous, and the ability to raise funds in a number of short-term financial markets remains quite difficult. I would just highlight a few of the financial anomalies that are reflective of the situation. Usually, the overnight Eurodollar trades very close to the overnight fed funds rate. Both are overnight dollar loans between financial institutions on an unsecured basis. Over the past month, the funds for overnight Eurodollars have frequently been trading much higher than overnight fed funds. This highlights the difficulty that some European financial institutions are having borrowing in dollars and the unwillingness of many financial institutions to arbitrage these spreads if they involve credit exposures to European financial institutions, even for overnight. These difficulties worsen when the maturities extend out to one to three months. Both the one-month and three-month LIBOR rates have remained very elevated, particularly given that the fed funds futures during this period have indicated a market expectation of falling federal funds rates over the next three months. The elevated LIBOR rate tightens credit for a variety of domestic borrowers and could affect areas that are already troubled. For example, many subprime mortgages are tied to the LIBOR rate as are many loans that have been used to finance leveraged buyouts. A second example is the significant swelling of bank assets in August. The monthly growth rate for bank C&I loans was 2.6 percent and for other loans and leases was 6.3 percent. These are among the largest monthly increases in thirty years. As in other periods of liquidity strain, bank balance sheets become particularly important. As banks honor loan commitments and agreements to provide liquidity support, their balance sheets grow. My concern is that bank obligations will continue to expand bank balance sheets in September and crowd out other investment opportunities. Many financial market participants are very concerned about the next two weeks, despite some recent easing of conditions. Some investors are not willing to lend except overnight. The asset-backed commercial paper market has remained under stress, and the rollovers have been for shorter maturities. There is significant concern that holders of commercial paper may be reluctant to hold asset-backed commercial paper on their balance sheets at the end of this month, and rumors abound about whether money market funds and other short-term investors will continue to hold commercial paper for structured products, particularly of the SIVs. So we have a situation of a very weak housing sector, some evidence of slowing employment growth, and a period of extended illiquidity that may get worse before it gets better. The tail risk of liquidity problems and economic problems has grown, and we clearly want to avoid outcomes by which declines in prices for houses and for financial assets tied to the housing sector could create more-severe economic outcomes. The fact is that we do not have much experience with periods of extended illiquidity, especially when the housing sector is so weak. So taking out insurance against these risks seems entirely appropriate. The decision is made easier, in my view, because I see the risk of unacceptably high inflation resulting from such an action as being quite low. My hope is that with appropriate easing of policy the liquidity issues will abate as we start the fourth quarter." FOMC20060328meeting--38 36,MS. JOHNSON.," We now have complete fourth-quarter data for U.S. trade and the balance of payments. Several elements of those data seem to me to be worth mentioning at this meeting as they correspond to issues with which we have wrestled in putting together the international portion of your Greenbook forecast. The U.S. current account deficit came in at an annual rate of $900 billion in the fourth quarter—7 percent of nominal GDP. The jump from the previous quarter was sizable, and the number gives me, at least, a bit of sticker shock. With $900 billion already recorded, it is not surprising that our forecast for the current account deficit crosses $1 trillion and reaches about 8 percent of GDP by the end of the forecast period. With the U.S. economy projected to perform well through the end of next year, we have no reason to expect that the financing of such a large deficit will cause problems in foreign exchange and asset markets. But the risk of such problems is again a factor in the forecast. The deficit on goods and services, at $790 billion, accounts for most of the fourth- quarter current account deficit. Of that figure, the non-oil merchandise balance is about 70 percent. The balance on trade in services is actually a small positive. We look for the bill for imported oil and the balance on services trade to change little through the end of 2007. However, we expect that the non-oil merchandise balance will widen significantly over the forecast period, contributing a little more than one- half of the increase in the current account deficit, and that deterioration of net investment income will largely explain the remainder. Net investment income had remained stubbornly positive even as the United States became a large net international debtor. The initial release of fourth-quarter balance of payments data shows a small negative for net investment income. Even if that negative is subsequently revised away, we expect a negative change in the income balance through the end of next year that is almost as large as the widening in the non-oil merchandise trade balance. The decline we anticipate in net investment income reflects both the growing U.S. net debt position and the projected rise over time in the interest rates applied to our net position in fixed-income assets. The information available to us about the financing of the external deficit for last year as a whole supports our view that there is no basis for expecting an imminent, disruptive consequence for asset markets of the growing U.S. external imbalance. In 2005, private foreign investors made net purchases of U.S. securities that totaled almost as much as the entire current account deficit. This category of financial flows increased greatly from the previous year, consistent with upward pressure on the dollar in exchange markets over much of that time. The appetite of private foreign investors for corporate and municipal bonds was particularly strong. Foreign direct investment into the United States also rose during 2005 to a figure that is quite robust, even if not at the scale of the extremely large inflows in the late 1990s and 2000. The offsetting flows of direct investment abroad by U.S. entities were small, reflecting the temporary, favorable tax break on repatriated foreign earnings. Reported foreign official holdings of dollars in the United States did increase last year, but at a rate significantly below that in 2004. Of the $217 billion increase in foreign official holdings reported in the Greenbook for 2005, a very large portion is due to increased official holdings by China. Although official Japanese holdings of dollar assets had significantly risen in 2004, the ending of exchange market intervention by Japanese authorities in March of that year resulted in no further official acquisition of dollar assets last year by them. Oil exporters, particularly Russia, accounted in 2005 for a moderate share of the change in foreign official dollar holdings. All told, foreign official acquisition of dollar assets does not appear to have been a dominant feature in the picture of financial flows painted by the balance of payments statistics for last year. Beyond the current quarter, our baseline forecast calls for real exports of goods and services to expand at an annual rate of 5 percent. This export growth mainly reflects our outlook for real GDP growth abroad. We project that, over the final three quarters of this year, average real output growth abroad will be comparable to that of the U.S. economy; for next year, we expect foreign growth to exceed U.S. growth by about ¼ percentage point. We see the global expansion as broadly based across regions, with real GDP growth in the emerging market economies significantly faster than that in the industrial countries, but with both groups doing well. We expect that, among the foreign industrial countries, Canada and the United Kingdom will continue to be relatively strong and Japan’s recovery will become well established, although its rate of output growth will abate somewhat going forward. Among the Asian emerging market economies, we look for a slowing in the rate of growth from recent rates, importantly in China, but expect that on average those economies will maintain a pace of expansion of nearly 6 percent. In Latin America, we project that our major trading partners will all see solid growth that averages almost 4 percent this year and a bit less next year. Although the dollar moved up slightly over the intermeeting period, we again forecast some dollar depreciation in real terms, as we remain mindful of the financing requirements posed by our external deficits. Over time, that depreciation should work to boost our real exports, although for the forecast period the lagged effects of dollar appreciation during 2005 are more dominant and the contribution from the dollar diminishes rather than strengthens through the end of 2007. Dollar depreciation should add somewhat to import price inflation this year and next. However, changes in global commodity prices have been sizable and have largely determined the path of nonfuel core import prices. Prices of global nonfuel commodities have ratcheted up further in recent months. Futures prices for these commodities indicate some future flattening, but lagged responses to these increases should boost core import price inflation to 3 percent this year before some deceleration occurs next year. Our projections for the U.S. economy, for relative prices of nonfuel imports, and for global energy prices combine to imply a rate of growth for real imports of goods and services over the remaining seven quarters of the forecast period that is slightly greater than that for exports. With nominal imports currently more than 150 percent of nominal exports, the resulting implication for the nominal trade deficit is inevitably a further widening. In our baseline for this Greenbook, the contribution of exports to U.S. real GDP growth for the rest of this year and next is, at an annual rate, just a bit more than 0.5 percentage point. The arithmetic contribution from imports varies by quarter, in part because of the way real imports are seasonally adjusted. On average, imports subtract more than exports add, resulting in a net negative contribution to GDP growth from the external sector that is 0.3 to 0.4 percentage point at an annual rate." CHRG-110hhrg46591--243 Mr. Yingling," I am not sure every foreign country has done all that well in terms of their regulation, but one thing we really do need and that, I think, there is a consensus on here is that we need an oversight regulator who really looks over the economy and who looks at gaps and who looks at trends. I must say that about a year ago, I asked our economics department to give me the information on what had happened with some of these mortgages, and they brought me some charts that really made me gasp. These were charts about no-down-payment loans and how they had grown in 2004 and in 2005 and in 2006. That graph went like that. How you could have graphs like that and not have somebody in our government say, ``Wait a minute. We have to really look into this very hard,'' is somewhat beyond me, because I gasped. I said, ``How could this be?'' I think the problem is that nobody has really been assigned to do that. In some ways, the Fed was supposed to do it, but we have not assigned anybody in our government to look at potentially big problems. Why didn't we have somebody looking at the growth of these SIVs? Why didn't we have somebody look at and see the growth of the securitizations of these mortgage products? It fell between the gaps. So I think one thing we need is a systemic overview regulator who has the explicit role of saying, ``I am going to look for big problems.'' Any time you have a chart that goes like that, you had better look at it. We do not. It falls between the gaps. " CHRG-110hhrg34673--197 Mr. Castle," I have last year introduced legislation about transparency in hedge funds. I am concerned about hedge funds. You answered this yesterday in Senate testimony and basically indicating that the liquidity of hedge funds could be very important. I don't have a problem with that either, but I do have a problem in terms of what hedge funds could do with respect to commodity markets and a variety of things they get into because of the enormity of it and the number of them that have opened in recent years and where they are going. I am not one who looks for overregulation or overtransparency, if there is such an expression, but I think proper transparency is in order. I would like your thoughts, if you could, about where we are with respect to hedge funds, and what do you think the role of the--regulatory role or perhaps our committee role in this area should be. " FOMC20050920meeting--66 64,MR. STOCKTON.," I think it was a little bit of both. As I indicated, the scale of that package we thought would be sufficient in some sense, given our estimates of the amount of damage that has occurred, to provide both the wherewithal to fund substantial amounts of the rebuilding and to provide significant offsets for income losses that were associated with the September 20, 2005 28 of 117 The $200 million figure which, as I mentioned in my briefing, has gotten so much attention recently actually came into play after we closed the Greenbook. But even if that had come up before, I don’t think we necessarily would have altered our projection significantly. Our reading of that is that if the figure comes in that high, it’s more likely to be because it includes the funding of some very long range and expensive construction projects around New Orleans—for example, the significant strengthening of the levees to a category 5 level of protection. That spending would occur outside the window of the current forecast projection. But obviously there are risks, and if I had to be honest, I’d say the risks are probably more to the upside of the figure that we have built into this forecast than the downside, given the current political climate in which the general attitude seems to be “we’ll spend whatever it takes to make this happen.” We illustrated a little bit of that in an alternative simulation that we showed in the Greenbook in which the disruption effects are relatively small and you get a much bigger fiscal stimulus. The results associated with that are a drop in the unemployment rate to below what we would think of as the natural rate and a bit higher inflation pressures." FOMC20071211meeting--100 98,MR. LOCKHART.," Thank you, Mr. Chairman. I think President Stern framed it well in bringing focus to the effect on our thinking that the financial markets are having. As many have said, the central question is not whether the economy is softening but whether it is softening beyond the range that underpinned the policy decision in October. I’d add to that a range of questions related to financial markets, particularly the question of whether the deterioration in the financial markets changes the prospects for achieving financial stability, the potential for spreading to a wider array of financial markets and institutions, the potential for spillover to the general economy, and the compounding of the already heightened degree of uncertainty. All of these weigh heavily on my thinking. Like the Greenbook projections, Atlanta’s forecast has been revised down as a result of incoming data since the last meeting. I just point out, speaking only for ourselves, that these downward revisions of previous forecasts and our general outlook have been a pattern over recent months. The current situation is extremely difficult to read—which is another way of saying that uncertainty around our forecast has increased yet again. Contributing to this uncertainty is the continuing, if not accelerating, gap between the anecdotal information and the views I’ve received from Wall Street versus Main Street. The expectations of financial market participants have deteriorated and can be characterized as extremely serious. However, the message I get from directors and representatives of nonfinancial businesses outside the housing sector, though relatively pessimistic, has not changed substantially since our October meeting. In my conversations with financial market contacts, to varying degrees I heard the persistent and growing apprehension concerning the spread of turmoil to an expanding set of affected markets and institutions and a wondering of what will be the next shoe to drop. One consistent message is the belief that the recent volatility and increase in term spreads cannot be entirely explained by the year-end problem. Most of my contacts agreed that year-end balance sheet concerns are adding to market stress, but no one expressed confidence that getting past year-end will bring much reduction of concerns over counterparty weakness, asset values, and secondary market liquidity. Most expect financial market turmoil to be protracted, with increasing risk to the general economy. Almost all my contacts noted that deteriorating housing values are a root cause, feeding problems in the markets. This view holds that the adjustment in prices and inventory required to stabilize the housing sector will take many months to play out, and until that occurs, the value of structured financial instruments and the solvency and liquidity of structured investment vehicles will be uncertain. There remains a great deal of skepticism that arrangements like the super SIV and the Treasury’s rate freeze plan will have much tangible effect. The issue of SIV restructuring and support by sponsors is a growing focus of concern because of their linkage to money market funds as well as their contribution to a general contraction of credit availability. In sum, my contacts in the financial industry uniformly express the belief that things will not get better any time soon and may well get worse. While recognizing that a rate reduction does not directly address the information problems in the markets, there is widespread sentiment that lower costs of funds will help. Turning to the anecdotal inputs from contacts in my District, there is some divergence of views between contacts directly affected by the housing sector, including bankers, and others. Bank loan activity remains particularly weak in real estate segments. Trucking, large retailers, auto dealerships, and businesses supplying building materials and household durables were identified as segments where loan volumes are slipping. Industrial warehouse markets have weakened in some metro areas as subcontractors have exited. Bankers also expect that consumer credit exposures in credit cards, auto loans, prime mortgages, and HELOCs will see a combination of credit deterioration and demand contraction in 2008. The anecdotal messages from other contacts are less dire. We took great care in our information-gathering this round to probe hiring expectations, investment plans, and credit availability conditions. Though credit conditions do seem to have tightened, we still are not hearing that they are preventing planned spending. Spending and hiring plans remain on the weak side, but no more so than was the case at our October meeting. Consistent with the Greenbook projection for exports, we heard that spending from abroad, including international tourism and condo-purchase activity, continues relatively strong. At the branch board meeting in Miami, I heard that Russians are the latest foreign buyers of condos. So combine that with President Poole’s comment on trucks, as a child of the Cold War, I think it is very ironic that our bailout is coming from the Russians. [Laughter] On the employment front, the demand for workers in sectors such as hospitality and energy remains quite strong, but overall plans appear to be more cautious. The trend in regional labor data mirrors the slowing trend in the national statistics. Each FOMC round my staff provides a summary sentiment index of expected economic conditions over the next six months based on responses of directors and contacts. Relative to the October meeting, that index is little changed, with the majority expecting flat or slower growth. When I combine the somewhat, but not dramatically, worse data inputs since the last meeting with the anecdotal and survey information from regional and other markets, I’m left with a view that economic fundamentals, current and prospective, have not yet fallen off a cliff. That being said, there’s not much of a case to be made for any risk assessment other than one weighted to the downside. In my view, the potential for protracted and growing financial market troubles should weigh heavily in the policy decision, and though recent core inflation readings are acceptable, I continue to be concerned about the ongoing divergence between headline and core inflation. Until they converge, price pressures cannot be removed from the watch list. But overall I see more uncertainty and, therefore, more downside risk in the real economic growth picture. Thank you, Mr. Chairman." FOMC20061212meeting--107 105,MR. MADIGAN.,"2 Thanks, Mr. Chairman. I will be referring to the material that was distributed labeled “Material for FOMC Briefing on Monetary Policy Alternatives.” Financial market conditions eased noticeably on balance over the intermeeting period. As shown in the top panels of exhibit 1, ten-year nominal Treasury yields dropped 30 basis points, the dollar declined nearly 2 percent, and equity prices rose more than 3 percent. As portrayed in the middle left-hand panel, the decline in Treasury yields seems to have been prompted in part by incoming spending and production data that were generally weaker than investors anticipated and inflation figures that were viewed as relatively benign. The labor market reports for October and November, however, came in at or above market expectations, interrupting the general downward trend in rates. As shown in the middle right-hand panel, inflation compensation was little changed for the next five years, after adjustment for carry effects, and was only a little lower for the subsequent five years. Thus, almost all the decline in nominal yields represented a drop in real rates. The bottom left-hand panel indicates that one-year nominal forward rates at the two-year and three-year horizons dropped the most, but the decline in yields was spread across the forward rate curve. The fact that relatively near-term forward rates declined steeply seems consistent with an interpretation that investors marked down their views of the cyclical strength of the economy, but the considerable drop in far forward rates seems to suggest that investors believe that more-persistent factors are also at work. As shown to the right, however, primary dealers and Blue Chip forecasters revised down their forecasts for GDP growth over the five quarters ending late next year by only about ¼ percentage point, and private forecasts of long-run or potential GDP were essentially unchanged, leaving unanswered questions about the source of the drop in rates. As can be seen in the top left-hand panel of exhibit 2, our three-factor term- structure model attributes the decline in the ten-year Treasury yield over the intermeeting period primarily to lower term premiums, the green portion of the bars. Ten-year term premiums are estimated to have declined from 31 to 12 basis points, leaving them almost invisibly thin and around their record lows. Expected future rates over the next ten years, the blue portion of the bars, are estimated to have accounted for only 9 basis points of the decline. However, we have some doubts about this estimated decomposition, in part because a sizable drop in the term premium, which at least conceptually represents compensation for interest-rate risk, seems hard to square with measures of interest-rate uncertainty. As shown to the 2 Material used by Mr. Madigan is appended to this transcript (appendix 2). right, implied volatilities on Treasury yields, the black line, have edged up in recent weeks, and uncertainty about the Eurodollar rate six months ahead, the red line, has risen quite noticeably. Also, as shown by the blue bars in the middle left-hand panel, the average individual uncertainty that primary dealers expressed about the stance of policy three meetings ahead has crept up since the summer. In any case, both market participants and market economists on average anticipate that policy easing is not far off. As indicated in the middle right-hand panel, primary dealer economists expect that the federal funds rate will average 5.16 percent in the first quarter and 4.82 percent in the fourth quarter of 2007. Quotes on fed funds futures, the right-hand column, suggest that investors see an even steeper easing of policy, with the funds rate expected to drop about ¾ percentage point over the next year. As shown by the red bars in the bottom left-hand panel, the downward shift of rate expectations over the intermeeting period has been accompanied by a greater leftward skew of the distribution. As noted in the bottom right-hand panel, dealers uniformly expect you to keep the federal funds rate unchanged today, and most anticipate little change to the wording of the statement apart from updating the characterization of the economic situation. A week ago, a minority expected a more significant softening of the statement, perhaps by referencing downside risks to growth or possibly even by describing the risks to growth and inflation as balanced; but informal reports suggest that some have backed off such expectations in view of Friday’s employment report. If Committee members see significant odds that the market expectation of a near- term easing of policy could prove warranted, they might wish to start adjusting the policy statement in that direction, as in the Bluebook’s alternative A, discussed in the top left-hand panel of exhibit 3. While Committee members might remain concerned about the upside risks to inflation with an unchanged federal funds rate, they might also believe that the substantial slowing in the housing sector, relatively high inventories in some sectors, and the sluggishness of manufacturing mean that the downside risks to economic activity have increased and now roughly balance the upside risks to inflation. Such an increase in downside risks could be a result of the gradual weakening of the near-term outlook, particularly if members place some weight on the possibility of nonlinear effects as economic growth slows. Moreover, while we do not fully understand what investors are reacting to, policymakers may be concerned that the decline in market rates could be signaling a degree of economic weakness that we do not yet appreciate. Also, our estimated policy rule indicates that maintaining rates at their current level would be consistent with the Committee’s past behavior. On the other hand, the Committee might see the recent easing of financial conditions as one of several considerations tilting it toward alternative C. As noted in the top right-hand panel, financial markets evidently are imparting increased stimulus to aggregate demand even as labor market conditions have tightened further. Members may view that stimulus as unwarranted and undesirable if their view of economic fundamentals hasn’t changed much and may believe that at least some of it should be offset by a firmer stance of monetary policy. Moreover, while core inflation has edged lower by some measures, it may not be seen as convincingly on a downward trend. And even if the Committee does believe that inflation is gradually ebbing, it may be dissatisfied with the anticipated pace of that decline. These considerations may motivate the Committee to consider firming policy today. However, the Committee might once again conclude that holding policy steady at this meeting is likely to be consistent with achieving its goals over time while perceiving that, if anything, modest additional firming may be required, as in alterative B. Although the Greenbook forecast for near-term activity has been marked down slightly, the medium-term outlook is essentially unchanged, and as illustrated in the middle left-hand panel, the real federal funds rate remains at the upper end of the range of model-based estimates of its short-run equilibrium and slightly above the Greenbook-consistent measure. In the Greenbook, maintaining the current stance of policy over the next two years produces economic growth a bit below that of potential in 2007 and core PCE inflation that edges down slowly to about 2 percent by 2008. While you would likely prefer stronger output growth and lower inflation, you might find the outcome projected in the Greenbook to represent both a plausible outcome and a reasonable balancing—given your dual objectives—of what is actually achievable in the circumstances. As noted previously, maintaining your stance for the near term would also be consistent with the Committee’s past behavior, as captured in our estimated outcome-based policy rule. Similarly, as shown in the panel to the right, optimal control simulations based on the extended Greenbook projection and an inflation objective of 2 percent would call for holding the federal funds rate at its current level over the next several quarters before easing slightly. While maintaining the current stance of policy, the Committee might believe that the risks remain tilted to the upside, as noted at the bottom of the exhibit. The unemployment rate is below most estimates of the NAIRU, suggesting that labor market strains could be putting upward pressure on prices, and the Committee may consequently be concerned that inflation may not decline as in the staff’s outlook. Moreover, with core inflation recently running around 2¼ to 2½ percent, somewhat above the preferred ranges cited by some of you, the Committee may continue to feel that risk-management considerations argue for an assessment that the risks remain tilted toward higher inflation, as in alternative B. Table 1 as it appeared in the Bluebook is included as exhibit 4 for your reference. Under the formulation of alternative B shown in this table, the Committee would refer to the “substantial” cooling of the housing market, indicate that “the recent pace of growth appears to have been somewhat more subdued than anticipated,” but still conclude that “the economy seems likely to expand at a moderate pace on balance over coming quarters.” This alternative would retain paragraphs 3 and 4 as they appeared in the October statement. If you found that version of section 2 too broad, you might prefer the version of alternative B presented in exhibit 5, shown in seasonally appropriate colors. [Laughter] Under this formulation, in section 2 the first sentence and the second clause of the second sentence would be identical to that presented in the Bluebook. However, the first clause of the second sentence would indicate that “some recent indicators of production and spending have been slightly weaker than anticipated.” This formulation may be seen as superior in that, first, it characterizes recent indicators without making a pronouncement about overall growth for the fourth quarter and, second, it suggests that not all economic indicators have been weak. Both the exhibit 4 and the exhibit 5 versions of alternative B seem broadly in line with market expectations. Thank you, Mr. Chairman." FOMC20050322meeting--212 210,MR. POOLE.," Thank you, Mr. Chairman. I support the 25 basis point increase. I want to emphasize a point that Don Kohn brought up. Since our last meeting, the forward market estimates March 22, 2005 93 of 116 interest rates or all the forward forecasts, in terms of the impact on the 10-year rate, there’s a perfect substitution between an extra 25 basis points now and an appropriate move out in the future. The advantage, I think, of pushing it out in the future is that it keeps the current increases on a very predictable path, which I believe should be a goal in and of itself. If we were to move 50 basis points—and this may come up in the future—I think there’s an argument for doing it when it’s a clear response to some new piece of information. But to do it almost out of the blue is going to create a lot of uncertainty, and the market is not going to know why we are doing it or what to make of it if it’s not a clear response to something new in the information set. So, given that there is this substitutability between that and the extension of the 25 basis point increases, it seems to me we should work in the latter direction rather than take the market by surprise. I don’t know of any good case where creating uncertainty for its own sake is advantageous. I think we want to go very much in the other direction. If at some point we move by 50 basis points without a clear case for doing so, it is going to be very hard to gauge or forecast the likely effects and impact of that. Thank you." FOMC20071031meeting--103 101,MR. MADIGAN.,"4 Thank you, Mr. Chairman. I will be referring to the package labeled “Material for FOMC Briefing on Monetary Policy Alternatives.” That package includes two versions of table 1: The first is the version that was discussed in the Bluebook, and the second is a revised version dated October 31. The revised table presents basically the same policy alternatives as the Bluebook version but with some changes in the rationale and risk assessment sections. To review, alternatives B and C contemplate leaving the stance of policy unchanged today, but they differ importantly in their assessments of risk: Alternative C characterizes the downside risks to growth as roughly offsetting the upside risks to inflation, whereas alternative B indicates that the downside risks to growth are the Committee’s greater policy concern. Alternative A, in contrast, eases the stance of monetary policy 25 basis points and indicates that the Committee assesses the risks to growth and inflation as roughly in balance. In discussing these alternatives, I will basically be working from right to left across the two versions of the table. As Dave Stockton discussed yesterday in response to a question from Vice Chairman Geithner, the Greenbook projection is a modal forecast. Without consideration of risks, the Greenbook analysis would seem to support the Committee’s selection of alternative C. In that forecast, which is conditioned on the federal funds rate remaining at 4¾ percent, economic growth slows in the near term, and below-trend growth over the next few quarters closes the small positive output gap that the staff sees as currently prevailing. Maintaining the present stance of monetary policy leads to a gradual strengthening of the expansion over 2008 and 2009 and by enough to leave the economy producing at its capacity. Core inflation stays under 2 percent, while total inflation runs a bit lower, reflecting declining energy prices. Judging by your projections, most of you would find such a trajectory for inflation satisfactory, at least for the next couple of years if not over the longer term. Your projection submissions, however, as well as your comments yesterday, suggest that many of you see less vigor in aggregate demand than the Greenbook does as well as appreciable downside risks—an outlook that might argue against alternative C. The Greenbook provided several alternative simulations involving greater weakness in housing and larger fallout from financial stress that illustrate some prominent risks to spending; they suggested that the path of the federal funds rate might need to run ¾ percentage point or more below baseline should such weakness in aggregate demand eventuate. The choice of alternative B could be consistent with a modal expectation along the lines of the Greenbook coupled with appreciable concerns about downside risks and a judgment that you need to await additional information before deciding whether to ease policy further. As noted in alternative B, section 2, of either version, the statement would in effect explain the decision to stand pat, first, by recognizing that economic growth last quarter was solid and perhaps conveying the implicit suggestion that the economy was likely to continue to expand at an acceptable pace, even if growth were to slow temporarily; second, by noting that strains in financial markets have eased somewhat on balance; and third, by indicating that the domestic 4 The materials used by Mr. Madigan are appended to this transcript (appendix 4). economy apart from housing has proven resilient and that the global economy remains strong. At the same time, the statement would indicate that the Committee is concerned about downside risks to growth, explicitly citing the potential effect of tightening credit conditions. Regarding inflation, the language would be identical to that used in September. The statement would conclude by indicating that, on balance, the Committee saw the downside risks to growth as the greater policy concern. As Bill Dudley noted, the market was all but certain as of yesterday that you will ease policy today 25 basis points. Today, in response to the economic data released earlier, intermediate and longer-term interest rates have risen somewhat; however, futures quotes still suggest that investors now see high odds that you will ease policy today. Thus, the announcement of an unchanged stance of policy would come as a considerable surprise to markets. To be sure, the assessment under alternative B that the downside risks are the greater policy concern and its implication that further easing might well be forthcoming before long would soften the blow. But a selloff in bond and equity markets would no doubt ensue. Moreover, financial asset prices could remain volatile for a time, as investors attempted to recalibrate their expectations of the probable path of monetary policy going forward. Concern about such market reactions clearly would not persuade you to ease policy at this meeting if you judged that an unchanged stance of policy would likely be more consistent with maximum employment and stable prices, and hitching monetary policy to market expectations would make for extremely poor economic outcomes. But especially in circumstances of persisting financial strains, concern about unnecessarily adding to those strains might incline you a bit more toward easing, as in alternative A, if you were already strongly leaning that way today based on your view of economic and financial fundamentals. As I noted yesterday, your economic projections suggest that most of you believe that the stance of policy should be eased within the next six to twelve months, and many of you indicated that some easing was appropriate imminently. You may see several reasons for preferring to move earlier rather than later. In particular, you may think that a timely reduction in interest rates could be valuable now in buoying household, business, and investor confidence. Yesterday the Chairman noted the possibility of a vicious cycle involving a deteriorating macroeconomic outlook and tightening credit conditions. By bolstering confidence in the outlook, easing policy as expected could help reduce concerns about deteriorating economic fundamentals and declining asset values. Beyond reducing the risks of nonlinear responses, easing policy as expected by market participants would support growth of aggregate demand over time through the usual channels. Of course, you may also be worried about a possible increase in inflation. Such concerns may reflect a variety of factors—the further sharp increase in oil prices of recent weeks, the depreciation of the dollar, accelerating unit labor costs, and perhaps the relatively high level of resource utilization. But given the recent good inflation performance, you may feel that downside risks to growth are the more immediate danger and believe that further easing today to address those risks is warranted. You may also believe that, should the easing eventually appear to have been unnecessary, you could act as quickly to remove stimulus as you did to put it in place. If you were inclined toward easing policy another 25 basis points at this meeting, you would need to confront the question of the appropriate statement language. In both versions of alternative A, the first two sentences of section 2 are similar to those proposed for alternative B. But rather than emphasizing remaining downside risks, the statement would then repeat most of the “help forestall” language used in September. The language proposed for the inflation paragraph in both versions is identical to the corresponding paragraph suggested for alternative B; again, the language shown in the October 31 version suggests a bit more concern about inflation risks than the September language. Finally, both versions of alternative A would characterize the upside risks to inflation as roughly balancing the downside risks to growth. This indication might well lead market participants to reduce the nearly two-thirds odds that they currently place on another quarter-point easing in December and might trim the extent of the overall easing of policy anticipated over the next year or so. Thus, implementation of alternative A also could prompt some further backup in market interest rates. In closing, let me remind the Committee that the September trial run highlighted the potential for inconsistencies between the results of the projections survey and the Committee’s statement. Your latest forecast submissions indicated that, while a minority of you sees the risks to inflation as skewed to the upside, a slight majority perceives the risks to total inflation as broadly balanced, and a more-sizable majority judges that the risks to core inflation are in balance. These results could be seen as incongruent with the draft statements for some of the alternatives. For example, alternative A references upside risks to inflation. Several considerations might explain this apparent inconsistency. For example, your responses on skews in the projections survey may capture only the subjective probabilities that you attach to various outcomes, while you may see the statement language as capturing not only the odds but also the economic costs associated with those outcomes. Or perhaps the upside risks to inflation referenced in the statement should be interpreted as reflecting the views of all members not just of the majority who saw inflation risks as balanced, thus encompassing the views of those in the minority who see upside inflation risks. Finally, I am worried about the possibility that some of you may have provided your numerical projections under the assumption of appropriate monetary policy but may not have applied that assumption as well to your individual risk assessments. In your upcoming remarks, you may wish to address whether there is any tension between your own views of the distribution of risks and the risk assessments in the draft statements. Thank you." CHRG-111hhrg53244--70 Mr. Bernanke," I am very open to discussing the role of the council. I think a very important role is to coordinate regulators, to oversee the system, to identify risks and so on. But there may be situations where the council can have authority to harmonize different practices or to identify problems and to take action. So I think the Congress should discuss what powers the council should have. " FOMC20061212meeting--49 47,MR. STOCKTON.," Well, it is in the forecast. It’s just not so easy to see on a revision-by- revision basis because we’re also being surprised by the tightness of the overall labor market, by the decline of the dollar, and by somewhat higher import prices. So there have been other offsetting factors that are masking the underlying effect of the lower energy prices. We have built in those energy prices on the upside; we’re taking them out on the downside; and they are, I think, an important factor behind the contour that we’re projecting. It’s just that there are other factors operating." FOMC20071031meeting--26 24,MR. STOCKTON.," We felt that in the past we did not typically worry about that sort of surprise effect, given that overall our ability to predict asset prices is so limited to begin with. This seemed stark enough that we thought we should probably lean in that direction. Whether we are too large or too small I don’t know. It’s not a very significant or consequential effect. Obviously, we are not pretending to forecast all the things that might happen if you were not to ease at this meeting in terms of how the financial markets might take that. We’re just trying to take the biggest pieces, and that’s where we were." CHRG-111shrg50814--70 Mr. Bernanke," That the way the capital we provided will be in the form of a convertible preferred stock, so this capital is available to the bank, but it does not have an ownership implication until such time as those losses which are forecast in the bad scenario actually occur. At that time, then the bank could convert the preferred to common to make sure it has sufficient common equity, and only at that time going forward, if those losses do occur, would the ownership implications become relevant. Senator Corker. Thank you, Mr. Chairman. " FOMC20050202meeting--190 188,MR. REINHART.," I would say that there are tradeoffs possible. That is, if all you did was cut out the last paragraph, it would be seen and interpreted by markets as cutting back on the degree of transparency in a retrograde step. But if you wanted to, you could expand your characterization of the outlook in the previous paragraph, implicitly providing some sort of forecast and, therefore, hinting at the future direction of rates. You could be more numeric in your characterization of the outlook, say, by releasing your central tendency surveys more frequently. So, there are some possibilities. But I think that just dropping it outright would probably not be well received." FOMC20050202meeting--156 154,MR. POOLE.," Thank you, Mr. Chairman. When I talk to my business contacts, I try to let them, first of all, tell me what’s bothering them. Sarbanes-Oxley and health care costs rise to the top of the hit parade there; that’s about all they really want to talk about. Certainly, Sarbanes-Oxley is causing a significant increase in accounting and audit budgets, and a lot of senior executive time is being devoted to it. Nevertheless, the costs associated with that legislation are not going to show up February 1-2, 2005 109 of 177 total outlays. So it’s a diversion and a nuisance—a pain in the neck for many people, including ourselves. When I tried to extract views by asking contacts if they were concerned about certain issues—for example, labor availability—the answer was typically “no.” They feel labor is readily available except for occasional specialties, like auditing. [Laughter] The only group for which they really see a bit of tightening, I think, is IT [information technology] professionals. But concern about labor availability is not general; it’s spotty. So if you’re opening a new retail store, you’d probably find several times over the applicants for the number of associate positions you have. I got the same kind of reply about concerns regarding wages and labor costs generally. The one thing I have seen is a modest upward revision among my contacts in expectations for their companies. A contact from a computer firm with a large international business reported that his company has revised upward somewhat their expectations for global growth. From contacts in the package delivery business we heard reports of some orders for new aircraft. They see continuing strong growth in the volume of traffic from Asia, so that’s leading to some expansion there. The overall impression I get is that things are very, very well balanced. There are modest upward revisions in plans and expectations. I think the expansion is proceeding and is, in fact, unusually free of significant bottlenecks. Things seem to be working out in an extremely orderly way. I don’t even have any minor quibbles with the staff outlook, but I would like to emphasize the following point, which comes from the fan charts depicting the forecast confidence intervals. I think the staff’s forecast is a very, very sound central tendency. But when I look at the table showing the confidence interval around the Greenbook forecast for real GDP this year, I see a point estimate of 3.9 percent and a confidence interval of 2.2 to 5.5 percent. Our life is going to look quite different if GDP growth is either 5.5 or 2.2 percent. But that is the sort of confidence interval that comes from the history of Greenbook forecast errors. So, I think it’s extremely important that we keep our minds open to various February 1-2, 2005 110 of 177 either side. Moreover, I think it’s important that we provide that message to the markets so that the markets don’t assume that we are locked into a particular path. The path that we’re on makes a whole lot of sense given what we know now. But we don’t want to condition the market to think that we’re locked into that path independent of shocks and disturbances. I’ve written down a list of various potential shocks and disturbances. We can all do that. We’ve talked about some of them. The ones that will come and bite us probably will not be any of those that are on the list. They’re probably going to be total surprises. Thank you." CHRG-111hhrg48867--283 Mr. Yingling," I think your question is very, very important, because, as you are pointing out, there is a tendency in regulatory agencies to fight the previous war. We talk about the Fed being the systemic regulator. There is another option, and that is you have a council that is headed by the Fed. And whether you use that model or the Fed, I think this needs to be a different group. It needs to be a smaller group. It needs to be people that are not there to fill out forms or read forms or read reports. It has to be people who are looking out and looking at statistics and going out and talking to people. And a prime example is somebody that would look at the growth in subprime mortgages and the 3/27s and 2/28s and look at that chart and say, that is a big fire. And so, whether it is in the Fed or within a committee headed by the Fed, it ought to be a group that has that role. They don't have a regulatory day-to-day role. Their role is to be entrepreneurial, as you are saying. " FOMC20070509meeting--80 78,MR. KOHN.," Thank you, Mr. Chairman. My outlook, like most of the rest of yours, was basically the same as the one in the Greenbook, and it hasn’t changed all that much over the past few weeks. Like the rest of you, I see income growing at less than the growth rate of potential for several quarters, the pace held down by housing and the slower growth of consumption that has become evident in recent data and confirmed by President Poole’s reports. This is offset over time by a strengthening of business spending, the end to the inventory correction that we see in IP and ISM statements, and a pickup in capital expenditures as businesses feel more comfortable that the expansion will continue and that any overbuilding they did when income growth was higher in those three or four years that President Stern was talking about has been absorbed. Like the rest of you, I see a pickup in demand to something like the growth rate of potential some time next year as housing activity adjusts to the lower level of demand and as inventory is worked off. Several favorable factors support this eventual return to potential: supportive financial conditions, especially for businesses; credit availability, which we’ve just been talking about; narrow credit spreads; low long-term rates; and good foreign demand— another upward adjustment in this Greenbook to rest-of-the-world economic growth; and the decline in the dollar—which will support exports. I used the staff structural growth of 2½ percent. It seemed to me that the adjustments the staff made were small, offsetting in participation and productivity, and looked reasonable given the recent data. There is still a tension between the labor data and having potential growth as high as it is, and it leaves the staff in a position in which labor force participation is slightly above the trend, which strikes me as where it ought to be when the unemployment rate is slightly below the NAIRU. Also, productivity is slightly below the trend, so they need faster-than-trend productivity growth just to get back to their now lower trend, which strikes me as where it ought to be after three or four quarters of below-trend growth and presumably some labor hoarding, but not that much below trend. So that looked like a reasonable assumption to me, and that’s what I used in my projection. I differ from the Greenbook in a couple of respects. One is that I had softer equity and house prices than the staff did. On the equity front—I think I said this last time—I expected equity prices to be soft, and they’re up 6 percent. [Laughter] Fortunately, I don’t back my predictions with my personal wealth. But—I’m going to hold to that prediction—[laughter] the market still seems to be building in a more rapid increase in profits than seems consistent with moderate nominal GDP growth and some rebalancing of the labor-capital share, which we may be beginning to see. Certainly, there is practically no growth at all in domestic profits in the Greenbook for ’08. Now, the market may get more from the foreign profits, as people have been saying, but I think there is potential for disappointment there. On house prices, inventories are large, and the price-to-rent ratio is still extremely high. On the demand side, I think demand is being damped by tightening in subprime and alt-A markets. On the supply side, there will be some more foreclosures, particularly as rates adjust up this year. So I presume that prices will need to drop somewhat, rather than just stay level as in the staff forecast, even to get the housing stabilization and eventual slight rebound that the staff and I included in our real GDP forecast. Now, to offset the effects of weakness in wealth from these prices, I had a slight easing of monetary policy this year, next year, and the following year—¼ percentage point each year—to get that same output. This was only a slight easing in real rates given that inflation is edging down and inflation expectations aren’t presumed to change very much. I did this in the context of what I would have as an interim inflation target of 2 percent. I think 2 percent is achievable without significant output loss: It is low by historical standards and broadly consistent with price stability and minimal welfare distortions relative to 1½ percent. I agree that a little lower might be nice eventually, but I would get there opportunistically by leaning against any increases and accepting decreases rather than deliberately going to 1½ percent. I’m skeptical about the expectations effect that might accrue from the announcement of a 1½ percent commitment. A second difference with the Greenbook is that I assumed a slightly lower NAIRU— 4¾ percent. Any point estimate is silly—we really have only the vaguest idea—but it seemed to me that the compensation data, the price data, of the past few years were more consistent with a NAIRU that was a bit below 5—and so I assumed 4¾ percent. As a consequence, I had slightly less inflation than the staff forecast—0.1 in ’07 and in ’08. So I had 2.2 in ’07 and 2.0 in ’08 and had it staying there in ’09. In some sense I thought the more interesting part of the forecast was thinking about the second moments—the skews and the probabilities around the central tendencies. I confess that for ’07 I committed the sin of thinking things were more uncertain than usual, Mr. Chairman. [Laughter] I hate it when I hear people say that." FOMC20071211meeting--43 41,MR. STOCKTON.," Food is important. In fact, we devote, I would imagine, a surprising amount of resources to it. We have an agricultural economist whose job is to follow those developments and report on them. It is his view—and based on both the futures prices and some of the modeling that we have done—that we will see a deceleration going forward in retail food prices. As you know, futures prices basically are projecting a flattening-out. I assume that is part of what is in Nathan’s forecast as well. We are not trying to outguess the markets in that regard, and the reports that we have received on agricultural production look relatively favorable for the coming year. Now, most of that is a bit of winter wheat at this point and not much more in terms of production, although we have seen some significant rebuilding of both flocks and livestock herds that suggests that we are on the right track in terms of an output response to the higher prices that we have seen in the past year. Markets are tight, and I think there probably is some asymmetry in the risk surrounding the food price forecast, in that it is easier to see some possibility of stock-out problems if there is any shortfall in production over the coming year, than that there would be some massive boom in agricultural production that will depress prices sharply. But I do think—and in the Greenbook Part 2 quite often, especially in the autumn, when we are actually doing a more careful accounting of the harvest—we devote a fair amount of attention to resources to it. We can certainly do even more going forward." CHRG-111hhrg55809--146 Mr. Price," Is it the government's role to determine what is in the consumer's interest? " FOMC20061025meeting--81 79,MR. LACKER.," Thank you, Mr. Chairman. The Fifth District survey for October just released today shows manufacturing flattening out after a run-up last month, though expectations remain upbeat. Services firms note solid increases in revenues, and overall District job growth remains strong. Among retailers, big-ticket sales were softer, and housing-related sales slowed further; but with other retailers, the picture brightened, with sales and traffic notably stronger. The housing sector continues to slow, with sales weakening further in the D.C. area and modest price reductions occurring in other large markets. Some cities in the Carolinas, however, continue to report modest increases in home sales prices and even permits, and in many locations, activity varies significantly across different price ranges. District labor markets remain tight, and our surveys indicate that expectations are for some additional wage pressures in the next six months. This commentary includes the now-usual reports of shortages of particular skills. Our price measures moderated some, but they remain elevated. The national outlook has changed only marginally in the past five weeks. At our last few meetings, we have seen the staff mark down their forecast for second-half growth as the pace of the contraction in housing activity has become clear. The information that has come in over the past several weeks does not suggest any steepening in the rate of decline, and if anything, there are scattered signs suggesting that we might be getting close to the bottom. Except for housing, the economy still appears to be in good shape. Consumer spending is holding up well. Employment is tracking labor force growth. Commercial construction is fairly robust, and business investment spending continues to grow. So we’re still not seeing any major spillovers from the housing market to other economic sectors. Housing is certainly going to subtract from headline growth over the next couple of quarters, but I expect GDP growth to return to close to potential at some point next year, and I remain more optimistic than the staff about when that will occur. There is a risk that output growth will come in lower than I anticipate because of a more severe deterioration of the housing markets or more substantial spillover effects on other spending categories. Although it’s certainly too early to rule this out, I think the probability of such an outcome has receded in recent weeks. So my outlook for real growth is about the same as it was in September with, if anything, a tad less downside risk. The inflation outlook has not improved since our last meeting. The September core CPI reading was 2.9 at an annual rate, identical to the August reading, and core PCE inflation for September is estimated at an annual rate of about 2.1 percent, I think. I grant that three-month core PCE inflation has come down off its May peak of close to 3 percent. I do take some comfort in the fact that core inflation did not remain so high, but that measure of inflation has been right about 2¼ percent for three straight months. The Greenbook forecast has it stepping up to 2.4 percent for the next six months and falling below 2.2 percent only in the second quarter of 2008. So three-month core PCE inflation is now as low as it gets for the next year and a half in the Greenbook forecast, and at the end of 2008, core inflation will have been above 2 percent for five straight years. I have my doubts about the prospects for even the modest decline described in the Greenbook. The notion that slowing real growth will bring inflation down much has already been heavily discounted around this table—and rightly so, in my view, given the tenuous status of the relationship between real gaps and inflation. The recent fall in energy prices may help, but relying on tame energy prices is problematic, I think. It would encourage the public to believe that we will allow core inflation to rise whenever energy prices surge. That belief is, for me, the leading hypothesis explaining the run-ups in core inflation that we saw last fall and earlier this year. We are likely to see some significant swings in energy prices in the years ahead. So help from this direction is by no means certain. More broadly, I believe we should be leery of letting a relative price move core inflation around. There was a lot of discussion at our last meeting about the state of inflation expectations, and a number of people pointed to evidence that market participants did not seem to believe we intend to bring inflation down to the center of the 1 to 2 percent range. This is confirmed by the Bluebook, which provides a very useful compilation this time from various sources of market expectations for core PCE inflation, and they are all clustered around 2¼ percent. If the Greenbook forecast is realized and core inflation gradually comes down to 2.1 percent over the next two years, it’s hard to believe these expectations would fall much. So with core inflation running around 2¼ percent and not likely to come down much soon and with expectations apparently settled at about the same rate, I’m deeply concerned about inflation. Thank you." FOMC20051213meeting--27 25,MR. STOCKTON.," Thank you, Mr. Chairman. In the spirit of the season, I am tempted to report that I bring you great tidings of comfort and joy. However, this is, after all, the Federal Reserve, so it is probably more appropriate to simply note that tidings have improved modestly over the intermeeting period. While not quite in the miracle category, we have raised our projection for the growth of real GDP over the next two years and lowered our projection of price inflation. As you know, we revised up our estimate of the growth in real GDP in the third quarter by more than a percentage point and left fourth-quarter growth unchanged. As a consequence, real output is now projected to expand at an annual rate of nearly 4 percent in the second half of this year—about ½ percentage point faster than we were forecasting in October. The surprising strength in recent months has been widespread. But clearly, one of the standout areas of strength has been consumer spending. To be sure, sales of light motor vehicles were a bit softer than we had expected, but that was more than offset by considerably stronger consumer outlays in other areas. This morning=s retail sales report for November provided further evidence of the underlying strength in consumption. Although spending in the retail control category, which excludes sales at auto dealers and building supply stores, dropped 0.6 percent last month, that decline was more than accounted for by lower gasoline prices. In real terms, we estimate that spending was up more than 1 percent for the month. That figure is somewhat stronger than we had expected and would likely cause us to revise up the growth of consumption nearly ½ percentage point at an annual rate in the fourth quarter. December 13, 2005 10 of 100 In light of the 1 percentage point upward revision that we made to real GDP growth in third quarter, it may appear a bit surprising that we only carried the higher level, and not a higher growth rate, into the fourth quarter. But part of our upward surprise in the third quarter was in non-auto inventory investment. With stocks appearing reasonably well aligned with sales in most sectors, we didn=t see the need to make any further upward adjustment to this aspect of the forecast. Moreover, some of the third-quarter strength in GDP reflected defense spending that seemed likely to have been pulled forward from the fourth quarter. Both of these judgments appear to have been supported, and then some, by incoming data in the past two days. Yesterday=s Monthly Treasury Statement and this morning’s reading on retail inventories suggest that both defense spending and inventory investment are likely to be even weaker in the fourth quarter than we had written down. Balancing these softer readings against the stronger retail sales data would leave our forecast for real GDP growth in the fourth quarter unchanged at about 3½ percent. In contemplating the forecast for 2006 and 2007, we had to make some assessment of the sources of the strength in activity in the second half of this year. As we had anticipated would be the case back in September, we are now in the position of having to interpret whether the errors in our forecast of aggregate activity reflect misestimates on our part of either the hurricane effects or of the underlying behavior of the economy. We do believe that some of the surprising strength of activity is probably attributable to smaller negative effects from hurricanes than we had previously penciled in. To be sure, production in the energy sector is coming back a bit more slowly than we had expected, especially production from the off-shore platforms in the Gulf of Mexico. But outside of energy, production appears to be recovering more quickly. Output of chemicals, paper, rubber and plastics, and some areas of food processing improved noticeably in October and November. And we look to be getting a bigger plus from the production of construction supplies. On the spending side, the hits to consumption of housing services, food, and gasoline—areas that we had thought would be affected by hurricane-related disruptions—appear to have been smaller over the past few months than we had incorporated in our previous couple of forecasts. Of course, most of this remains educated guesswork and needs to be taken with a grain of salt. But all in all, we are inclined to attribute a few tenths of the surprising strength in second-half growth to smaller hurricane effects. December 13, 2005 11 of 100 However, the information that we have received over the past six weeks has not been confined solely to aggregate demand. Developments on the supply-side of the economy also appear to have been more favorable than we had expected. The surge in output growth last quarter was accomplished with almost no increase in hours worked. Consequently, output per hour in the nonfarm business sector rose at a 4½ percent annual rate in the third quarter and is now estimated to have been up more than 3 percent over the past four quarters. As optimistic as we have been, the data have continued to outflank us on the upside in recent quarters. In response to this continued good news, we revised up our estimates of structural labor productivity. In addition to an upward adjustment to the level this year, we boosted the growth of structural labor productivity about ¼ percentage point to a bit above 3 percent in both 2006 and 2007. Capital deepening is making a slightly larger contribution to this estimate, but most of the upward revision has occurred in multifactor productivity. Despite being nearly a decade into this favorable productivity wave, there are few signs that the efforts or abilities of businesses to implement greater technical and organizational efficiencies are flagging. On balance, the revisions that we made to aggregate demand were a touch larger than those we made to aggregate supply, and we estimate the output gap to be slightly narrower, on average, over the next two years than in the previous forecast. In response to these developments, we raised our path for the funds rate another 25 basis points, to 4½ percent by early next year. Despite these modest adjustments, the basic contour of our forecast remains unchanged. After increasing 3¾ percent this year, the rise in real GDP slows to 3½ percent in 2006 and 3 percent in 2007. That pattern reflects several powerful crosscurrents. We expect activity to be boosted early next year by rebuilding efforts in the Gulf Coast region. Moreover, with energy prices projected to level out after increasing sharply over the past two years, the drag on aggregate demand from the earlier run-up in prices should begin to ebb. But these positives are more than offset by fading fiscal stimulus, the lagged effects of tighter monetary policy, and a gradually diminishing impetus to consumer spending from equity and housing wealth. In sorting through the details of our forecast, it should be pretty obvious that a flattening out of activity in the housing sector is one of the principal sources of slower aggregate growth. After contributing about ½ percentage point to growth in real GDP per annum over the past four years, we are projecting residential investment to be a roughly neutral factor over the next two years. But that is still all forecast. To date, the hard data on housing have remained solid. Housing starts have remained at elevated levels, new home sales hit a record high in October, and house prices as measured by the OFHEO purchase index continued to increase at a double-digit pace through the third quarter. December 13, 2005 12 of 100 Board briefing, a variety of indicators of housing activity have turned down in recent months. Household attitudes toward home buying have dropped sharply; builder ratings of new home sales have deteriorated; the index of mortgage applications for home purchase has fallen off; and the inventory of unsold homes has moved up. Taken in isolation, none of these measures has an especially reliable statistical relationship to housing activity. But taken together, they could be indicating that we are at the front edge of some cooling in these markets. I offer one more piece of evidence that I think almost surely suggests that the end is near in this sector. While channel surfing the other night, to the annoyance of my otherwise very patient wife, I came across a new television series on the Discovery Channel entitled “Flip That House.” [Laughter] As far as I could tell, the gist of the show was that with some spackling, a few strategically placed azaleas, and access to a bank, you too could tap into the great real estate wealth machine. It was enough to put even the most ardent believer in market efficiency into existential crisis. [Laughter] Only time will tell if these indicators are giving us a head fake or are the start of our long-awaited slowdown in this sector. For now, we are sticking with our call that housing activity will level off next year. Moreover, we continue to anticipate that a more visible deceleration in house prices will be in evidence by the middle of next year, and the associated slower growth of household net worth contributes to the projected up-tilt in the personal saving rate. In our view, both of these developments are critical for damping growth by enough to prevent the economy from overheating. To date, the news on inflation does not suggest that we have overshot the mark on potential, though our ability to make that assertion with any confidence in real time is admittedly very tenuous. To begin, measures of core consumer prices came in a bit below our expectations. We also had a faster unwinding of the earlier hurricane-related increase in retail energy prices. Survey measures of inflation expectations have retraced virtually all of this autumn=s run-up, and TIPS [Treasury inflation-protected securities] -based measures of inflation compensation have retreated as well. On the cost side, lower hourly compensation and faster growth in structural productivity imply less pressure from labor costs, and the markup of prices over unit labor costs has risen further, pointing to a somewhat larger cushion between costs and prices. December 13, 2005 13 of 100 Obviously, there are some very important risks on both sides of our forecasts for real activity and inflation, and we tried to highlight some of the more prominent ones in the Greenbook. I recognize that our baseline forecast, in which the economy=s growth slows to about trend, output settles out at a level very close to potential, and inflation pressures ease a bit, all with just a little more tightening of policy, seems too good to be true. No doubt, events will conspire to force adjustments, both major and minor, on the staff projection. Perhaps I=ve just written the “flexibility and resilience” speech for the Chairman so often over the past few years that I=m suffering from something akin to the Stockholm syndrome—the tendency of hostages over time to sympathize with the views of their keepers. [Laughter] But as I look back over the past year and observe how well the economy performed in the face of some pretty substantial shocks, I don=t think our optimistic outlook is unwarranted. Karen will continue our presentation." FOMC20070918meeting--124 122,MR. KOHN.," Thank you, Mr. Chairman. The repricing of risk and rechanneling of credit flows under way I believe will exert restraint on spending, especially in the near term, but over the longer run as well. A critical channel of contagion that came into play in the intermeeting period was the involvement of the banks as providers of credit and liquidity backstops in the ABCP market. As a consequence, uncertainties about real estate markets, the performance of nonprime mortgages, and structured-credit products came to rest as greater uncertainty about bank exposures. The classic flight to safety under way—the desire to protect capital and liquidity—has caused banks and those providing them credit to become more cautious. This has resulted in greatly reduced funding in term markets spreading the constriction of credit potentially well beyond the mortgage and leveraged-loan markets we talked about in early August. Like so many around the table, I feel that I can honestly say that the uncertainties around the output forecast were indeed larger than usual this time. Fortunately, we don’t have many degrees of freedom to test hypotheses about the sorts of relationships that we’re talking about here. I think we can expect effects on spending to be greatest in the short and intermediate terms, while markets are disrupted and while participants are struggling to find new ways of intermediating credit that address the perceived shortcomings of the previous practices. In the short run, to preserve capital and liquidity while secondary markets are impaired, banks have tightened terms and standards for loans. You can see this directly in the rise in spreads in the prime jumbo market, but it must be true for other less easily observed credits as well. Some credits, such as nonprime mortgages and leveraged loans, just haven’t been available for a while. An already weak housing market has been most directly affected, and construction sales and prices will probably fall substantially further because of the reduced demand along with a large overhang of unsold homes. Consumption spending is also likely to be trimmed. Tighter terms for home equity lines of credit and second mortgages mean not only that housing wealth is declining but also that it is probably less liquid and more expensive. To the extent that asset- backed security markets are affected and lenders have questions about consumer balance sheets, the cost of consumer credit could well rise also. Household confidence has apparently been affected by the adverse financial market news. Investment spending may also be held down by uncertainty, by a sense that consumer demand will be growing less rapidly. I have been struck in listening to presidents around the table report about their Districts that the tone has shifted noticeably toward less optimism, slower growth, and more caution on the part of our business respondents. It has been one of those shifts that you hear every couple of years around the table that are different from what might have been anticipated, say, from reading the Beige Book. There is also some tightening of credit conditions in the business sector—for example, for commercial real estate credit, as some have noted, and for credit for below-investment-grade firms. As a consequence, some downshift in GDP is highly likely over the next few quarters, and without policy action, we would most likely end up with a substantially lower GDP a few quarters out. Indeed, in the Greenbook, the output gap is noticeably wider at the end of ’08 despite near-term policy easing of 50 basis points. I also noted downside risk to my output forecast. It seems to me that, in this period when markets are adjusting, those risks are most skewed. The potential for adverse interactions seems large, as nervous creditors assess the implications of declines in house prices, volatile earnings of commercial and investment banks, and setbacks in overall confidence. I think there is a non-negligible risk that the constrictions in credit availability would feed back on the economy and, in turn, feed back on credit supply. As market participants are better able to distinguish and assess risk, liquidity will be re-established in many markets. Although we have seen some improvement in the past week or two, markets are still quite dysfunctional in many regards. Like others, I think it could take a while to discover how to structure securitizations that have the requisite transparency and appropriate principal-agent incentives to restore investor confidence and to recalibrate the roles of securities markets and banks. The process could be particularly drawn out in mortgage and related markets, which are likely to be affected for some time by uncertainties about the prices of houses and about the performance of mortgages. Moreover, some effects of the recent turmoil will be longer lasting. Risk spreads in a great variety of markets are likely to be at higher, more- realistic, and more-sustainable levels; banks should be charging more for credit liquidity backstops; less leverage in the financial sector implies a need for return on the greater amount of capital involved in intermediation, including at banks; and some credit conditions at any given fed funds rate will be tighter one year from now than they were a few months ago. I have concentrated on problems for growth, but the upside inflation risks have not disappeared. Unit labor costs have been rising. Markups, while still high, have come in, affording a reduced cushion for absorbing labor costs. Resource utilization remains high by historical standards. Import prices may prove problematic. Although commodity prices may level out as in the staff forecast, foreign economies also are producing at high levels. Pressures on the costs of finished goods could increase, especially if the dollar declines further. My expectations for the most likely path for inflation have been revised just a tick lower, given the favorable incoming data and the lower path for economic activity relative to potential, which will increase competitive pressures in labor and product markets. For now, given this outlook, we need to concentrate on the potential effects of the disruptions to financial markets on the real economy when we consider policy in the next portion of this meeting. Thank you, Mr. Chairman." CHRG-110hhrg44900--105 Secretary Paulson," As I said, I believe that GSE's have played a constructive role, and that they are playing a very important and vital role right now. They touch 70 percent of the mortgages that are made in this country. And so they are a very important part of our economy, a very important part of our housing market. And they are an important part now, and they are going to be an important part in the future. Mr. Moore of Kansas. Thank you, Mr. Chairman. " CHRG-111shrg61513--51 Mr. Bernanke," Well, first, I agree that the economy is still very weak and very disappointing in that respect. I think low interest rates do tend to help, and I will give you a couple of examples. One, you mentioned the durable goods. Notwithstanding--I have not had a chance to get into those numbers in detail this morning, but investment, actually equipment investment, equipment and software investment has been something of a bright spot and has been growing. And part of the reason for that is that larger firms at least have pretty good access to credit at reasonable rates in the corporate bond market, for example, and that has supported the investment rebound, which is a big part of what we are seeing in the recovery. Another example is that the Fed's actions, interest rate actions and our purchases of mortgage-backed securities, have helped bring down mortgage rates. That has helped to some extent to stabilize demand for housing and helped--as you may know, house prices seem to have flattened out and begun to rise a bit, which is very important for consumers in terms of their wealth, in terms of the risk of foreclosure, and in terms of, you know, restarting activity in the residential construction sector. So those are two examples where we see growth. We did have 4-percent growth in the second half of 2009. I think the issue we face is will the growth be fast enough to materially reduce the unemployment rate at a pace that we would like to see, and that is a big uncertainty right now. But we are getting some output growth at this point. Senator Johanns. Mr. Chairman, thank you. Senator Johnson. Senator Brown. Senator Brown. Thank you, Mr. Chairman. Mr. Chairman, nice to see you. We all know for most of our Nation's history--I am going to go in a bit different direction. For most of our Nation's history, manufacturing and agriculture and transportation drove our economy, whether it is steel in Youngstown or agriculture around places like Lexington, Ohio, or the Port of Cleveland shipping raw materials and finished goods all over the Midwest. As an expert on--as an economic historian, as you are, and an expert on the Great Depression, you are aware, obviously, of the role of manufacturing, especially a historic role, in pulling our Nation out of recession. As many Ohioans can tell you, can painfully tell you, manufacturing steadily declined over the last three decades. At the same time, we know that the financial industry has rapidly expanded. As recently as the 1980s, manufacturing made up 25 percent of GDP; financial services made up less than half of that, in the vicinity of 11 or 12 percent. Those numbers crossed in the 1990s. Now it is almost a direct flip. Manufacturing, 12 percent; financial services, 20 or 21 percent. Wall Street's output, put another way, was equal to all the Farm Belt States and the Industrial Belt States combined. In 2004, 44 percent of all corporate profits in the United States came from the financial sector compared with 10 percent from manufacturing. And I say that as a preface to my question for this reason: Kevin Phillips, the writer, has noted sort of the history of great nations in the last 400 years. Habsburg Spain, the United Provinces of Netherlands, and Imperial England, all three saw their economies go from manufacturing, shipping, agriculture--depending on which of each of the three--and energy into more and more emphasis on financial services. And the financialization in that sense is what probably cost those empires their empire. They were countries that never really recovered in the wealth creation. It really is the fact that banking is not an independent source of wealth. It does not cause our prosperity. The success of banking is created by our success and our ability to create wealth. Then I hear people, when I talk about manufacturing policy, I hear your predecessors say this, I hear advisers in the White House, regardless of party, say we cannot have a manufacturing policy, we cannot pick winners and losers. Well, it is pretty clear in the 1980s that this country, this Government, your predecessors, and the Treasury Department picked winners and losers. They decided that financialization, the financial services sector should be the winner as we got rid of usury laws, as we changed rules and deregulated and all those things. So we put ourselves in a position where, as Kevin Phillips said, finance is the chosen sector of the U.S. economy. So my question is this: As your role, your statutory role, a mandated target of 4-percent unemployment, it is at least twice, maybe three times that right now. When I look at a building on the Oberlin College campus 20 miles from my house, fully powered by solar energy, the largest solar-powered building on any college campus in America, about 8 years it was built. All the panels were built in Germany, a country that had an industrial policy that stimulated demand and supply and have built clean energy jobs way better than we have. You read the articles in the paper about what China is about to way outcompete us on alternative energy, solar and wind turbines. We know all that. We still sit with no manufacturing policy. So my question is this: As the economic historian that you are, are you troubled by the fact that the financial sector is now twice the size of the manufacturing sector? And I put parentheses around the next part of that, that no country that I can see in economic history has done well when that happened. Are you troubled by that? And if you are troubled by that fact that the financial industry is twice the size of manufacturing, flipping what it was, what should we do about it and what are you doing about it? " FOMC20081029meeting--250 248,MR. WARSH.," Thank you, Mr. Chairman. The first sentence of the Greenbook said that ""recent economic and financial news has been dismal""; and the last sentence on page 1 of the Bluebook said that ""markets generally remain extremely illiquid and volatile."" I can't do better than that, but I can certainly do worse; so let me give that a try. [Laughter] Market prices and official and corporate data confirm an additional leg down in midSeptember, which has been much discussed. I think it is going to become increasingly clear that October, particularly the first 20 days of the month, was materially worse. So if we fell off the cliff in the middle of September, I think that once the data come out and find their way into the marketplace in October, the Greenbook forecast might look a bit more positive than the facts on the ground would suggest. As a result, my own forecast is less optimistic than the Greenbook, but there is plenty of uncertainty, as I think Dave Stockton talked about yesterday. Let me make a few comments about financial markets before turning to the broader economy. I expect a prolonged period of significantly strained credit markets, and that strain is likely to be exacerbated between now and year-end and I suspect even well into 2009. The credit intermediation process that we've talked about is fundamentally broken. I talked six months ago about the financial architecture that was fundamentally being changed. I think that has all happened faster than I could have anticipated. Confidence, not just in counterparties but in basic rules of doing business across financial markets, has been lost, and my own sense is that loss of confidence is not easily fixed, even by well-intended government programs. We should all be quite patient in terms of seeing the benefits of the rather dramatic actions taken by the official sector, both here in the United States and overseas. Corporate bond rates and other risk spreads may well fall from their recent peaks, as suggested in the Greenbook, but spreads across asset classes are likely to stay far wider than historical norms throughout the forecast period. I think these new spread relationships are uncertain. So what we thought would be sort of normal spreads of LIBOR and normal spreads of corporate bonds, all have to be reassessed not just by us but also by market participants. Even if credit is now made more available to businesses through some of these new Treasury and other programs, I suspect the all-in cost of capital is likely to materially impede business investment, particularly given expectations by businesses for a weaker economy in the upcoming period. As Vice Chairman Geithner suggested, monetary policy might be able to do a bit about this, but it is not going to be able to change it very much. Let me turn to three points on the economy before closing. First, in the near term, given my sense of how October is tracking, it's likely to be extraordinarily weak. I expect weaker fourthquarter consumption than the Greenbook, weaker labor markets going into 2009, and a materially weaker fourth-quarter GDP print. Some labor surveys--including some of my own preferred measures, like the JOLTS--seem to be holding up; but I'm not sure that that's going to hold for another couple of months. So I'd expect the labor markets to trend more materially in the direction that I've discussed. Well, what about beyond the near term? What about 2009 and beyond? It strikes me that the catalysts for marked improvement are lacking. When I think about fiscal policy, regulatory policy, tax policy, and trade policy, which I talked about previously, it's not obvious to me that any of those are going to provide some kind of catalyst for a marked change in the contour of the economy. On the fiscal front, I assume that the fiscal stimulus is likely to be larger, maybe even materially larger, than in the Greenbook alternative simulation, but my own conclusions are similar to the Greenbook's, which is that I'm not sure it's going to be terribly effective. I'm not sure it's going to be constructed in that way, and I'm not sure it will do nearly as much as it will inevitably be advertised to do. A more disturbing trend probably even than the efficacy of a fiscal package-- which in my own view is absolutely necessary, but again I query whether it's going to be structured in a way to do what it needs to do--is that potential output in the forecast period is likely to fall. Trend growth rates are coming down, and I expect productivity to fall perhaps even more than in the Greenbook projection. The vaunted resilience of the U.S. economy, which I've talked about for a long time, is certainly going to be tested during this period. Business investment, it strikes me, will be a useful gauge as we get into the first quarter of 2009 to see how tough an economic period we have in front of us, and I worry about the decisions that business people will be making. Now, of course, against all of this, markets could snap back, as we saw a little yesterday--2009 could look better. We have to remain open minded about the possibility that the economy will continue, as it has over the past ten or fifteen years, to outperform model-based expectations. Let me turn to foreign growth. These decouplers, which were so prominent for so long, are somehow hard to find these days. Foreign growth strikes me as likely to fall faster and stay lower than in the Greenbook projection. The road back is not likely to begin as early as the first quarter of 2009 for our major trading partners. The ""more financial fallout"" alternative simulation strikes me as significantly more likely for foreign growth. In light of a growth trajectory that is better here in the United States than outside the United States, at least relative to current market expectations, I'd expect the foreign exchange value of the dollar on balance to strengthen against a basket of foreign currencies. So let me turn finally to inflation. The trend on import prices, the broad measures of commodity prices, and the expected dollar strength all suggest that inflation problems are abating markedly. I think an open question, which isn't likely to be dispositive but is likely to be interesting, is how sticky prices are, particularly from the consumer product companies during this period--how long the various surcharges and increases in prices we've seen can stay high and the companies attempt to keep profit margins. My guess is that they can make profit margins look decent for another quarter or two; but beyond that, prices across a broad set of products and services are likely to retrace some of the gains in recent periods. I'll save the balance of my remarks for the next round. Thank you, Mr. Chairman. " FOMC20050322meeting--84 82,MS. MINEHAN.," This is probably going on a little long, but I’ll ask one quick question. I see that you have gone from a negative contribution to growth in the first quarter from equipment spending to a positive one. But in terms of the growth rate for the first quarter, you end up with a projection that’s on the order of 10 percentage points under the growth rates predicted elsewhere in the Blue Chip and the Wall Street forecasts, and so forth. I know you’ve probably done some hand-wringing about that. Any thoughts?" FOMC20050630meeting--292 290,MR. STOCKTON.," I think part of the purpose of putting that in the Bluebook was to June 29-30, 2005 98 of 234 react in the way that optimal path suggests, you would need to be tighter than in the baseline assumption in the Greenbook. Those differences are pretty small because while I don’t follow that path precisely, I use that as some guidance in thinking about where to set the funds rate path for the Greenbook. Our goal is to put a forecast on the table that would be helpful to you in your discussion." FOMC20060131meeting--116 114,MR. KOHN.," Thank you, Mr. Chairman. The projections I submitted for this meeting reflected expectations of an economy that probably is operating in level terms somewhere in the neighborhood of its long-run, sustainable potential and will continue to do so over the next two years with growth broadly in line with the growth of potential and inflation basically stable. My forecasts for 2006 are very close to those I submitted last January and June. That’s partly a product of innate stubbornness. [Laughter] But it also reflects the fact that 2005 came in largely as expected—after allowance for hurricanes and an energy shock last year that elevated core inflation and damped growth somewhat compared with our forecasts last January. This is encouraging in that it suggests that we are not looking at major unexplained and unanticipated forces acting on the economy. At this point, our focus appropriately is on keeping inflation contained. I see several reasons for optimism in this regard. One is the performance of core consumer prices and price measures, which continue to suggest that the pass-through of higher energy prices will be limited. Core inflation was roughly stable last year. It picked up a bit in the fourth quarter, but that was from unusually low readings in the third quarter. Declining consumer inflation expectations in the most recent Michigan survey, along with the failure of market-based inflation compensation readings to respond significantly to the substantial run-up in oil prices and higher core readings over the intermeeting period, just reinforce my assessment that any pass-through should be small and limited in duration. As we noted at the last meeting, perhaps the greater threat to sustained good inflation performance comes from possible increases in pressures on resources. The critical question is whether growth in output close to trend is a reasonable expectation with only modest further policy firming, given the low level of long-term rates, reduced drag from energy prices, and a boost from rebuilding. I thought it was a reasonable expectation, for a number of reasons. First, after smoothing through the fluctuations caused by auto incentives and hurricanes, private domestic final demand already showed signs of moderation last year. Growth in private domestic final sales slowed from 4¼ percent in the first half of the year to 3 percent in the second half of the year, with every element—consumption, business fixed investment, residential housing investment— moderating. The staff estimates that about 0.3 of this was due to hurricane effects, but that still leaves underlying private demand slowing to an annual rate of about 3¼ or 3½ percent. This moderation did not reflect the full effects of our policy tightening, especially on the housing market. Even well-anticipated increases in the short-term rates seem to be having a significant effect on housing markets, which have become more dependent on adjustable rate mortgages to maintain affordability. We are just beginning to see the anticipated slowdown in this sector. With growth in consumption and sales constrained by a leveling-out of housing wealth, businesses are unlikely to see the need to step up the pace at which they are adding to their capital stock. As a consequence, investment growth could slow, at least slightly, over the next few years, reflecting reduced impetus from the accelerator. Finally, although foreign economies are strengthening some, foreign investment and consumption remain subdued relative to income. And given our continuing outsized appetite for imports, net exports are unlikely to be putting added impetus to demands on domestic production. I think there are several upside and downside risks around this picture of growth near potential, as a number of you pointed out. I agree that the housing market is the most likely source of a shortfall in demand. I don’t think we can have much confidence about how the dynamics of this market will play out now that it has begun to soften. My suspicion is that, as little bubbles in the froth are popped, the risks are tilted more toward quite a sharp cooling off than toward a very gradual ebbing of price increases and building activity. On the other side, it seems to me global demand would be a major upside risk to growth and to price stability. The extraordinarily rapid rise in commodity prices and upward movement in global equity prices may indicate a very fundamental turnaround in foreign demand and attitudes beyond just a stepwise strengthening of growth. For now, these remain risks that we’ll need to monitor. In making my forecast, I assumed we would tighten at this meeting, and likely at the next as well, to gain greater assurance that inflation will remain contained over time, consistent with my forecast of a 1¾ percent increase in core prices in 2007. However, I do see action in March as dependent on the readings we get in coming months. There is, as usual, considerable uncertainty about the precise nature and magnitude of the risk to the outlook, but we’re dealing with an economic picture that overall is remarkably good and expected to remain that way for the foreseeable future. Reflecting on this situation, among many, many aspects of the past, I end my remarks as I began them: Thank you, Mr. Chairman." FOMC20070321meeting--238 236,MR. KOHN.," I’m reading the statement. [Laughter] But it didn’t take long. [Laughter] I think Carol has redistributed the list of questions that came from the memo that Vincent sent around.4 There have been slight rewrites of questions 5 and 7, but the idea is basically the same. 4 The list of questions to which Mr. Kohn refers is appended to this transcript (appendix 4). I want to start by thanking the staff for all the background memos. I thought they were particularly clear and helpful. We are not going to have staff briefings this morning, in part because they did such a good job on the memos that I didn’t think we really needed to follow up with briefings this morning. But thank you all very much. We have two items on the agenda—the numerical specification of price stability and the trial run on the forecast and the forecast narrative. On the price stability objective, you have the questions in front of you. Once we finish the discussion, the subcommittee will compile the results, try to ascertain where we are and what the center of gravity would be, and consider what the next steps might be, depending on what people say. On the trial run, I don’t anticipate an extended discussion. If people have major issues and questions to raise, they should raise them. But much of the idea of the trial run is to uncover major issues and questions, so I hope that the discussion can be relatively short. That’s all I have to say by way of introduction, Mr. Chairman." FOMC20080130meeting--194 192,VICE CHAIRMAN GEITHNER.," I'm going to end dark, but it's not all dark. The world still seems likely to be a source of strength. You know, we have the implausible kind of Goldilocks view of the world, which is it's going to be a little slower, taking some of the edge off inflation risk, without being so slow that it's going to amplify downside risks to growth in the United States. That may be too optimistic, but the world still is looking pretty good. Central banks in a lot of places are starting to soften their link to the dollar so that they can get more freedom to direct monetary policy to respond to inflation pressure. That's a good thing. U.S. external imbalances are adjusting at a pace well ahead of expectations. That's all good, I think. As many people pointed out, the fact that we don't have a lot of imbalances outside of housing coming into this slowdown is helpful. There's a little sign of incipient optimism on the productivity outlook or maybe a little less pessimism that we're in a much slower structural productivity growth outlook than before. The market is building an expectation for housing prices that is very, very steep. That could be a source of darkness or strength, but some people are starting to call the bottom ahead, and that's the first time. It has been a long time since we've seen any sense that maybe the turn is ahead. It seems unlikely, but maybe they're right. In the financial markets, I think it is true that there is some sign that the process of repair is starting. We have seen very, very substantial adjustment by the major financial institutions; very, very substantial de-leveraging ahead as the institutions adjust to this much, much greater increase in macroeconomic uncertainty and downside risk; very, very substantial early equity raising by major firms; pretty substantial improvement in market functioning; and easing of liquidity pressure. Those are useful, encouraging things. There is a huge amount of uncertainty about the size and the location of remaining credit losses across the system. But based on what we know, I think it's still true that the capital positions of the major U.S. institutions coming into this look pretty good relative to how they did in the early 1990s. Of course, as many people have said many times, there's a fair amount of money in the world willing and able to come in when investors see prices at sufficiently distressed levels. One more encouraging sign, of course, is that the timing, content, and design of the stimulus package look as though the package will be a modest positive. It could have been a worse balance of lateness and poor design, but I think it looks to be above expectations on both timing and design, and it will help a little on the downside and take out some of the downside risk. Having said that, though, I think it is quite dark still out there. Like everyone else, we have revised down our growth forecast. We expect very little growth, if any, in the first half of the year before policy starts to bring growth back up to potential. The main risk, as has been true since August, is the dangerous self-reinforcing cycle, in which tighter financial conditions hurt confidence and raise recession probability, causing people to behave on the expectation that recession probably is higher, reinforcing the financial headwinds, et cetera. The dominant challenge to policy is still to arrest that dynamic and reduce the probability of the very adverse outcome on the growth side. Of course, we have to do that without risking too much damage to our inflation credibility and too much damage to future incentives and future resource allocation. Like many of you, I think the inflation outlook for the reasons laid out in the Greenbook is better than it was. It's not terrific, but it's better. The risks are probably balanced around the inflation outlook. Our inflation forecast still has core PCE coming down below 2 percent over the forecast period. There's obviously a lot of uncertainty around that, but I really think that you can look at inflation expectations in the markets as somewhat reassuring on the credibility front to date. So again, I think the key question for policy is how low we should get real short-term rates relative to equilibrium, and our best judgment is that we're going to have to get them lower even with another 50 basis points tomorrow. We're still going to need to try to reinforce the signal that we're going to provide an adequate degree of accommodation or insurance against this very dangerous risk of a self-reinforcing cycle in which financial weakness headwinds reinforce the risk of a much deeper and prolonged decline in economic activity. " FOMC20070131meeting--397 395,MR. MISHKIN.," It’s hard enough for the Bank of England to do it with a committee of nine people. We have nineteen. Furthermore, at the Bank of England they’re all living in the same house and talking to each other all the time. We have people all over the country with very different jobs, and so it’s just infeasible to do it. I think Dave would quit. [Laughter] It would eat up a huge amount of staff resources, and we might have some of our research directors quitting or going to the research staffs at the Reserve Banks. It would be very hard to get a timely agreement on it—and, again, I think timeliness is important. It would also be hard to get the diversity of views clearly expressed. So I end up where Janet ends up—I think that we need to keep something like the current procedure in which all nineteen participants give their views. It is very important that there be no attributions and that we amalgamate the views in some way. The procedure we have now may not be perfect—maybe there’s something better—but it should be something similar. Question 2: Should we have common conditioning factors? Here, again, I believe that the diversity of views is a good thing, and so again I agree with Janet that each participant has his or her own conditioning factors. The most important conditioning factor is clearly the path of the federal funds rate, but I have mixed feelings about it. We may want to provide some information about what individual participants think about this. The concern I have here is that the details really matter. There is some danger if people seem to be making a commitment, because we know that any path one specifies is surely not going to be the path that actually transpires because new data are going to come in. I’ve been very concerned about this issue, and in fact I wrote a paper on it that is cited in the R&S document. Sometimes transparency may go too far. In particular, I was not a fan of the “moderate pace” language that the Federal Reserve used in the past—I was not here at the time, but I think that language did not express the issue of conditionality enough. If the Committee then had to change the path, which it surely might at some point, it could be accused of flip- flopping, which would create severe problems for the Committee. However, maybe we can do it appropriately through fan charts to derive the degree of uncertainty, but we really need to discuss this possibility. The details matter. If we even think about going in this direction, the trial runs are going to be critical, so I want to have a bit more of an open mind on that. On question 3, obviously for reasons that I outlined earlier, I strongly support a narrative to accompany the forecast. On question 4, I feel that the narrative and the forecast need to be very timely. If we could do this, it would be a great advantage to do it very quickly, possibly even at the beginning of the week after the FOMC meeting. That would require a much more expedited process. We’d have to use some delegation—to the Chairman or the staff—for writing up this process. That would require moving up the Greenbook a bit. For us to produce our forecasts and a narrative, we need to see the Greenbook—I certainly needed to see the Greenbook to come up with my forecast—but then people could provide information very much along the lines that Vice Chairman Geithner provided. Some might do it verbally. Some might do it the way you did it, which was very nice. That could then go to the staff a little earlier than now—let’s say, by Wednesday. Then a narrative could be written up that would go to people before the FOMC meeting and then could be discussed at the FOMC meeting. I don’t know how this would work. It would require that we not go through as much of an iterative process as we sometimes do—that is critical for the timeliness issue. One thing that we might think about is that we have the “Recent Developments” part of the Greenbook, and releasing that might have some value. That would be from the staff; it would not be from the Committee. It gives some flesh to the discussion that would be in the summary, so we might think about doing something with that as well. As to question 5, on frequency, I don’t think that twice a year is enough to give markets the information they need. As for eight times a year, again, I worry about losing our top people from the staffs; they might come after us with pitchforks. I tend to lean to four, but there is the interesting issue about the timing of our meetings, so we’d have to work that out. So quarterly seems about right to me. On question 6, because I believe the forecast period needs to be longer than the policy period, for the reasons I discussed earlier, it clearly has to be longer than two years. However, too long a period might put too much of a burden on us. A period of three years, which is common in central banks, would give the flavor of the direction of the path that we’re thinking about and would be adequate. On question 7, to keep things from being too burdensome, I want to use the KISS principle—the fewer variables the better. At a minimum, the three variables that I think are the right ones are the ones that I think are obvious—an inflation measure, an output measure, and an employment measure. I think we should kill nominal GDP; it’s a vestige of the past. There is an issue about the federal funds rate, but, again, that should be discussed. It hasn’t been mentioned yet, but I would be uncomfortable providing projections of potential GDP. I think we do need it for our own purposes, but it raises really huge political economy problems because people can think of it as a speed limit or a target for growth, which could be dangerous. So although I welcome it in the Federal Reserve Bank of New York’s document that we received, I do not think it would be particularly wise to release it. On question 8, for the reasons I outlined earlier, I think it’s extremely important for us to provide information about uncertainty. Fan charts are the right way to do this. I really like what I see here, but there might be technical details that we’d have to decide on: Should we give only one 70 percent confidence interval? Should we give more shadings? There’s an issue about how this chart would be produced. The reality is that it would have to be produced in the same way that the narrative is, in the following sense: It would have to be delegated. The information from the nineteen participants would help in producing it in terms of their views. The staff would have to come up with some measures. Then there would be some iteration along the same lines as the narrative in order to produce it. But it then would have to be timely; it would have to be released with both the narrative and the forecasts themselves. So with that, let me stop. I don’t think I’ve been quite as charming here. Thank you." FOMC20070509meeting--89 87,CHAIRMAN BERNANKE.," Thank you. Let me try to summarize the discussion around the table and take any comments on the summary, and then I would like to add just a few thoughts. Broadly speaking, the outlook of most participants has not substantially changed since March. Housing remains weak, and it is the greatest source of downside risk. Whether the demand for housing has stabilized remains difficult to judge, in part because of subprime issues. It is also unclear whether builders will seek to return inventories to historical levels, and if so, at what rate. There is yet no indication of significant spillover from housing to other sectors, although that remains a risk. The downside risks to investment have moderated since the last meeting, although investment seems unlikely to be a strong driver of growth. The inventory cycle is now well advanced, and production is strengthening. Consumption growth seems likely to moderate, reflecting factors such as weakness in house prices and high energy prices. However, the labor market remains strong, particularly in the market for highly skilled workers. Incomes generated by the labor market, together with gains in the stock market and generally accommodative financial conditions, should provide some support for consumption going forward. Financial markets are priced for perfection, which implies some risks on that score. Foreign economies remain strong and should be a source of support, although some are undertaking monetary tightening. Overall, the economy is in a soft patch and will likely grow below trend for a while. Growth should return to potential later this year or in 2008, depending on the evolution of the housing market. The rate of potential growth remains hard to pin down. Several participants seem a bit more optimistic than the Greenbook on potential growth and the NAIRU, although there are risks. Inflation has improved a bit, and most see continued but very slow moderation. However, there are upside risks to inflation, including compensation, the dollar, energy prices, and a slowing in productivity. Moreover, a rise in inflation from current levels would be costly, particularly if it involved unhinging inflation expectations. Vigilance on inflation must, therefore, be maintained. Overall the risks and uncertainties seem a bit less pronounced than at the last meeting, and participants seemed relatively comfortable with the outlook. Although there are some potentially significant downside risks to output, arising particularly from the housing sector and the possible spillover to consumption, the group still appears to view a failure of inflation to moderate as expected to be the predominant risk to longer-term stability. Are there any comments or questions? Hearing none, I will just add a few points. First, following President Yellen, I think that the tension between slow growth and a strong labor market remains central to understanding what’s going on. Okun’s law is supposed to work better than this. [Laughter] I looked at recent history. Over the past twenty years or so, there has been no exact parallel to what we are seeing now. There was a jobless recovery in ’91-’93 in which unemployment remained high even though growth was picking up, and we had a midcycle slowdown in ’95 and ’96, which was relatively short and not very severe, in which the unemployment rate got temporarily ahead of growth. So there have been some deviations. Interestingly, after the 2001 recession, despite lots of talk about jobless recoveries, Okun’s law worked pretty well. So we are in an unusual situation—instead of a jobless recovery, we have growthless job growth. [Laughter] Interpreting this correctly is very important. The staff forecast essentially assumes that Okun’s law will revert to historical tendency. I think that assumption is reasonable, particularly since the staff is not exceptionally optimistic about potential growth and, therefore, that particular source of error is moderated. That would suggest that labor hoarding is probably a good part of what is happening here. If there is one area in which labor hoarding appears to be significant, it would be construction, as President Yellen mentioned. I asked the staff to do a simple study of this relationship, to which Dave Stockton referred. Andrew Figura and Adam Looney of the Board’s staff performed a regression analysis in which they regressed all construction employment against all investment in structures quarterly with lags going back to 1985. The reason to look at all construction in terms of both employment and production is that there is a lot of substitutability between those two categories. That regression approach should also account for unmeasured labor, including undocumented workers and the like. In this analysis they found that employment is roughly proportional to construction activity, but with substantial lags, which again is somewhat surprising. Indeed, the model fits well through the fourth quarter of ’06 but then begins to underpredict significantly in the first quarter of ’07. If this model is correct, then given what is already in the pipeline in terms of reduced construction activity and then going on with the forecast in the Greenbook, we should begin to see fairly significant declines in construction employment on the order of 30,000 per month over the next year, which would be sufficient in itself, with all else being equal, to add 0.2 to 0.3 to the unemployment rate. So if labor hoarding explains the failure of Okun’s law, then we may soon see some gradual rise in the unemployment rate, which would also be consistent with the view that the staff has taken that a good bit of the slowdown in productivity is cyclical. It is actually fairly difficult to calculate the contribution of the construction sector to productivity because it involves not just construction workers but also upstream production of various kinds. But one estimate, which comes from discussions with the Council of Economic Advisers, had the implication of employment hoarding in construction being about ½ percentage point on productivity growth. We will see how that develops. Even though I believe, as does the staff, that we will see some softening in the labor market, I should say that the evidence is still quite tentative. We saw a bit of weakness in the last labor report, but unemployment insurance claims remain low, and we do not really see a significant indication. The other major issue is the housing market. Again, as a number of people pointed out, this is an inventory-cycle problem. The two main determinants of an inventory cycle are (1) what the level of final demand is and (2) how quickly you move to bring inventories back to normal. There does seem to have been some step-down in final demand over the past few months. Assuming that homebuilders would like to get not all the way to but significantly toward their last ten years’ inventories by the end of 2008 implies fairly weak construction, not only in the second quarter but going into the third quarter as well. Only in the fourth quarter will we see a relatively minor subtraction from GDP. That’s also relatively speculative, but residential construction does seem fairly likely to me to be more of a drag than we previously thought and to continue to be a problem into the third quarter. There will also be a slowdown in consumption. We have been having rates near 4 percent, which is certainly not sustainable. We already see indications that consumption may be closer to 2 percent in the second quarter. I think the house-price effects are going to show up. Gasoline prices will have an effect. The labor market is strong, but it is going to slow a bit. So it looks to me as though underlying growth is roughly 2 percent and will be so for a couple of quarters to come. Notice in the thinking about the underlying case that there has been quite an asynchronicity between private domestic final demand and production lately. For example, for the second quarter we expect to see weaker private domestic final demand but probably a stronger GDP number because of rebounds in net exports and the like. But we should look past that—those are just quarter-to-quarter variations—and observe that growth is moderate, an observation that is supported by the sense that industrial production and manufacturing seem to be picking up. To summarize, I think that the notion of moderate growth with some uncertainty and with return toward potential later in the year or early next year is still probably about the right forecast. On inflation, there’s the famous stock market prediction that prices will fluctuate. That seems to be true also for inflation. I mentioned at the last meeting that the monthly standard deviation in inflation numbers is about 0.08, and so between 0.1 and 0.3 there is not necessarily a whole lot of information. We have a few pieces of good news. I think vacancy rates are rising for both apartments and single-family homes. At some point we will begin to see better progress on owners’ equivalent rent and shelter costs. Also, the quarterly average of medical cost increases was much more moderate than in the first two months, which suggests that maybe this risk is not as serious as it may have looked. However, as many people pointed out, there are a number of negatives, including the dollar, energy, food prices, commodity prices, and most importantly, the labor market. The compensation data remain quite mixed—in particular, the ECI, which was a very soft headline number. The 1.1 percent quarterly wage and salary number, or 3.6 percent for twelve months, is now more or less consistent with what we’re seeing in average hourly earnings. If productivity falls below 2 percent, then we are beginning to get to a range in which unit labor costs will be putting pressure on inflation. So I am quite comfortable with the view expressed around the table that, although inflation looks to be stabilizing and perhaps falling slowly, there are significant risks to inflation and we should take those very seriously. Very much a side point—I did have some interesting discussions with the staff about the role of the stock market in the forecast. This is not the staff’s fault, but there is a sort of tension in how the stock market is treated. On the one hand, the stock market is assumed to grow at 6½ percent from the current level. On the other hand, the forecast has profit growth going essentially to zero by the third quarter but interest rates coming up. Those two things are a little hard to reconcile. The difficult problem is which way you should go to reconcile it. On the one hand, it could be that the forecast is right, and therefore the stock market will in fact be weaker; that will have implications for stability, for consumption, and so on. On the other hand, perhaps we should be taking information from the stock market in making our forecast. So it is a very difficult problem, and I just wanted to point out the tension that we will have to see resolved over the next few quarters. One partial resolution is that, as has been noted, the stock market and the economy as a whole can be decoupled to some extent because of overseas profits. This is an interesting example of how financial globalization is creating stability for domestic consumption—you know, decoupling domestic consumption from domestic production. Again, we had a very good discussion with the staff about this issue, and I think it is just something we will need to think about going forward. In summary, in the last meeting we felt that uncertainty had risen. There has been perhaps a slight moderation of those concerns at this point—a little less inflation risk, a little less growth risk. Nevertheless, the balance of risks with inflation being the greater still seems to me to be a reasonable approach. Let me now turn to Vincent to begin the policy go-round." CHRG-111hhrg51698--177 Mr. Walz," Thank you, Mr. Chairman, and to our Ranking Member for holding this, as my colleagues have said, incredibly informative discussion. I do want to thank each and every one of you. You are being very candid, very open; and that is very helpful to us. Because, the bottom line is that we all want our markets to function correctly. We want to make sure that they are regulated to the point where people have trust in them, but that we are still encouraging innovation and people to move forward on some of these instruments. So all of us are trying to understand this. I think in that spirit, because this is very complicated--and I do thank Chairman Peterson personally. He has for several years talked to me and tried to educate me on these. What I would like to do, maybe Mr. Buis or Mr. Gooch, if you would help me, if each one of you would tell me--Mr. Buis, you can pick that soybean farmer out in Albert Lea, Minnesota, that is a Farmers Union member. Tell me how the future market works for them and how it affects their paycheck. Then, Mr. Gooch, tell me what your brokers do and what the futures market does and how they collect their paycheck, and what role each of them has in securing the economic well-being of this country. If you could do that, that would really help. Because I want to talk to my constituents about why this affects them. It is all too easy to demonize or take a populist position and point fingers. I want to get it right. So, Tom, if you want to start. " CHRG-109hhrg22160--97 Mr. Greenspan," First of all, that was written 40 years ago, and I was mistaken in part. I expected things that didn't happen. And, nonetheless, my general view toward the type of gold standard effect remains to this day. My forecast of what was going to happen subsequent to that period has proved, fortunately, wrong. And as I have said to you in the past, we have tried to manage the Federal Reserve over the years, really since October 1979--because, remember, up to that point we were in some very serious inflationary trouble. Since then I think we have been remarkably successful, in my judgment. " FOMC20060131meeting--102 100,MR. STOCKTON.," Mr. Chairman, I quickly consulted with my labor economist experts at the coffee break about your question about the demographic effects on the workweek, and, indeed, there is—and it’s incorporated in our forecast—a modest effect of the aging of the workforce on the workweek, with older workers having shorter workweeks. Obviously, the longer-term trend has been driven more by the shift in the composition of employment from manufacturing toward more service-oriented industries, which have shorter workweeks, but there is a perceptible demographic effect as well." CHRG-111shrg50814--62 Mr. Bernanke," Yes. There will be more information, I believe, very soon, but let me give you my view of that. The assessment will look at the balance sheets and the capital needs of each of our 19 largest, $100 billion plus banks over the next 2-year horizon, under both a consensus forecast of where we think the economy is likely to be, based on private sector forecasts, and an alternative which is worse, that is, a more stressed situation. I should emphasize that the outcome of this test is not going to be, say, you pass, you fail. That is not the outcome. The outcome is going to be: Here is how much capital this institution needs to guarantee that it will have high-quality capital and to be well capitalized sufficient to be able to lend and to support the economy, even if the stress scenario arises. So the purpose of the test is to try to ensure that even in a bad scenario, banks will have enough capital, including enough common equity, to meet their obligations to lend. Senator Corker. So what I would take from that is, in earlier comments about--I guess our concern still is about systemic risk and that there are organizations and institutions that are too large to fail. That is what you said earlier. And so, if I am to understand this right, the stress test would simultaneously in many cases, my assumption would be, show there is a need for additional large amounts of capital; and what you are saying is you are going to solve that problem--I think what you are saying is you have a plan to solve that problem simultaneously. " FOMC20080625meeting--133 131,MR. KOHN.," Thank you, Mr. Chairman. I support the action and language of alternative B; Brian's striking of ""near-term"" is fine with me. This is a tough situation, as we all remarked yesterday. Commodity prices are at the center of the problem that we find ourselves in. In my view, we didn't cause the rise in commodity prices. We may have contributed a little around the edges, but whatever we contributed was a necessary byproduct of what we needed to do to cope with what was happening to the U.S. economy, and we can't reverse the rise in relative prices without tremendous cost to the U.S. economy. Or even the rise in headline inflation, we couldn't undo that without putting a huge amount of slack in the economy to force down wages, sticky prices, et cetera, and that would not be appropriate. I think the classic response that we've all been talking about is to take a temporary increase in inflation and in unemployment that facilitates the relative price changes that need to happen, concentrate on second-round effects, and make sure those increases are temporary. I think that's inadvertently what we've fallen into here. Given the housing and financial shocks, the 2 percent fed funds rate of alternative B is consistent for now with continuing along the path of the temporary increases in inflation and unemployment. Unlike many of you, I don't see the current rate as extraordinarily accommodative, given what else has happened in financial markets. There is no insurance in the staff forecast, right? The Greenbook forecast has zero insurance in it. My own forecast was a little stronger than the Greenbook's. I think all of ours were a little stronger than the Greenbook's, but even if I marked up r* by � point or 1 point, that's not a huge amount of insurance in the circumstances that we're facing. I note that no one sitting around this table predicted a decline in the unemployment rate over the balance of the year; so everybody has 5� percent or higher unemployment rates predicted by the end of the year. The staff thinks that the current 5� percent is a little too high. So they are expecting the unemployment rate to come down in the next month or two. Given this, we're all expecting the unemployment rate to rise over the balance of the year. I would think, given the lags in policy, that if you thought policy was hugely accommodative, you'd see some decline in the unemployment rate over the next six, seven, or eight months. I think our own forecasts suggest that some insurance might be here, but not the amount that I'm hearing some of you talk about. I don't see the consistency there. My own view is that there's probably a little insurance in it, and it's appropriate for now. I agree that the next move in interest rates is more likely to be up than down. I assumed, like President Yellen, that it would be at the end of this year or at the beginning of next year. The rising unemployment that we all expect should help damp inflation and inflation expectations and make it very hard to pass through all these cost increases that we're hearing from businesses that they want to pass through and certainly make it hard for wages and cost pressures to rise. So I agree with everyone else that the weight in the two tails has shifted. There's less weight in the downside risk tail for output and more weight in the upside risk tail for inflation. The statement does a very nice job of saying that explicitly, and I think that we just need to await incoming data and information about inflation expectations, costs, and whatnot to see when the appropriate time to move will be. Because I don't think there's a tremendous amount of insurance in there, I think we can afford to be a little patient and data dependent here. Thank you, Mr. Chairman. " FOMC20050920meeting--26 24,MR. STOCKTON.," Obviously, in terms of the transmission of that output gap in thinking about inflation, our Phillips curve in essence is so flat and that slightly higher output gap is so briefly encapsulated in the forecast that it doesn’t really have any noticeable effect. But we did think about how we should communicate the consequences of the supply disruptions in potential output. And again, we just decided on reflection that we would incorporate the part that was the capital stock destruction but not necessarily other supply disruptions that are admittedly going to be occurring in the next few months." FOMC20070628meeting--173 171,MR. PLOSSER.," Thank you, Mr. Chairman. As people said before, I, too, am in favor of keeping the fed funds rate at 5¼ percent. The economy does seem to be rebounding in the second quarter. The lingering uncertainty over housing suggests that now is not the right time to take more-aggressive action. I am in agreement with that. However, the most current readings on core inflation, while they have been good—just to reiterate the point—I, too, believe there is a lot of evidence that it may be transitory, and we have to be very careful about the fact that headline inflation has not been very cooperative recently. Inflation expectations remain somewhat high from my perspective, and based on our previous discussions, that is a worry for me. I do tend to favor our announcing an inflation target. I am not yet convinced that we will see inflation expectations where they need to be to achieve my goal by the end of 2009. If we look at the projection narratives prepared by the Committee members, we see that a majority believe that the flat fed funds rate will get us to a PCE core inflation of 2 percent or slightly less by 2009. If my own goal were 2 percent, I might be more comfortable with a flat fed funds rate going forward. In fact, even the Greenbook suggests that there is a model where that could happen. The bottom line is that I think we can’t avoid the elephant in the room. How can we sensibly talk about the forecast and appropriate policy choices, either in real time, as we do today, or prospectively, when we can’t articulate or agree upon what our objective is? In the absence of agreeing on a numerical long-run inflation objective, we, as individual members, face increasingly difficult choices in arriving at an appropriate policy stance in any given meeting and even greater difficulty conveying our Committee’s decision to the public in an informative and transparent manner. Individuals could be advocating different policy paths either because they have different models of the economy or different inflation goals or both. At a minimum, I believe it would help our internal deliberations—and it would certainly help mine—if the causes of these differences in our projections were more transparent. If we are thinking about our forecast as a communication device, this would seem to even be more imperative. That brings me to language. I think the language in the revised alternative B is incredibly well crafted and it tries to get around the problem that we are facing in dealing with what we meant by “elevated” and how we think about this going forward. Citing growth over the past two quarters as having been moderate is a step in the right direction because it encourages the public and the markets to look through shorter-run, transitory movements. Similarly, we need to be looking through transitory movements in inflation as well. As several of you have pointed out in your comments on the proposed statement language before the meeting and as Vince pointed out in our last FOMC meeting, how we characterize the inflation outlook in our statements going forward is becoming increasingly an issue since we have not agreed on what our objective is. I have two related concerns. The first is that, in eliminating “elevated,” we run the risk of signaling to the market that we are satisfied with the current rate of inflation, even though we haven’t communicated what that means. Are we looking forward twelve months? Two years? Three years? Are we looking backward at the past three months or the past twelve months? Are we basing our judgment on forecasts of the next twelve months? Are we concerned only about the core PCE, or are we concerned about headline PCE or some version of the CPI that is relevant to our concept of inflation? As I said yesterday, my concern is that there is considerable confusion in the marketplace about why we focus on core and what it means to us and how we communicate that. Internally, we are not clear on these issues, so how do we expect the public to divine our meaning when we are not willing to do it internally? In essence, I think there will be a great deal of speculation, even with this language, about what we mean. Will the market conclude what we think it should, or will we just accept whatever the market divines our intentions to be? My second concern about changing the language dramatically is that it might convey to the market the notion that we are satisfied with inflation at current levels. We may reveal through our projections next month that we actually are forecasting inflation to be lower than it is today on a twelve-month basis. This was the point that President Yellen made in her memo. It creates somewhat of a contradiction in how we describe our current views. If the market infers that we are satisfied with a year-over-year core at 2 percent and then our forecasts come in at 1.8 or whatever, I think that will send some confusing messages. On the other hand, releasing the forecast later may clarify for the market what we are expecting and that may be the interpretation. But there is no way for us to know what the outcome of that is without being more specific about what our objectives are. Why do we want to create that much confusion and speculation in the marketplace about what we mean? I understand the desire to extricate ourselves from the language about core inflation, but I think we are being unnecessarily confusing and cryptic in our choice of language, and it will be difficult for us to control those expectations given the way we are trying to manage the language. I am not going to get engaged in all the details of the wording. There must be people who are better at that than I am. But I would just like to conclude by noting that, even if we are successful—and, indeed, we may be with the current language in alternative B—in wordsmithing ourselves around this delicate problem, it is not going to go away. We will continue to grapple with it in this environment—and we are going to continue to be pushed by the markets, by commentators, to clarify what in fact we mean. So the problem isn’t going to go away even if we sort of finesse our way around it in the short run. Thank you, Mr. Chairman." FOMC20081216meeting--236 234,MR. KROSZNER.," Thanks. President Lockhart's forecast about what members would say about the forecasts I think has turned out to be right, and I certainly don't want to disappoint. [Laughter] So I agree with what others have said, and I think most everything has been said about the intensification of the recessionary flames around the world. What I will do is just quickly look at it from the perspective of part of the banks' balance sheets and the things that may not be left on those balance sheets, to just underscore how I think this is going to be protracted for the financial services sector for a while. On the consumer side, as many people have mentioned, the very sharp step down in employment, the very large job losses, the increases in the unemployment rate, and the decreases in wealth have been leading to very significant increases in consumer delinquencies and very high roll rates--that is, people who become delinquent rolling directly into charge-off. This is happening not only on the credit card side and on a lot of different parts of the consumer side but also in mortgages, for which we are seeing exactly the same kind of thing. Although the most recent numbers that came out from the Mortgage Bankers Association suggested some stabilization in foreclosure starts, that actually had more to do with the laws in various states slowing down that process rather than any real change in the underlying economics. Of course, we still have a lot of option ARM types of resets that will be coming through in 2009. So a lot of pressure is there, and as was mentioned, housing prices are still going down. We haven't yet seen as much of an actual downturn in commercial real estate, but undoubtedly that will occur as fewer people are shopping in shopping malls and as a lot of other commercial real estate projects don't have the payoffs that people expect. Also, an enormous amount of refinancing is going to be necessary during the next few months, and having to pay an additional 600 or 800 basis points really changes the economics of a lot of these projects, if they can even get the refinancing at an additional 600 to 800 basis points. For leveraged loans, another piece of the balance sheet, as people have said, there is very little activity going on in takeovers. The only positive there is that the failure of certain deals has taken some of the pressure off certain banks' balance sheets. On the commercial and industrial side, as we have noted, the investment-grade market for debt issuance seems to have maintained itself, but that is really one of the few markets that is there. If any challenges come in there, it could be very, very difficult for firms to finance investment. We certainly have seen the spreads going up recently, even if the volume has come back a bit. But as we have seen in the non-investment-grade part, the spreads have blown out, and the financing is not there. That tends to be a little more of what many banks have on their balance sheets, and so I think that is representative of the challenges that the banks are going to have. That suggests that we have a lot of challenges in banking and financial institutions' balance sheets to come that have nothing to do with any particular level of assets or accounting issues but just real economic factors that are going to be affecting the balance sheets. So the credit headwinds are going to be very, very strong for a number of quarters going forward. The points that President Rosengren made are extremely important ones. We have to think about, as we move to the zero lower bound, how that is going to affect behavior of financial institutions. Certainly, the staff memos were good on addressing some issues, but I think that other things that have been mentioned, like imposing minimums or floors on interest rates on loans, we have not carefully analyzed or really understand well. There may be a variety of other responses that we don't understand well that we really do need to get a better handle on, both to see how the effects of traditional monetary policy change--the transmission mechanism--and to think about the nontraditional aspects of monetary policy that we would be undertaking by using our balance sheet. So where can we use it most effectively? If the financial institutions are changing their behavior, we need to be cognizant of that and think about where we need to try to unfreeze markets if we are going to be using our balance sheet in that way, and I think it is very important that we do so. I will underscore also what other people have said about the great importance of clearly articulating what we are doing. It is not that we have given up and that the Fed is impotent but that, through changes in our balance sheet, we can be quite potent in particular markets and in general. That then brings us to whether we can be too potent and raise inflation concerns. Exactly as President Stern said, we should be so lucky to have that as our problem. We do need to make sure that we maintain credibility and show that we feel that we can and do act to offset concerns about deflation. It is very difficult to tell what the price-level evolution is likely to be over the next year, but I do think that there is a real concern about that, and we have to take that very, very seriously going forward. I think we would, obviously, be able to get out of these different programs, and we need to think about getting out of them at some point. But right now the key is getting into the programs, using the nontraditional approaches, to make sure that we offset a deflationary psychology that could develop. Thank you. " FOMC20050322meeting--87 85,MR. STOCKTON.," Well, I’m not quite sure. I don’t want to impugn them that way. We could be wrong, obviously, about that component. The nontransportation component we have only a bit slower than it was in the fourth quarter of last year. So at this stage, we are just doing our best straightforward read of the incoming data. We are not imposing any additional add- factors or restraint on the assumption that the partial expensing is pushing things down. That said, this is a very volatile area of the forecast and one in which we have made big errors. And I assume others have as well." FOMC20060920meeting--100 98,MS. MINEHAN.," One small thing. On the other side of the devil and the deep blue sea, there is such a sharp contraction of residential investment, which lasts basically for a year and a half—the forecast does attenuate the rate of decline into ’07, but the contraction lasts pretty much a year and a half from where we are. Could it be faster? Could builders see that it is in their best interest to stop building now so that prices do not go down on new homes faster than they have gone already and inventories do not build anymore. Could that contraction be shorter, and could we come out of it faster?" FOMC20060808meeting--29 27,MS. MINEHAN.," I have a follow-on question to Sandy’s. I know how the benchmark GDP revisions work into your forecast. But if you look just at the headline numbers, we seem to have the worst of all circumstances for a central bank: a good deal slower growth for a number of reasons—the benchmark being one of them—even though all the output gaps and everything else remain relatively the same, slower headline growth in both GDP and consumption, and higher inflation. This is not an easy set of circumstances by any means. One thing I am concerned about, like Sandy, is the speed with which you have consumers reacting in their consumption to potential GDP changes. You haven’t changed the saving rate that much from your earlier forecast, but you do get the 0.3 percentage point out of GDP growth. I was just wondering about your thoughts on that—the reaction seemed fast. Second, outside of a recession, have we ever seen this kind of decline in real estate investment in a period of growth? We were trying to find it, but it’s hard to sort through cause and effect here. The decline seemed very large in terms of the negative real estate investment. Finally, Karen mentioned that we haven’t seen wage inflation or wage growth outstrip productivity here or in major countries anywhere else in the world. I’m wondering, given all the focus on the fact that median family incomes are not growing on a real basis, whether there is at least some chance that we’re going to start seeing an increasing return, particularly for skilled people, which everybody tells you they can’t find." FOMC20070628meeting--170 168,MR. MOSKOW.," Thank you, Mr. Chairman. I am very comfortable with the policy stance—keeping the rate at 5¼ percent. I think policy is in the right place. It is moderately restrictive but not restrictive enough to cause us any problems, particularly in the housing area. In terms of the statement itself, I am comfortable with alternative B, as written or as modified by Don Kohn. We could talk a bit more about where that word “pressure” should be when you compare it with the last statement that we had, but that is a very minor point. The key in this statement is dealing with the fact that core inflation, according to our forecast, is going to be 1.4 percent in the second quarter. It was 2.4 in the first quarter, 1.4 in the second, and then it goes back up to 2.2 and 2.2. That is really the key because, when you see inflation improving and then going back up again and juxtapose that against the longer-term forecast that we have come up with, which shows some improvement in inflation over time in ’08 and ’09, it is a delicate balance as to how we present this in the statement. I think the way alternative B has been formulated captures that. I had suggested a slightly different approach. I don’t feel strongly about this, but you could also take that first sentence in section 3, which says “readings on core inflation have improved modestly in recent months” and just add the phrase “but part of the improvement may be transitory.” But as I said, I am comfortable with either formulation here. I think it accomplishes the same objective." fcic_final_report_full--519 Table 11. 127 Fannie Mae Took Losses on Higher Risk Mortgages Necessary to Meet the Affordable Housing Goals Individual Enhancements (cost analysis for “base” MCM enhancement-not layered) 30 YR FRM Model Fee Average Default % Gap Base: 100% LTV, 20% MI 106 34 -68.50 Interest First (IF) 129 40 -91.50 Seller Contribution (SC) 115 23 -77.50 Temporary B/D (BD) 118 37 -80.50 Zero Down (ZD) 106 34 -68.50 Manufactured Housing (MH) 227 42 -189.50 From this report, it is clear that in order to meet the AH goals Fannie had to pay up for goals-rich mortgages, taking a huge credit risk along the way. The dismal financial results that were developing at Fannie as a result of the AH goals were also described in Fannie’s 10-K report for 2006, which anticipated both losses of revenue and higher credit losses as a result of acquiring the mortgages required by the AH goals: [W]e have made, and continue to make, significant adjustments to our mortgage loan sourcing and purchase strategies in an effort to meet HUD’s increased housing goals and new subgoals. These strategies include entering into some purchase and securitization transactions with lower expected economic returns than our typical transactions . We have also relaxed some of our underwriting criteria to obtain goals- qualifying mortgage loans and increased our investments in higher-risk mortgage loan products that are more likely to serve the borrowers targeted by HUD’s goals and subgoals, which could increase our credit losses. [emphasis supplied] 128 The underlying reasons for the “lower expected returns” were reported in February 2007 in a document the FCIC received from Fannie, which noted that for 2006 the “cash flow cost” of meeting the housing goals was $140 million while the “opportunity cost” was $470 million. 129 In a report to HUD on the AH goals, dated April 11, 2007, Fannie described these costs as follows: “The largest costs [of meeting the goals] are opportunity costs of foregone revenue. In 2006, opportunity cost was about $400 million, whereas the cash flow cost was about $134 million. If opportunity cost was $0, our shareholders would be indifferent to the deal. The cash flow cost is the implied out of pocket cost.” 130 By this time, “Alignment Meetings”—in which Fannie staff considered how they would meet the AH goals—were taking place almost monthly (according to the frequency with which presentations to Alignment meetings occur in the documentary record). In an Alignment Meeting on June 22, 2007, on a “Housing Goals Forecast,” three plans were considered for meeting the 2007 AH goals, even 127 128 129 Id., p.8. Fannie Mae, 2006 10-K, p.146. Fannie Mae, “Business Update,” presentation. “Cash flow cost” equals expected revenue minus expected loss. Expected revenue is what will be received in G-fees; expected loss includes G&A and credit losses. “Opportunity cost” is the G-fee actually charged minus the model fee—the fee that Fannie’s model would impose to guarantee a mortgage of the same quality in order to earn a fair market return on capital. 130 Fannie Mae, “Housing Goals Briefing for HUD,” April 11, 2007. 515 though half the year was already gone. One of the plans was forecast to result in opportunity costs of $767.7 million, while the other two plans resulted in opportunity costs of $817.1 million. 131 In a Forecast meeting on July 27, 2007, a “Plan to Meet Base Goals,” which probably meant the topline LMI goal including all subgoals, was placed at $1.156 billion for 2007. 132 FOMC20061212meeting--32 30,MR. MOSKOW.," I have a question for Dave on the first paragraph of the Greenbook, where you said that labor markets have been stronger than we were expecting. Of course, just now you also talked about that and about the employment report on Friday. Then you said, “In constructing our forecast of aggregate activity, we’ve given greater weight to the data on spending and industrial production.” I was just wondering why you decided to do that. You pointed to the labor market as an upside risk, but I was wondering why you decided to give greater weight to the spending and industrial production data." CHRG-111hhrg56776--13 Mr. Volcker," I appreciate your invitation to address important questions concerning the link between monetary policy and Federal Reserve responsibilities for the supervision and regulation of financial institutions. Before addressing the specific questions you have posed, I would like to make clear my long-held view, a view developed and sustained by years of experience in the Treasury, the Federal Reserve, and in private finance. Monetary policy and concerns about the structure and condition of banks in the financial system more generally are inextricably intertwined, and if you need further proof of that proposition, just consider the events of the last couple of years. Other agencies, certainly including the Treasury, have legitimate interests in regulatory policy, but I do insist that neither monetary policy nor the financial system will be well served if our central bank is deprived from interest in and influence over the structure and performance of the financial system. Today, conceptual and practical concerns about the extent, the frequency, and the repercussions of economic and financial speculative excesses have come to occupy our attention. The so-called ``bubbles'' are indeed potentially disruptive of economic activity. Then important and interrelated questions arise for both monetary and supervisory policies. Judgment is required about if and when an official response, some form of intervention is warranted. If so, is there a role for monetary policy, for regulatory actions, or for both? How can those judgments and responses be coordinated and implemented in real time in the midst of crisis in a matter of days? The practical fact is the Federal Reserve must be involved in those judgments and that decision-making, beyond this broad responsibility for monetary policy and its influence on interest rates. It is the agency that has the relevant technical experience growing out of working in the financial markets virtually every day. As a potential lender of last resort, the Fed must be familiar with the condition of those to whom it lends. It oversees and participates in the basic payment system, domestically and internationally. In sum, there is no other official institution that has the breadth of institutional knowledge, the expertise, and the experience to identify market and institutional vulnerabilities. It also has the capability to act on very short notice. The Federal Reserve, after all, is the only agency that has financial resources at hand in amounts capable of emergency response. More broadly, I believe the experience demonstrates conclusively that the responsibilities of the Federal Reserve with respect to maintaining economic and financial stability require close attention to manage beyond the specific confines of monetary policy, if we interpret monetary policy narrowly, as influencing monetary aggregates and short-term interest rates. For instance, one recurring challenge in the conduct of monetary policy is to take account of the attitudes and approaches of banking supervisors as they act to stimulate or to restrain bank lending, and as they act to adjust capital standards of financial institutions. The need to keep abreast of rapidly developing activity in other financial markets, certainly including the markets for mortgages and derivatives, has been driven home by the recent crisis. None of this to my mind suggests the need for regulatory and supervisory authority to lie exclusively in the Federal Reserve. In fact, there may be advantages in some division of responsibilities. A single regulator may be excessively rigid and insensitive to market developments, but equally clearly, we do not want competition and laxity among regulators aligning with particular constituencies or exposed to narrow political pressures. We are all familiar in the light of all that has happened with weaknesses in supervisory oversight, with failures to respond to financial excesses in a timely way and with gaps in authority. Those failings spread in one way or another among all the relevant agencies, not excepting the Federal Reserve. Both law and practice need reform. However these issues are resolved, I do believe the Federal Reserve, our central bank, with the broadest economic responsibility, with a perceived mandate for maintaining financial stability, with the strongest insulation against special political or industry pressures, must maintain a significant presence with real authority in regulatory and supervisory matters. Against that background, I respond to the particular points you raised in your invitation. I do believe it is apparent that regulatory arbitrage and the fragmentary nature of our regulatory system did contribute to the nature and extent of the financial crisis. That crisis exploded with a vengeance outside the banking system, involving investment banks, the world's largest insurance company, and government-sponsored agencies. Regulatory and supervisory agencies were neither reasonably equipped nor conscious of the extent of their responsibilities. Money market funds growing over several decades were essentially a pure manifestation of regulatory arbitrage. Attracting little supervisory attention, they broke down under pressure, a point of significant systemic weakness, and the remarkable rise of the subprime mortgage market developed through a variety of channels, some without official oversight. There are large questions about the role and supervision of the two hybrid public/private organizations that came to dominate the largest of all our capital markets, that for residential mortgages. Undeniably, in hindsight, there were weaknesses and gaps in the supervision of well-established financial institutions, including banking institutions, major parts of which the Federal Reserve carries direct responsibility. Some of those weaknesses have been and should have been closed by more aggressive regulatory approaches, but some gaps and ineffective supervision of institutions owning individual banks and small thrifts were loopholed, expressly permitted by legislation. As implied by my earlier comments, the Federal Reserve, by the nature of its core responsibilities, is thrust into direct operational contact with financial institutions and markets. Beyond those contacts, the 12 Federal Reserve banks exercising supervisory responsibilities provide a window into both banking developments and economic tendencies in all regions of the country. In more ordinary circumstances, intelligence gleaned on the ground about banking attitudes and trends will supplement and color forecasts and judgments emerging from other indicators of economic activity. When the issue is timely identification of highly speculative and destabilizing bubbles, a matter that is both important and difficult, then there are implications for both monetary and supervisory policy. Finally, the committee has asked about the potential impact of stripping the Federal Reserve of direct supervisory and regulatory power over the banks and other financial institutions, and whether something can be learned about the practices of other nations. Those are not matters that permit categorical answers good for all time. International experience varies. Most countries maintain a position, often a strong position, and a typically strong position for central banks' financial supervision. In some countries, there has been a formal separation. At the extreme, all form of supervisory regulatory authority over financial institutions was consolidated in the U.K. into one authority, with rather loose consultative links to the central bank. The approach was considered attractive as a more efficient arrangement, avoiding both agency rivalries and gaps or inconsistencies in approach. The sudden pressure of the developing crisis revealed a problem in coordinating between the agency responsible for the supervision, the central bank, which needed to take action, and the Treasury. The Bank of England had to consider intervention with financial support without close and confident appraisals of the vulnerability of affected institutions. As a result, I believe the U.K. itself is reviewing the need to modify their present arrangements. For reasons that I discussed earlier, I do believe it would be a really grievous mistake to insulate the Federal Reserve from direct supervision of systemically important financial institutions. Something important but less obvious would also be lost if the present limited responsibilities for smaller member banks were to be ended. The Fed's regional roots would be weaker and an useful source of information lost. I conclude with one further thought. In debating regulatory arrangements and responsibilities appropriate for our national markets, we should not lose sight of the implications for the role of the United States in what is in fact a global financial system. We necessarily must work with other nations and their financial authorities. The United States should and does still have substantial influence in those matters, including agreement on essential elements of regulatory and supervisory policies. It is the Federal Reserve as much as and sometimes more than the Treasury that carries a special weight in reaching the necessary understandings. That is a matter of tradition, experience, and of the perceived confidence in the authority of our central bank. There is a sense of respect and confidence around the world, matters that cannot be prescribed by law or easily replaced. Clearly, changes need to be made in the status quo. That is certainly true within the Federal Reserve. I believe regulatory responsibilities should be more clearly focused and supported. The crisis has revealed the need for change within other agencies as well. Consideration of broader reorganization of the regulatory and supervisory arrangements is timely. At the same time, I urge in your deliberations that you do recognize what would be lost, not just in the safety and soundness of our national financial system, but in influencing and shaping the global system, if the Federal Reserve were to be stripped of its regulatory and supervisory responsibilities, and no longer be recognized here and abroad as ``primus inter pares'' among the agencies concerned with the safety and soundness of our financial institutions. Let us instead strengthen what needs to be strengthened and demand high levels of competence and performance that for too long we have taken for granted. Thank you, ladies and gentlemen. [The prepared statement of Chairman Volcker can be found on page 100 of the appendix.] " CHRG-109shrg24852--21 Chairman Greenspan," First of all, I cannot comment for the Federal Open Market Committee's actions in the future because we have not taken them, and we will obviously engage in ongoing deliberations to make judgments at each of our meetings. But I think there is a misconception relevant not to what we may do but to the importance of an inverted yield curve. It is certainly the case that if you go back historically, an inverted yield curve has actually been a reasonably good measure of potential recession in front of us. The quality of that signal has been declining in the last decade, in fact, quite measurably, and the reason basically is that it was a good measure in the early period when commercial banks were the major financial intermediaries, and when you had long-term interest rates rise. I should say that when short-term interest rates--rise relative to long-term interest rates, it usually implied a squeeze on the profitability of commercial banks because they tend to hold somewhat longer maturities on the asset side of their balance sheet than on the liability side. As a consequence, that squeeze was usually associated with an economy running into some trouble. But extraordinary new avenues of financial intermediation have developed over the last decade and a half, and, therefore, there are innumerable other ways in which savings can move into investment without going through the commercial banks. As a result, a straightforward statistical analysis of the efficacy of the yield curve inversion as a forecasting tool has diminished very dramatically because of economic events. So, yes, we do look at the structure of long-term rates and the inversion of yields as well as a whole panoply of everything else, before we make judgments as to the Federal funds rate. Our basic goal, as I have indicated many times here, is essentially to create an environment which sustains maximum sustainable growth, and we have always argued--because the data are so persuasive that inflation stability is a necessary condition to achieve that goal. In that context, we make our judgments meeting by meeting. " CHRG-109shrg30354--34 Chairman Bernanke," No, Senator. As I mentioned, we are following the data very closely and we revise our forecasts as needed. Right now we see, of course, the housing market slowing. We see some offsetting strength in some other sectors of the economy and our expectation is that the economy is going to be growing at or about the pace of its underlying potential. We also think that inflation is going to moderate. We see some risks to the upside, and that is an issue that we have to think about. But of course, if we see changes in the data, we will certainly adjust our balance of risk and thinks about it accordingly. " FOMC20061212meeting--88 86,MR. BARRON.," Thank you, Mr. Chairman. Over the intermeeting period, the Sixth District’s economic activity largely reflected the trends in the nation as a whole. But the magnitude has been amplified by the region’s relatively large exposure to housing-related activities. Specifically, while Florida continues to bear the brunt of the housing correction, we have increasingly heard reports of sales declines in other areas, too. For instance, an announcement at a recent conference of Atlanta homebuilders was that “Atlanta’s ability to outrun the downturn has run out.” The recent survey of the Beige Book would confirm this, in that contacts indicated that 67 percent of the District builders consider their inventory of unsold new homes to be either high or extremely high. The decline in housing market activity is affecting housing-related sectors such as construction, real estate services, wood products and manufacturing, and carpet production, to which our District is more exposed than are other parts of the country. For instance, Florida has a concentration of residential construction that is about 50 percent greater than that of the United States as a whole, and Florida’s construction employment has been declining at an annualized pace of 10 percent each month since May. Georgia is home to the largest concentration of carpet production in the United States, and these firms have reported that they are scaling back production as well as employment. We expect the negative effect on construction-related sectors to intensify over the next few months as builders complete current projects and significantly curtail future projects. Lending related to real estate has been a significant source of revenue and growth for District banks in recent years. Our banking contacts report that the pipeline of real estate lending has all but dried up. Some also noted concern about the prospective financial strength of smaller builders, although most expect the larger builders to be able to weather the downturn. On the consumer side, asset quality remained good, but some banks noted concern about the potential negative effects from adjustable rate mortgage resets that will occur in 2007. The good news for the housing outlook is that the continued decline in starts and the leveling-off of sales may have arrested the run-up in the inventories of unsold new housing. It’s hard to tell if we’re getting close to the bottom of the housing slump. Several of our builder contacts in Florida say that they expect sales to improve in the second quarter of 2007. Also, most contacts expect a pickup in the multifamily rental market in 2007. Outside the housing sector, indicators of economic performance in the District were mixed. Nonresidential construction remains at modest levels, with the pace for October and November being about what it was in 2005. Builders expect that the overall pace for 2007 will match that of 2006, and signs are that the demand for office and industrial space is picking up, with lower vacancies and rents beginning to firm. Early reports on holiday retail sales were on the positive side. However, tourism performance in Florida has disappointed in recent months. Visitors to all areas of Florida are down so far in 2006, which could give the state the first year- over-year drop since the September 11 terrorist attacks. The shuttering of the Ford auto assembly plant in Atlanta and the weak performance by GM, Saturn, and Nissan have led us to cut District auto production. However, on net, the strong performance by Mercedes, Honda, and Hyundai has been more than enough to keep overall auto production in the District moving along at a relatively solid clip. Along the Gulf Coast, much uncertainty remains about the long-term economic recovery of New Orleans. One hope for a signal of recovery was the restarting of the Crescent City’s tourism and convention business. Unfortunately, indicators such as airport traffic and convention bookings have not strengthened over the year and remain well below pre-storm levels. In contrast, a key Mississippi Coast economic engine is up and running—the casinos. [Laughter] All the casinos damaged or destroyed by Katrina have reopened, and gaming revenues have returned to pre-storm levels, in some cases even above those levels. This signal has generated optimism about the eventual recovery of the Mississippi Coast. Putting aside the problems of accurately calibrating growth in real GDP for the national economy that were discussed in the Greenbook, it seems clear that the slowing of the economy that many of us noted last meeting continues. At the same time, some of the pressures on the inflation side may be abating as well. Housing and its potential spillover effects to other segments of the economy remain a question mark, as does the slowing in manufacturing that now appears to be in progress. However, several factors suggest that the slowdown is transitory and that the risk is relatively small that it will turn into a full-fledged recession. For example, corporate profits remain healthy. Business investment has continued to expand, although a bit more slowly. The most recent labor report is quite positive, with job growth now averaging about 138,000 over the past three months. Going forward, the decline of the dollar suggests that net exports will be less of a drag on our output. This conclusion about the likely path of the economy is also consistent with our own District model forecasts that have changed only slightly from October. They have shifted in almost the same way that the Greenbook forecast has, and the differences are relatively small when all things are considered. Let me stop and save my other comments for the policy go-round." FOMC20050503meeting--58 56,VICE CHAIRMAN GEITHNER.," David, you referred in your remarks to the exercise shown in the package of materials for Monday’s Board briefing. I’m looking at the pass-through into core inflation of the rise in energy prices, import prices, and commodity prices. If back in December ’03, which is your baseline for this exercise, you had had a forecast for energy prices, commodity prices, import prices, and the dollar that is consistent with what happened, would you have expected your model to show this much pass-through to core inflation prices? Or would this result have been surprising?" FOMC20050503meeting--95 93,VICE CHAIRMAN GEITHNER.," Thank you, Mr. Chairman. We think the fundamentals underpinning a forecast of a reasonably strong expansion with moderate inflation seem reasonably persuasive. However, we are less confident than we were at the last meeting. On the assumption that we continue to move the fed funds rate higher on a path close to that now in the market, we expect the economy to grow at a 3½ percent rate during the balance of this year and in 2006. And we still expect core PCE inflation to come in below 2 percent, although just below, over the balance of the forecast period, but we think it will follow a somewhat higher path. As this implies, we’re very close to the Greenbook projection on the overall contour of the forecast, and we’re close on the components as well. We see greater uncertainty in the forecast, with some downside risk to growth and some upside risk to inflation. We think the probability of inflation coming in higher is greater than the probability that growth will be lower. And, of course, that judgment about the change in relative May 3, 2005 56 of 116 On the growth front, the anecdotal reports we’re exposed to are weaker than they have been. They’re weaker than the national numbers and may imply some further deceleration ahead. We don’t have much basis for confidence that these numbers tell us much about the future, but the sentiment does seem a bit more fragile. The fact that confidence seems to have eroded so quickly in the face of a relatively limited period of weaker numbers might itself suggest greater vulnerability to the forecast. Despite all of this, though, we think the near-term fundamentals of the economy look fairly good. The resilience of the recent past seems likely to be durable. We think the labor market still looks to be on a path of gradual improvement. Investment growth still seems likely to be pretty healthy, with profit margins high, balance sheets strong, and credit conditions favorable. We think the factors supporting solid investment growth remain compelling. And we still are inclined to believe that structural productivity growth is likely to remain strong, which should provide both continued impetus to investment and continued confidence about future income growth. It’s hard to find other constraints out there that could limit the expansion. Of course, we still face some risk of an abrupt change in household saving behavior, and the effects of that could be significant. On the inflation front, we’ve been surprised by the extent of the acceleration in core prices and we are a bit concerned about the higher expectations reflected in some surveys. The economy is growing at a rate that seems likely to be sufficient to continue to absorb remaining slack, unit labor costs have moved up, and we hear continued reports of increased pricing power. And some measures of expectations at the intermediate horizon—the horizon over which we expect monetary policy can affect inflation—are above the desirable level of inflation. Accordingly, we see greater risk that inflation will follow a higher path than we are comfortable with. This seems a prudent view May 3, 2005 57 of 116 has been modest to date—profit margins remain very high, of course—and despite expectations of fairly good future structural productivity growth. The modest widening in credit spreads and the volatility in equity prices we’ve seen recently have been absorbed reasonably well. I’d be inclined to view this modest repricing of risk and uncertainty as welcome and healthy rather than as foreshadowing a deeper, more protracted deceleration. On balance, we believe that monetary policy should continue to be directed at moving the real fed funds rate higher. At our last meeting we introduced a bit more uncertainty into the monetary policy signal by putting in more qualifications about the likely path of monetary policy going forward and about the cumulative amount of tightening. The overall effect of these changes to our statement was to continue to signal that we think the slope of the funds rate path remains positive, implying, of course, that monetary policy is still too accommodative. But we also indicated, through these changes to this statement, that we have less certainty about the slope and shape of that path. Long-term measures of inflation expectations moderated immediately following the meeting, and some measures of uncertainty about future rates went up. And since then, market participants have demonstrated a very significant degree of sensitivity to incoming data—at least in terms of the fed funds path priced into the markets To me this suggests that we got the balance about right last time. We bought ourselves the desirable increase in flexibility to respond to a somewhat more uncertain set of conditions going forward, and I think we should try to preserve that balance in our signal today. We need to acknowledge, of course, the moderation in the rate of growth in output and demand we’ve seen and the higher inflation numbers, but I don’t see a good reason to try to alter May 3, 2005 58 of 116 The increased uncertainty in the market about the forecast reflects some greater dispersion in the likely path of the fed funds rate, and I think it suggests little gap between the market’s view and our own view of policy uncertainty going forward. So I don’t see a case for altering the statement significantly today in a way that would introduce a greater degree of uncertainty about monetary policy than is already reflected in the markets at this point. Thank you." FinancialCrisisReport--397 In addition to not disclosing the asset selection role and investment objective of the Paulson hedge fund, Goldman did not disclose to investors how its own economic interest was aligned with Paulson. In addition to accepting a sizable placement fee paid by Paulson for marketing the CDO securities, Goldman had entered into a side arrangement with the hedge fund in which it would receive additional fees from Paulson for arranging CDS contracts tied to the Abacus CDO that included low premium payments falling within a specified range. 1606 While those lower premium payments would benefit Paulson by lowering its costs, and benefit Goldman by providing it with additional fees, they would also reduce the amount of cash being paid into the CDO, disadvantaging the very investors to whom Goldman was marketing the Abacus securities. Goldman nevertheless entered into the arrangement, contrary to the interests of the long investors in Abacus, and failed to disclose the existence of the fee arrangement in the Abacus marketing materials. On April 16, 2010, the SEC filed a complaint against Goldman and one of the lead salesmen for the Abacus CDO, Fabrice Tourre, alleging they had failed to disclose material adverse information to potential investors and committed securities fraud in violation of Section 17(a) of the Securities Act of 1933 and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. On July 14, 2010, Goldman reached a settlement with the SEC, admitting: “[T]he marketing materials for the ABACUS 2007-AC1 transaction contained incomplete information. In particular, it was a mistake for the Goldman marketing materials to state that the reference portfolio was ‘selected by’ ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection process and that Paulson’s economic interests were adverse to CDO investors.” 1607 Goldman agreed to pay a $550 million fine. The Hudson, Anderson, Timberwolf, and Abacus CDOs provide concrete details about how Goldman designed, marketed, and administered mortgage related CDOs in 2006 and 2007. The four CDOs also raise questions about whether Goldman complied with its obligations to offer suitable investments that it believed would succeed, and provide full disclosure to investors of material adverse interests. They also illustrate a variety of conflicts of interest in the CDO transactions that Goldman resolved by placing its financial interests and favored clients before those of its other clients. 1606 3/12/2007 Goldman memorandum to Mortgage Capital Committee, “ABACUS Transaction sponsored by ACA, ” GS MBS-E-002406025-28, Hearing Exhibit 4/27-118. 1607 Securities and Exchange Commission v. Goldman, Sachs & Co. and Fabrice Tourre , Case No. 10-CV-3229, (S.D.N.Y.), Consent of Goldman Sachs, (July 14, 2010), at 2. FOMC20060510meeting--91 89,MR. MOSKOW.," Thank you, Mr. Chairman. Most of my business contacts indicated that overall economic activity remains on a solid footing and that resource utilization has tightened further. Both of the major temporary-help firms headquartered in our District said that hiring remains strong nationwide. They continued to say that skilled workers are in short supply. This topic was also on the minds of our contacts in manufacturing and construction. As I’ve noted previously, we’ve heard a few reports from manufacturers that labor shortages were causing delays in supplier deliveries. Strengthened labor demand, however, has not yet spread to lower-skilled workers. So while wages for skilled individuals continue to increase briskly, pay rates for other workers are up only modestly. We’re also seeing signs of pressure on nonlabor resources. Some of our contacts have run into problems with the costs and availability of trucking and rail shipping capacity, and a manufacturer of drilling equipment reported supply disruptions because its vendors were heavily backlogged. Several contacts noted that price pressures have intensified for many commodities, as we’ve discussed before. Of course, everyone was talking about the surge in energy costs. Some retailers noted that sales had slowed, and they attributed the softness to higher energy prices. Others were concerned about the impact of energy going forward. In contrast, our manufacturing contacts reported that they generally have no plans to scale back production in response to the recent increases. There is not much new to report on the Delphi negotiations. The period for Delphi workers to sign up for early retirement is just starting. Delphi, General Motors, and the UAW hope that many will accept the buyout. This would leave fewer union workers vulnerable to being laid off as Delphi downsizes, which would make the negotiations easier for all the parties involved. On a final note, several of my directors continue to be concerned about the amount of liquidity in financial markets. They say prices and terms for more and more deals are bordering on speculative. Turning to the outlook, we’ve had quite a bit of news since our last meeting. Much of it suggests increased risks on the inflation front. Of course, the March reading on core inflation was just one month, but the twelve-month change in core PCE inflation is now back up to 2 percent. And as President Lacker said, the six-month change is now up to 2.4 percent. Moreover, energy prices have jumped again. The dollar has weakened a bit more, and inflation expectations have risen. In response to the latest data, the forecasts from our indicator models of inflation have moved up some. Currently, these project 2007 core PCE inflation between 2 percent and 2.4 percent. To be sure, things are far from getting out of hand: Resource utilization measures currently are only modestly on the tight side, and we are all well aware of the uncertainty surrounding those measures. Furthermore, the recent ECI data suggest that wage pressures remain muted. That said, other measures of wage growth have been rising. Looking at the markup of prices over labor costs, one would think that there’s plenty of room for profit margins to absorb higher wages. But as Bill Poole suggested in the issue we discussed before, the business people I talked to haven’t gotten that message. Their attempts to maintain margins in the face of increasing costs represent an upside risk to the inflation outlook. So I agree with the upward nudge to the Greenbook inflation forecast, but I’d go a bit further. Given the Greenbook path for the funds rate, I think core inflation of 2¼ percent is a more reasonable point forecast for 2007. In terms of growth, the expansion still appears solid. The softening in housing that we have been anticipating is more obvious now. There’s a possibility that moderation might turn to something bigger, but I don’t see this as a large risk. Of course, $3-a-gallon gasoline should restrain demand somewhat, and we’ll need to keep a close eye on how consumers respond to yet another hit to their purchasing power. But employment continues to rise at a good pace, generating healthy increases in income, which should support household demand. Businesses are supporting spending on capital goods, and growth prospects abroad continue to suggest some optimism on export demand. So I think growth will average around potential over the course of the projection period." CHRG-110shrg50369--82 Mr. Bernanke," One of the concerns that I have is that there is some interaction between the credit market situation and the growth situation--that is, if the economy slows considerably, which reduces credit quality, that worsens potentially the condition of credit markets, which then may tighten credit further in a somewhat adverse feedback loop, if you will. I think that is an undesirable situation. I would feel much more comfortable if the credit markets were operating more nearly normally and if we saw forecasted growth--not necessarily current growth but forecasted growth--that looked like it was moving closer toward a more normal level. So what I would like to see essentially is a reduction in the downside risks which I have talked about, particularly the risk that a worsening economy will make the credit market situation worse. Senator Bayh. Well, let me ask you--but I have got only 1 minute so I am going to need to hurry. I did have two questions. What aspect of the credit markets will you look to? And, in particular, I have been interested--you talked about the flight from risk. There have been some aspects of the credit market that seem to me to be almost without risk, and yet people are fleeing from those as well. These auction rate securities, very short term, the underlying assets, particularly in the municipal sector, virtually no risk of default, and yet that seems to have seized up as well. What do you think will lead people to begin to assume rational levels of risk again? And what indicia will you look to in the credit markets to reassure yourself that this situation is beginning to work itself through? " FOMC20080916meeting--114 112,MR. LOCKHART.," Thank you, Mr. Chairman. I finalized the thinking that went into my prepared remarks late last week, which seemed like a good idea at the time. But I should follow the philosophy of Charlie Brown, who I think said, ""Never do today what you can put off until tomorrow."" [Laughter] Obviously, we can't ignore the events of the weekend and yesterday's financial markets. So late yesterday I reviewed the views that I shaped last week and tried to ground them in an assessment of whether the outlook for the real economy has changed materially, whether the balance of risks has been altered, and whether, in my opinion, we must reintroduce a risk-management approach and consider taking out more insurance. With that as prologue, let me make just a couple of comments on regional soundings from the last couple of weeks. Anecdotal reports from the Sixth District support the view that the economy is quite weak but not deteriorating markedly. The CFO of a large retailer of housing-related goods said that they think they see a bottom forming. I am also starting to hear some reports that housing markets feel as though they are beginning to stabilize; but, really, it is a little too early to say that a bottom has formed in any of our housing markets. My overall sense from District contacts and our surveys is of an economy that is quite weak, with no clear trend evident. Turning to the national outlook, like most forecasts, my view on the likely path for the economy has not changed materially since our August meeting. I see nothing in the data and hear nothing from District reports that alters my views that the second half will be very weak. I expect this weak period to be followed by a slow recovery gathering in 2009, but the foundation of a recovery starting around year-end or early 2009 may be far from solid. The contraction of credit availability that is confirmed by both surveys and anecdotal evidence could deepen as financial institutions face tight liquidity and difficulty recapitalizing. A protracted credit crunch would likely operate as a substantial drag on the economy. Consistent with the Greenbook, I expect some near-term improvement in headline inflation, as we saw this morning, some near-term deterioration of core inflation measures, and inflation moving in the right direction later this year and into next year. That said, one director said that he and his particular industry had seen no moderation of price increases up to this date. I am comforted somewhat that the upward drift in some inflation expectation measures appears to have been reversed. In addition, my staff has been monitoring revisions to inflation forecasts of professional forecasters, which also seem to suggest that concerns about accelerating inflation have abated somewhat. Regarding the balance of risks in the economy, I am concerned that the downside risks to growth may be gathering force, as evidenced by the weakening personal consumption and retail sales data, the weakening economies of export partners, and the delicate state of the financial markets. At the same time, I perceive that there is significant risk that the current disinflationary environment may fail to bring core inflation down to anything resembling acceptable levels for the longer term. Adding up all of this, I perceive a very rough balance of risks that could break either way in coming months. My view of the appropriate policy path is consistent with the Greenbook--that the fed funds rate target will remain stable at or close to the current level for several months going into 2009. My preference is to hold the fed funds rate at the current level of 2 percent. Among the reasons is that a � percentage point drop, as suggested by alternative A, is really not clearly called for by a changed outlook for the real economy. Inflation risks are still in play, and I think we should give credit markets more time to digest events and sort out rate relationships. As regards the statement, my preference is alternative B. However, I am concerned that the reference to the recent financial turbulence is not quite strong enough, so I took a shot at rephrasing just the beginning of the rationale section to read as such: ""Economic growth appears to have slowed recently, and labor markets have weakened further. In addition, strains in financial markets have increased significantly""--basically taking the slightly stronger expression in the alternative A rationale and putting it in alternative B. So my position, Mr. Chairman, is to hold at this meeting. Thank you very much. " CHRG-109shrg30354--55 Chairman Bernanke," Senator, I agree that there is more of a problem in the product markets than in the labor markets. In the product markets they are sufficiently tight that firms are developing pricing power and they are passing on their energy and materials costs. It still is an inflation problem because if inflation rises, it is still going to have the same adverse affects. It is going to get into expectations. I am not saying that is going to happen. Our forecast is for inflation to decline over time. But it is a risk. And nevertheless, if it is coming from product markets more than labor markets, it is still a risk to inflation. Senator Sarbanes. Thank you, Mr. Chairman. " FOMC20081007confcall--53 51,MR. KOHN.," Thank you, Mr. Chairman. I support the proposal for all the reasons that others have given. I think the incoming data and the events of the last month or so suggest a major downward revision to expected income and a substantial revision to expected inflation. On the income side, we still have very substantial downside risk. This is a credit crunch. Banks won't lend to each other. It's hard to imagine that they will lend much to households and businesses unless they perceive those households and businesses to be super-safe borrowers. I think there's a real risk of a very sharp downturn in the economy here. It's not my modal forecast, but I think that tail has gotten very fat. So even on a mechanical basis, a Taylor rule or something like that on a forecast basis would justify a 50 basis point cut in the funds rate. But this isn't about mechanics. We're in the middle of a crisis of confidence, really, in the financial markets, and I think part of the dynamic that we're seeing out there is concern about how the financial markets and the economy will interact. I agree with everyone else that a cut in the federal funds rate is certainly not a panacea. It's not going to restore confidence instantaneously. But I do think the coordinated action by the central banks will have an effect around the edges on interest rates and on the cost of capital, but even more in confidence that at least some functions here are operating--people are consulting internationally and are willing to take decisive action. It's not going to be sufficient to get us out of where we are, but I think it's a necessary step. Thank you, Mr. Chairman. " FOMC20060510meeting--106 104,MS. PIANALTO.," Thank you, Mr. Chairman. Based on the reports from my directors and my business contacts in the Fourth District, the relatively broad-based growth of the first quarter appears to have carried over into April. However, their comments about the balance of the year are consistent with the moderating trend of the Greenbook baseline projection. To put it in terms used by the Conference Board’s consumer sentiment measures, the current condition index is high, but the expectations index is falling. I was reminded by my staff as we were preparing for this meeting that real-time data on real economic growth are difficult to assess. At the end of our rate-increase cycle in 2000, the GDP figures were providing unreliable signals about the underlying strength of the economy. We had a second quarter that had real growth of more than 6 percent. We were forecasting, and even saw in the advance figures a very strong third quarter, and yet we had negative growth in that quarter. Comments I hear about price pressures contain some mixed messages. I don’t hear many complaints about price pressures except for the obvious ones about the energy-related costs and material shortages in construction-related businesses. However, I am hearing concerns about the persistence of these costs and the possibility that they may have negative consequences for both inflation and overall business conditions. The consequences of the energy shocks for prices are already apparent. At our November meeting, I agreed with the Board staff projection that we would, at about this time, find ourselves facing some pass-through in our core inflation measures from some of the previous energy-price increases. At that time, however, it also appeared that headline inflation would be coming down at this point. Obviously, the current Greenbook suggests that recent oil shocks have taken that scenario away from us, at least for the immediate future, and the tick-up in expected core inflation is now even further away from my comfort zone than before. That said, based on what I’m hearing from my directors and business contacts, the Greenbook’s assessment of current conditions and baseline projections going forward seem about right to me. But I sense rather significant perceived risks both that economic growth might turn out weaker than I expect and that inflationary pressures might be larger or even more persistent than I expect. If we can take any encouragement from this, it would be that similar sentiments were expressed during the run-up in oil and gas prices last fall, and those sentiments did abate fairly quickly when the energy market situation stabilized. Unlike many of my colleagues who have spoken ahead of me, I do think that the risks are weighted against both of our objectives, and, obviously, that’s not a comfortable place for a monetary policymaker to be in. Thank you, Mr. Chairman." FOMC20061025meeting--59 57,MR. FISHER.," Mr. Chairman, at our last meeting I engaged in a little Texas brag. I mentioned that the employment growth rate in our District was twice that of the national average. Then I read in the pre-briefing for the Board last night the penultimate sentence, which had a wonderful three-word phrase—“Humility is required.” So let me report that economic growth in our District has slowed somewhat, and I want to put the “somewhat” in perspective. We redid the numbers of our first-quarter real GDP growth. Growth of the state real gross product for the first quarter was 9 percent for the Eleventh District. So it’s not a great wonder that it is slowing—it is slowing down from too torrid a pace. But our housing sector is still sweet—perhaps the only spot left in the country—particularly in the Houston area. We actually are building a new auto plant, President Moskow, a Toyota plant in San Antonio, which is getting an inordinate amount of attention. The exports from our state are growing at a monthly rate annualized at 45 percent, and Texas is now the largest exporting state in the nation. So from the standpoint of economic growth, even as I am trying to be humble, the District is doing exceedingly well. The only consistently sour note that we hear is what you have heard around this table—and just now from First Vice President Barron—that we have continued reports of shortages of skilled and unskilled labor, from chemical engineers to school teachers to bank tellers and even to hotel housekeeping staff. So we have a significant problem in terms of labor shortages—skilled, semi- skilled, and now, increasingly, unskilled. To put some numbers on this, we have a contact who has surveyed fifty plants on the Gulf Coast for the price of welders. In eight months, the price for a welder has gone from $19 an hour to $25 an hour. You have to pay them a bonus of $100 when they show up, and you have to pay them a completion bonus as well. The bottom line is that in the Eleventh District we’re behaving as though we were a full-employment economy. In the rest of my comments, I’d like to emphasize not my District but our views on the U.S. and the global economies, particularly the U.S. economy. I want to go back to your concluding remarks, Mr. Chairman, at the last meeting, when you reminded us that, if we believe we need to have output below potential to help address inflation pressures, it’s a delicate operation, and we may have a very narrow channel to navigate as we go forward—just to keep with your naval analogy of a few seconds ago. This summer I sailed the Corinth Canal, which is so narrow that at times you feel you can reach out and touch both sides. Even though I was on vacation, I was actually thinking of one side as the shoals of slow economic growth—almost recessionary growth, which seems to be what the Greenbook is forecasting at least for the third quarter, and the risk that seems to be out there—and of the other side as the shoals of inflation. From the 27 or 28 CEOs and CFOs to whom I spoke in preparing for this meeting, as I always do, I do hear reports of a slowdown. I talked to two of the Big Five housebuilders this time. They are cutting back significantly. Let me give you some numbers. For example, Centex owns 109,000 lots outright and has 54,000 lots under hard option and 80,000 lots under soft option, as they call it. They’ve canceled 25 percent of their hard options. That is $85 million worth of properties. Hovnanian is walking away from $100 million worth of hard option properties. The effort there is to cut back so that what was a two-month leading supply has now become a three- month leading supply. You can see how the dynamics are beginning to work. They’re moving on price, but they are also trying to shut down their inventory and are taking very quick action. That is a depressing factor. One of the truck dealers I talked with, Rush Enterprises, has about $2.7 billion a year in sales. I believe they are the largest in the country; they are nationwide. They are reporting that Christmas retail activity seems to be backing up; in other words, it is slower than it was in previous years. This is an operator with 41 years of experience. They are also building their inventory, particularly in the coastal areas, with the heavy trucks that are going to be used for home construction. The book-to-bill ratio for Texas Instruments has fallen below 1; it is the lowest since 2000. And if you read the newspapers, you will see that the airlines are offering very deep discounts and for longer periods than before. So there seems to be a slowdown in activity. With that said, when you talk to the rails, there is a diminution of growth, perhaps 1 percent third quarter over second quarter, and if you talk to UPS, as I reported last time, you’re still seeing some rather robust reports of economic growth of 2 to 3 percent. I think the best way to summarize the economy is, as President Moskow said earlier, that although there are weak signs, the economy is still robust. The chairman and CEO of Cadbury-Schweppes said, “I keep looking and listening, but I’m just not seeing what everybody tells me is going to happen.” Again, as I reported last time, the CEO of EDS, who is an experienced businessman, said, “It’s a funny period. Everybody is prepared to be bearish, but it’s simply not materializing.” So, David, from an economic standpoint, both from the anecdotal evidence and our own economic modeling, we don’t quite accept the Greenbook’s forecast of the kind of slowdown that you’re expecting for the third quarter or for the second half. There are positive benefits, and the benefits are, of course, with price pressure abatement. My favorite anecdotal example, by the way, comes from globalization at work, Karen. Interestingly, the CEO of Fluor, who is one of my contacts, reports that when they bid for the Bay Bridge construction, their bid on U.S. steel prices was rejected as being too expensive. They went back and bid based on what they could buy steel from China for, and the bid was accepted. Canadian steel now sells for 25 percent less than U.S. steel, and Chinese steel is being dumped into this market at a price 40 percent lower than Canadian steel. From the standpoint of raw materials and energy, you have seen price pressure abatement. But from businessperson after businessperson, we still hear the same reports, Mr. Chairman, that we hear in our District and that you’ve heard around this table, which is of significant price pressures stemming from labor. As I mentioned earlier, it is not just skilled labor; it is now semi-skilled labor such as truck drivers and welders. Increasingly shortages are being reported, throughout our District and the rest of the country. So I would summarize by agreeing with President Moskow in that we in the Eleventh District find the Greenbook’s projection of economic growth to be too pessimistic. Although price pressures have abated somewhat, we know by our measure—the trimmed-mean PCE, off of which we key our view of the economy—that the three-month rate is still running at 2.9 percent and the twelve-month rate is running at 2.7 percent. I would argue as we navigate this narrow channel, Mr. Chairman, whether it’s the channel you describe or the Corinth Canal, that I would be more careful of the inflationary shoals than of the risk of excessive slowdown of growth. Thank you." FOMC20081216meeting--232 230,MR. KOHN.," I am not going to even try to top either of those anecdotes or jokes. I agree certainly with the thrust of the comments around the room. The economy is in a steep decline. There was a break in confidence somewhere in September that took what had been a gradual decline in employment, production, and output and made it much, much, much, much steeper. The feedback loop between the financial markets and the real economy just intensified--turned up many, many notches at that time. Households and businesses, as President Fisher was remarking, are very worried, and they are acting in a way to protect themselves. They have cut back on spending, and they have cut back on lending. I think the response of businesses is particularly interesting. They responded very, very rapidly to the falloff in demand with cuts in employment and production. So we are not even getting the sort of automatic stabilizer effect that we usually get from a buildup in inventories and a bit of labor hoarding as demand drops. Thus businesses' actions are just accentuating the weakness. As many have remarked, the weakness is global, everywhere, including in emergingmarket economies where, as Shaghil showed us, the inflow of capital has slowed substantially. There is no real region to lead the globe out of this swamp we are in. Financial markets remain very strained. I think of particular concern are the securitization markets. When they are not operating, a lot of credit to households and businesses won't be available at the same time that the banks are tightening up very sharply. We have seen in these charts that household and business borrowers with anything less than very high credit scores are just finding credit either extraordinarily expensive or unavailable. As a consequence, a very sizable output gap has opened up. I think we can see that the decline is going to remain steep for some time. The multiplier�accelerator effects of the drop in demand we have seen over the last couple of months have to feed back through consumption and investment. I don't think we have seen the full effect of the tightening in credit conditions and the decline in wealth from the end of September on. You can see the continuing economic decline in the initial claims data, the weekly IP, and the anecdotes we heard around the table on sales; and financial markets are going to remain impaired for a while despite our best efforts to open them up. There are huge losses in the capital of intermediaries to absorb, so folks will be very cautious about making loans. As long as investors, savers, households, and businesses see the economy in steep decline, the fear that is gripping the financial markets and the economy isn't going to abate very rapidly. Inflation is decelerating across a broad front, and that is going to continue. Economic slack will be increasing, cost pressures will be abating, and the ability to pass through cost increases will be highly constrained. So far, longer-term inflation expectations seem to have been reasonably well anchored, though they are very hard to measure. But I agree with President Bullard that we are going to need to watch this very, very closely for signs of a disinflationary dynamic taking hold. I think what happens to the economy and inflation over the latter part of next year is extremely uncertain. We have huge changes in forecasts in very short periods of time, and I suspect, like the staff, that the improvement in financial markets and the rebound in the economy will be gradual, in part reflecting the limited power of monetary policy. But even if we thought that a sharper rebound next year was a distinct possibility, I don't think it would matter very much for our policy purposes here today. The trajectory, the economic decline, the extent of the output gap, and the degree of disinflation in train all imply that our task at this time is to try to limit economic weakness. Thank you, Mr. Chairman. " FOMC20070321meeting--128 126,MR. REINHART.,"3 That won’t be noted in the transcript. [Laughter] I’ll be referring to the materials right in front of you. Financial markets were volatile over the intermeeting period amid a repricing of risky assets. As can be seen in the top left panel of your first exhibit, monetary policy expectations shifted down almost ½ percentage point, on net, at longer horizons, and uncertainty about that path, the top middle panel, spiked higher. Investors now admit the possibility of much lower policy rates just six months from now—the red bars in the top right panel—compared with the hollow dashed bars witnessed at the time of the January meeting. A part of this downward revision was due to concerns that strains in the subprime mortgage market would leave a more significant mark on spending than previously suspected. As shown by the blue line in the middle left panel, the spread on the BBB-minus- rated tranche of a CDS index covering subprime mortgages that were originated in the first half of last year ballooned in response to remarkably poor payment performance. About the same time that investors rethought the prospects for the mortgage market, they marked down the prices of equities considerably, the bottom left panel. The combination of lower equity prices and an expectation of markedly easier future monetary policy presumably signals that markets think the prospects for economic growth are now less bright. Against this backdrop, nominal ten-year Treasury yields fell about 40 basis points, as shown by the dotted blue line in the right panel. Longer-term TIPS yields, the red dashed line, fell as much as their nominal counterparts, leaving inflation compensation little changed. The ten-year BBB corporate yield, the solid black line, followed the downward track of comparable Treasury yields until February 27, keeping the corresponding spread little changed. Since February 27, this risk spread, like others, has widened modestly. As shown in the top panel of exhibit 2, the yield on the two-year Treasury note remains well below the intended federal funds rate. The last time this spread was so decidedly negative was in 2000, the shaded area, late in the previous economic expansion. As shown in the middle left panel, the Committee began 2000 with three successive policy tightenings, which brought the federal funds rate to 6½ percent. At those meetings, market participants had expected some firming—that is shown by the dotted lines plotting the path of the expected federal funds rate for each meeting. By summer, however, investors had taken out 3 Material used by Mr. Reinhart is appended to this transcript (appendix 3). the anticipation of firming; subsequently, they priced in policy ease. This occurred as forecasts for real activity softened, as shown at the middle right by the Blue Chip Consensus forecasts for real GDP growth over 2001, the solid line, and for the annual average 2001 unemployment rate, the dotted line. As noted in the bottom left panel, in the first seven meetings of the year, the Committee held that the balance of risks was tilted toward heightened inflation pressures—in part, it seems from rereading the transcripts, because no one wanted to be seen as lacking vigilance against inflation. Three lessons from this experience are noted at the bottom right. First, statement language can hamper your flexibility. Second, downward moves in financial market yields can be informative. Third, those forward-looking adjustments in financial markets can help to offset the effects of gradualism in policymaking. In writing the Bluebook, we tried to offer a greater measure of flexibility for policy going forward in alternatives A and B. You might want that flexibility if you harbor serious concerns about the housing market, the subject of the top panels of exhibit 3. In particular, some members might be of the view that the turmoil in the subprime market may prompt a significant pullback in funding for housing, steepening the slide in home sales, the left panel. At the same time, homebuying attitudes (the middle panel) have improved, no doubt in part because the drop in market yields has pulled down mortgage rates for prime borrowers (the right panel). Given these cross-currents, you might be inclined to await more information and be prepared to move in either direction when the time comes. Waiting a bit might not seem so costly, in that the real federal funds rate, the solid line in the middle panel, is right on top of the equilibrium real federal funds rate consistent with the Greenbook forecast. By that measure, at least, maintaining the current real federal funds rate at 3 percent would imply closing the output gap in the next couple of years. Keeping the fed funds rate steady for a time is the prescription from the standard optimal control exercise with the FRB/US model with a 2 percent inflation goal (the solid lines in the bottom panels). As explained in a recent memo and a Bluebook box, the inertia of inflation in the FRB/US model is due importantly to the sluggishness of inflation expectations. If you believe that the public could be made to understand an inflation goal of 1½ percent relatively quickly and costlessly, perhaps as in the “immediate recognition” scenario plotted as the dashed lines, you might not feel the need to hurry to move the fed funds rate even if your inflation target was 1½ percent. This was the first Bluebook in some time that fully lived up to its official title, “Monetary Policy Alternatives.” That is, we provided three alternatives for the level of the intended federal funds rate. The policy easing of alternative A and the firming of alternative C, however, may have an air of unreality to them because market participants seem so firmly convinced that you will stand pat today, and I will expand on that issue with the aid of exhibit 4. The top panel plots the estimated effects of FOMC policy announcements on near-term policy expectations over the past six years. To be sure, a 25 basis point cut or hike would translate into a 25 basis point surprise, something that has not been seen since 2001. By the way, the coloring of the bars exposes regularity in your behavior. Policy easings, the red bars, tend to be surprises, whereas firmings, the blue ones, tend to be more predictable. That is, you’ve shown a revealed preference to be more willing to surprise markets on the downside than on the upside. But before you obsess too much on the perils of surprising markets in general, I would note that when the Bank of England tightened 25 basis points on January 11, fifty-one out of the fifty-one economists surveyed by Bloomberg just before the meeting had expected no change. As shown in the middle left panel, rates did rise that day but by a muted amount at longer maturities. As shown at the middle right, the imprint on ten-year gilt yields was not long lasting, nor was implied volatility deflected from its downward track. As to the direction of the potential policy surprise, the case for alternative A, as laid out in the bottom panels, probably rests on the belief that the ongoing weakness in the housing sector will intensify and be joined by softness in some other sector. One candidate is business spending given that, as at the left, purchasing managers see business conditions as treading water and, as at the right, view their customers’ inventories as too high. The policy ease in alternative A, and perhaps even the holding pattern of alternative B, might come at the cost of an increase in expected inflation, a concern that would be at the forefront for anyone inclined to the 25 basis point firming of alternative C, the subject of exhibit 5. As shown in the top panel, inflation expectations as surveyed from households (the solid line) or professional forecasters (the dotted line) remain above what many of you have identified as your comfort zone for inflation. The apparent poor alignment of these expectations with some of your statements may incline you to a “demonstration effect” of your resolve. You may view this as necessary merely to hold the line on inflation. The unemployment rate, plotted in the middle left panel, remains 4½ percent, consistent with a traditional view of pressures on resources. You might also be taking a cue from our trading partners. Last quarter, the arithmetic contribution of the improvement in real net exports to GDP growth was 1½ percentage points, and as shown in the table at the middle right, the staff forecasts foreign economic growth to continue to expand robustly. The fact that the recent angst about the U.S. expansion is not widely shared internationally may lend some comfort that economic growth at home still has a firm footing. You might also view this meeting as an opportunity to set market participants straight about your priorities. Policy firming would disabuse people of the notion that the FOMC responds mechanically to a decline in stock prices. Indeed, the still-low level of implied volatilities, as in the bottom left panel, may suggest that investors maintain the faith that monetary policy will smooth every road. The bottom right panel plots five-minute changes in the S&P 500 (along the horizontal axis) against five-minute changes in the one-year-ahead Eurodollar futures rate (along the vertical axis) since February 27. In the past few weeks, interest rate expectations have been very responsive to equity prices—possibly suggesting a widespread belief that the FOMC supports equity prices." CHRG-111hhrg49968--7 Mr. Bernanke," Thank you, Mr. Chairman. Chairman Spratt, Ranking Member Ryan, and other members of the committee, I am pleased to have this opportunity to offer my views on current economic and financial conditions and on issues pertaining to the Federal budget. The U.S. economy has contracted sharply since last fall, with real gross domestic product having dropped at an average annual rate of about 6 percent during the fourth quarter of 2008 and the first quarter of this year. Among the enormous cost of the downturn is the loss of nearly 6 million jobs since the beginning of 2008. The most recent information on the labor market, the number of new and continuing claims for unemployment insurance through late May, suggests that sizeable job losses and further increases in unemployment are likely over the next few months. However, the recent data also suggests that the pace of economic contraction may be slowing. Notably, consumer spending, which dropped sharply in the second half of last year, has been roughly flat since the turn of the year, and consumer sentiment has improved. In coming months, household spending power will be boosted by the fiscal stimulus program. Nonetheless, a number of factors are likely to continue to weigh on consumer spending, among them the weak labor market, the declines in equity and housing wealth that households have experienced over the past 2 years, and the still-tight credit conditions. Activity in the housing market, after a long period of decline, has also shown some signs of bottoming. Sales of existing homes have been fairly stable since late last year, and sales of new homes seem to have flattened out in the past couple of monthly readings, though they remain at depressed levels. Meanwhile, construction of new homes has been sufficiently restrained to allow the backlog of unsold new homes to decline, a precondition for any recovery in homebuilding. Businesses remain very cautious and continue to reduce their workforces and their capital investments. On a more positive note, firms are making progress in shedding the unwanted inventories that they accumulated following last fall's sharp downturn in sales. The Commerce Department estimates that the pace of inventory liquidation quickened in the first quarter, accounting for a sizeable portion of the reported decline in real GDP during that period. As inventory stocks move into better alignment with sales, firms should become more willing to increase production. We continue to expect overall economic activity to bottom out and then to turn up later this year. Our assessments that consumer spending and housing demand will stabilize and that the pace of inventory liquidation will slow are key building blocks of that forecast. Final demand should also be supported by fiscal and monetary stimulus, and U.S. exports may benefit if recent signs of stabilization in foreign economic activity prove accurate. An important caveat is that our forecast also assumes continuing gradual repair of the financial system and an associated improvement in credit conditions. A relapse in the financial sector will be a significant drag on economic activity and could cause the incipient recovery to stall. I will provide a brief update on financial markets in a moment. Even after recovery gets under way, the rate of growth of real economic activity is likely to remain below its longer-run potential for a while, implying that the current slack in resource utilization will increase further. We expect that the recovery will only gradually gain momentum, and that economic slack will diminish slowly. In particular, businesses are likely to be cautious about hiring, and the unemployment rate is likely to rise for a time, even after economic growth resumes. In this environment, we anticipate that inflation will remain low. The slack in resource utilization remains sizeable. And notwithstanding recent increases in the prices of oil and other commodities, cost pressures generally remain subdued. As a consequence, inflation is likely to move down some over the next year relative to its pace in 2008. That said, improving economic conditions and stable inflation expectations should limit further declines in inflation. Conditions at a number of financial markets have improved since earlier this year, likely reflecting both policy actions taken by the Federal Reserve and other agencies, as well as a somewhat better economic outlook. Nevertheless, financial markets and financial institutions remain under stress, and low asset prices and tight credit conditions continue to restrain economic activity. Among the markets where functioning has improved recently are those for short-term funding, including the interbank lending markets and the commercial paper market. Risk spreads in those markets appear to have moderated, and more lending is taking place at longer maturities. The better performance of short-term funding markets in part reflects the support afforded by Federal Reserve lending programs. It is encouraging that the private sector's reliance on the Fed's programs has declined as market stresses have eased, an outcome that was one of our key objectives when we designed these interventions. The issuance of asset-backed securities, backed by credit card, auto, and student loans, has also picked up this spring, and ABS funding rates have declined--developments supported by the availability of the Federal Reserve's Term Asset-Backed Securities Loan Facility, or TALF, as a market backstop. In markets for longer-term credit, bond issuance by nonfinancial firms has been relatively strong recently. And spreads between Treasury yields and rates paid by corporate borrowers have narrowed some, though they remain wide. Mortgage rates and spreads have also been reduced by the Federal Reserve's program of purchasing agency debt and agency mortgage-backed securities. However, in recent weeks, yields on longer-term Treasury securities and fixed-rate mortgages have risen. These increases appear to reflect concerns about large Federal deficits but also other causes, including greater optimism about the economic outlook, a reversal of flight to quality flows, and technical factors relating to the hedging of mortgage holdings. As you know, last month, the Federal bank regulatory agencies released the results of the Supervisory Capital Assessment Program. The purpose of the exercise was to determine for each of the 19 U.S.-owned bank holding companies with assets exceeding $100 billion a capital buffer sufficient for them to remain strongly capitalized and able to lend to creditworthy borrowers, even if economic conditions over the next 2 years turn out to be worse than we currently expect. According to the findings of the SCAP exercise, under the more adverse economic outlook losses of the 19 bank holding companies would total an estimated $600 billion during 2009 and 2010. After taking account of potential resources to absorb those losses, including expected revenues, reserves, and existing capital cushions, we determined that 10 of the 19 institutions should raise, collectively, additional common equity of $75 billion. Each of the 10 bank holding companies requiring an additional buffer has committed to raise this capital by November 9th. We are in discussions with these firms on their capital plans, which are due by June 8th. Even in advance of those plans being approved, the 10 firms have among them already raised more than $36 billion of new common equity, with a number of their offerings of common shares being oversubscribed. In addition, these firms have announced actions that would generate up to an additional $12 billion of common equity. We expect further announcements shortly, as their capital plans are finalized and submitted to supervisors. The substantial progress these firms have made in meeting their required capital buffers and their success in raising private capital suggests that investors are gaining greater confidence in the banking system. Let me turn now to fiscal matters. As you are well aware, in February of this year, Congress passed the American Recovery and Reinvestment Act, or ARRA, a major fiscal package aimed at strengthening near-term economic activity. The package included personal tax cuts, increases in transfer payments intended to stimulate household spending, incentives for business investment, increases in Federal purchases, and Federal grants for State and local governments. Predicting the effects of these fiscal actions on economic activity is difficult, especially in light of the unusual economic circumstances that we face. For example, households confronted with declining incomes and limited access to credit might be expected to spend most of their tax cuts. But then again, heightened economic uncertainties and a desire to increase precautionary saving or pay down debt might reduce households' propensity to spend. Likewise, it is difficult to judge how quickly funds dedicated to infrastructure needs and other longer-term projects will be spent and how large any follow-on effects will be. The CBO has constructed a range of estimates of the effects of the stimulus package on real GDP and employment that appropriately reflects these uncertainties. According to the CBO's estimates, by the end of 2010, the stimulus package could boost the level of real GDP between about 1 percent and a little more than 3 percent and the level of employment by between roughly 1 million and 3.5 million jobs. The increases in spending and reductions in taxes associated with the fiscal package and the financial stabilization program, along with the losses in revenues and increases in income support payments associated with the weak economy, will widen the Federal budget deficit substantially this year. The administration recently submitted a proposed budget that projects the Federal deficit to reach about $1.8 trillion this fiscal year before declining to $1.3 trillion in 2010 and roughly $900 billion in 2011. As a consequence of this elevated level of borrowing, the ratio of Federal debt held by the public, to nominal GDP is likely to move up from about 40 percent before the onset of the financial crisis, to about 70 percent in 2011. These developments would leave the debt-to-GDP ratio at its highest level since the early 1950s, the years following the massive debt buildup during World War II. Certainly our economy and financial markets face extraordinary near-term challenges, and strong and timely actions to respond to these challenges are necessary and appropriate. Nevertheless, even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets require that we, as a Nation, begin planning now for the restoration of fiscal balance. Prompt attention to questions of fiscal sustainability is particularly critical because of the coming budgetary and economic challenges associated with the retirement of the baby boom generation and continued increases in medical costs. The recent projections from the Social Security and Medicare trustees show that, in the absence of programmatic changes, Social Security and Medicare outlays will together increase from about 8.5 percent of GDP today to 10 percent by 2020 and 12.5 percent by 2030. With the ratio of debt to GDP already elevated, we will not be able to continue borrowing indefinitely to meet these demands. Addressing the country's fiscal problems will require a willingness to make difficult choices. In the end, the fundamental decision that the Congress, the administration, and the American people must confront is how large a share of the Nation's economic resources to devote to Federal Government programs, including entitlement programs. Crucially, whatever size of government is chosen, tax rates must ultimately be set at a level sufficient to achieve an appropriate balance of spending and revenues in the long run. In particular, over the longer term, achieving fiscal sustainability--defined, for example, as a situation to which the ratios of government debt and interest payments to GDP are stable or declining, and tax rates are not so high as to impede economic growth--requires that spending and budget deficits be well-controlled. Clearly, the Congress and the administration face formidable near-term challenges that must be addressed, but those near-term challenges must not be allowed to hinder timely consideration of the steps needed to address fiscal imbalances. Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth. And let me close briefly with an update on the Federal Reserve's initiatives to enhance the transparency of our credit and liquidity programs. As I noted last month in my testimony before the JEC, I have asked Vice Chairman Kohn to lead a review of our disclosure policies, with the goal of increasing the range of information that we make available to the public. That group has made significant progress, and we expect to begin publishing soon a monthly report on the Fed's balance sheet and lending programs that will summarize and discuss recent developments and provide considerable new information concerning the number of borrowers at our various facilities, the concentration of borrowing, and the collateral pledged. In addition, the reports will provide quarterly updates of key elements of the Federal Reserve's annual financial statements, including information regarding the system open market account portfolio, our loan programs, and the special-purpose vehicles that are consolidated on the balance sheet of the Federal Reserve Bank of New York. We hope that this information will be helpful to the Congress and others with an interest in the Federal Reserve's actions to address the financial crisis and the economic downturn. We will continue to look for opportunities to broaden the scope of the information and supporting analysis that we provide to the public. Thank you, Mr. Chairman. [The statement of Ben Bernanke follows:] Prepared Statement of Hon. Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve System Chairman Spratt, Ranking Member Ryan, and other members of the Committee, I am pleased to have this opportunity to offer my views on current economic and financial conditions and on issues pertaining to the federal budget. economic developments and outlook The U.S. economy has contracted sharply since last fall, with real gross domestic product (GDP) having dropped at an average annual rate of about 6 percent during the fourth quarter of 2008 and the first quarter of this year. Among the enormous costs of the downturn is the loss of nearly 6 million jobs since the beginning of 2008. The most recent information on the labor market--the number of new and continuing claims for unemployment insurance through late May--suggests that sizable job losses and further increases in unemployment are likely over the next few months. However, the recent data also suggest that the pace of economic contraction may be slowing. Notably, consumer spending, which dropped sharply in the second half of last year, has been roughly flat since the turn of the year, and consumer sentiment has improved. In coming months, households' spending power will be boosted by the fiscal stimulus program. Nonetheless, a number of factors are likely to continue to weigh on consumer spending, among them the weak labor market, the declines in equity and housing wealth that households have experienced over the past two years, and still-tight credit conditions. Activity in the housing market, after a long period of decline, has also shown some signs of bottoming. Sales of existing homes have been fairly stable since late last year, and sales of new homes seem to have flattened out in the past couple of monthly readings, though both remain at depressed levels. Meanwhile, construction of new homes has been sufficiently restrained to allow the backlog of unsold new homes to decline--a precondition for any recovery in homebuilding. Businesses remain very cautious and continue to reduce their workforces and capital investments. On a more positive note, firms are making progress in shedding the unwanted inventories that they accumulated following last fall's sharp downturn in sales. The Commerce Department estimates that the pace of inventory liquidation quickened in the first quarter, accounting for a sizable portion of the reported decline in real GDP in that period. As inventory stocks move into better alignment with sales, firms should become more willing to increase production. We continue to expect overall economic activity to bottom out, and then to turn up later this year. Our assessments that consumer spending and housing demand will stabilize and that the pace of inventory liquidation will slow are key building blocks of that forecast. Final demand should also be supported by fiscal and monetary stimulus, and U.S. exports may benefit if recent signs of stabilization in foreign economic activity prove accurate. An important caveat is that our forecast also assumes continuing gradual repair of the financial system and an associated improvement in credit conditions; a relapse in the financial sector would be a significant drag on economic activity and could cause the incipient recovery to stall. I will provide a brief update on financial markets in a moment. Even after a recovery gets under way, the rate of growth of real economic activity is likely to remain below its longer-run potential for a while, implying that the current slack in resource utilization will increase further. We expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly. In particular, businesses are likely to be cautious about hiring, and the unemployment rate is likely to rise for a time, even after economic growth resumes. In this environment, we anticipate that inflation will remain low. The slack in resource utilization remains sizable, and, notwithstanding recent increases in the prices of oil and other commodities, cost pressures generally remain subdued. As a consequence, inflation is likely to move down some over the next year relative to its pace in 2008. That said, improving economic conditions and stable inflation expectations should limit further declines in inflation. conditions in financial markets Conditions in a number of financial markets have improved since earlier this year, likely reflecting both policy actions taken by the Federal Reserve and other agencies as well as the somewhat better economic outlook. Nevertheless, financial markets and financial institutions remain under stress, and low asset prices and tight credit conditions continue to restrain economic activity. Among the markets where functioning has improved recently are those for short-term funding, including the interbank lending markets and the commercial paper market. Risk spreads in those markets appear to have moderated, and more lending is taking place at longer maturities. The better performance of short-term funding markets in part reflects the support afforded by Federal Reserve lending programs. It is encouraging that the private sector's reliance on the Fed's programs has declined as market stresses have eased, an outcome that was one of our key objectives when we designed our interventions. The issuance of asset-backed securities (ABS) backed by credit card, auto, and student loans has also picked up this spring, and ABS funding rates have declined, developments supported by the availability of the Federal Reserve's Term Asset-Backed Securities Loan Facility as a market backstop. In markets for longer-term credit, bond issuance by nonfinancial firms has been relatively strong recently, and spreads between Treasury yields and rates paid by corporate borrowers have narrowed some, though they remain wide. Mortgage rates and spreads have also been reduced by the Federal Reserve's program of purchasing agency debt and agency mortgage-backed securities. However, in recent weeks, yields on longer-term Treasury securities and fixed-rate mortgages have risen. These increases appear to reflect concerns about large federal deficits but also other causes, including greater optimism about the economic outlook, a reversal of flight-toquality flows, and technical factors related to the hedging of mortgage holdings. As you know, last month, the federal bank regulatory agencies released the results of the Supervisory Capital Assessment Program (SCAP). The purpose of the exercise was to determine, for each of the 19 U.S.-owned bank holding companies with assets exceeding $100 billion, a capital buffer sufficient for them to remain strongly capitalized and able to lend to creditworthy borrowers even if economic conditions over the next two years turn out to be worse than we currently expect. According to the findings of the SCAP exercise, under the more adverse economic outlook, losses at the 19 bank holding companies would total an estimated $600 billion during 2009 and 2010. After taking account of potential resources to absorb those losses, including expected revenues, reserves, and existing capital cushions, we determined that 10 of the 19 institutions should raise, collectively, additional common equity of $75 billion. Each of the 10 bank holding companies requiring an additional buffer has committed to raise this capital by November 9. We are in discussions with these firms on their capital plans, which are due by June 8. Even in advance of those plans being approved, the 10 firms have among them already raised more than $36 billion of new common equity, with a number of their offerings of common shares being over-subscribed. In addition, these firms have announced actions that would generate up to an additional $12 billon of common equity. We expect further announcements shortly as their capital plans are finalized and submitted to supervisors. The substantial progress these firms have made in meeting their required capital buffers, and their success in raising private capital, suggests that investors are gaining greater confidence in the banking system. fiscal policy in the current economic and financial environment Let me now turn to fiscal matters. As you are well aware, in February of this year, the Congress passed the American Recovery and Reinvestment Act, or ARRA, a major fiscal package aimed at strengthening near-term economic activity. The package included personal tax cuts and increases in transfer payments intended to stimulate household spending, incentives for business investment, increases in federal purchases, and federal grants for state and local governments. Predicting the effects of these fiscal actions on economic activity is difficult, especially in light of the unusual economic circumstances that we face. For example, households confronted with declining incomes and limited access to credit might be expected to spend most of their tax cuts; then again, heightened economic uncertainties and the desire to increase precautionary saving or pay down debt might reduce households' propensity to spend. Likewise, it is difficult to judge how quickly funds dedicated to infrastructure needs and other longer-term projects will be spent and how large any follow-on effects will be. The Congressional Budget Office (CBO) has constructed a range of estimates of the effects of the stimulus package on real GDP and employment that appropriately reflects these uncertainties. According to the CBO's estimates, by the end of 2010, the stimulus package could boost the level of real GDP between about 1 percent and a little more than 3 percent and the level of employment by between roughly 1 million and 3\1/2\ million jobs. The increases in spending and reductions in taxes associated with the fiscal package and the financial stabilization program, along with the losses in revenues and increases in income-support payments associated with the weak economy, will widen the federal budget deficit substantially this year. The Administration recently submitted a proposed budget that projects the federal deficit to reach about $1.8 trillion this fiscal year before declining to $1.3 trillion in 2010 and roughly $900 billion in 2011. As a consequence of this elevated level of borrowing, the ratio of federal debt held by the public to nominal GDP is likely to move up from about 40 percent before the onset of the financial crisis to about 70 percent in 2011. These developments would leave the debt-to-GDP ratio at its highest level since the early 1950s, the years following the massive debt buildup during World War II. Certainly, our economy and financial markets face extraordinary near-term challenges, and strong and timely actions to respond to those challenges are necessary and appropriate. Nevertheless, even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance. Prompt attention to questions of fiscal sustainability is particularly critical because of the coming budgetary and economic challenges associated with the retirement of the baby-boom generation and continued increases in medical costs. The recent projections from the Social Security and Medicare trustees show that, in the absence of programmatic changes, Social Security and Medicare outlays will together increase from about 8\1/2\ percent of GDP today to 10 percent by 2020 and 12\1/2\ percent by 2030. With the ratio of debt to GDP already elevated, we will not be able to continue borrowing indefinitely to meet these demands. Addressing the country's fiscal problems will require a willingness to make difficult choices. In the end, the fundamental decision that the Congress, the Administration, and the American people must confront is how large a share of the nation's economic resources to devote to federal government programs, including entitlement programs. Crucially, whatever size of government is chosen, tax rates must ultimately be set at a level sufficient to achieve an appropriate balance of spending and revenues in the long run. In particular, over the longer term, achieving fiscal sustainability--defined, for example, as a situation in which the ratios of government debt and interest payments to GDP are stable or declining, and tax rates are not so high as to impede economic growth--requires that spending and budget deficits be well controlled. Clearly, the Congress and the Administration face formidable near-term challenges that must be addressed. But those near-term challenges must not be allowed to hinder timely consideration of the steps needed to address fiscal imbalances. Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth. federal reserve transparency Let me close today with an update on the Federal Reserve's initiatives to enhance the transparency of our credit and liquidity programs. As I noted last month in my testimony before the Joint Economic Committee, I asked Vice Chairman Kohn to lead a review of our disclosure policies, with the goal of increasing the range of information that we make available to the public.\1\ That group has made significant progress, and we expect to begin publishing soon a monthly report on the Fed's balance sheet and lending programs that will summarize and discuss recent developments and provide considerable new information concerning the number of borrowers at our various facilities, the concentration of borrowing, and the collateral pledged. In addition, the reports will provide quarterly updates of key elements of the Federal Reserve's annual financial statements, including information regarding the System Open Market Account portfolio, our loan programs, and the special purpose vehicles that are consolidated on the balance sheet of the Federal Reserve Bank of New York. We hope that this information will be helpful to the Congress and others with an interest in the Federal Reserve's actions to address the financial crisis and the economic downturn. We will continue to look for opportunities to broaden the scope of the information and supporting analysis that we provide to the public.--------------------------------------------------------------------------- \1\ Ben S. Bernanke (2009), ``The Economic Outlook,'' statement before the Joint Economic Committee, U.S. Congress, May 5, www.federalreserve.gov/newsevents/testimony/bernanke20090505a.htm. " FOMC20071031meeting--41 39,MR. ROSENGREN.," Thank you, Mr. Chairman. The Boston forecast is very close to that of the Greenbook. With the constant federal funds rate assumption, the economy is very close to full employment, and core inflation is close to 2 percent at the end of 2008. Such an outcome is consistent with what I would hope to achieve with appropriate monetary policy. However, while this is an expected path that seems quite reasonable, the distribution of risks around that outcome for growth remains skewed to the downside. Our forecast, like that of the Greenbook, expects particularly weak residential investment. Problems in financing mortgages, expectations of falling housing prices, and more-severe financial stress for homebuilders are likely to weigh heavily over the next two quarters. In fact, our forecast for residential investment has become sufficiently bleak that there may actually be some upside risk to it. [Laughter] Somewhat surprising to me has been the lack of spillover to the rest of the economy from the problems in residential investment. I remain concerned that falling housing prices will further sap consumer confidence and cause a pullback in consumption, though to date there is little evidence of a significant effect of the housing problems on consumer spending. Similarly, I would have expected the financing problems that have aggravated the housing situation to have caused a sharper reduction in investment in general and in nonresidential structures in particular. However, so far these remain risks rather than outcomes. Thus, while I am worried about the downside risks, I am reminded that forecasters have frequently overestimated the consequences of liquidity problems in the past. On the financial side, there have definitely been improvements in market conditions, though markets remain fragile. Particularly worrisome has been the announcement of significant downgrades of tranches of CDOs and mortgage-backed securities with large exposure to the subprime mortgage market. Not only have the lower tranches experienced significant downgrades, but a number of the AAA and AA tranches have been downgraded to below investment grade. Some investors cannot retain below-investment-grade securities and are forced to sell these securities in an already depressed market. The number of the downgrades, the magnitude of the downgrades, and the piecemeal ratings announcements all are likely to call into further question the reliability of the ratings process. If many high-grade securities tied to mortgages are downgraded to below investment grade, some investors may conclude that repricing of even high-graded tranches does not reflect a liquidity problem but rather a substantial reevaluation of credit risk. Thus, I am concerned that continued widespread downgrades may make recovery in the securitization market more difficult, particularly for nonconforming mortgages, with a consequent increase in the financing cost of these assets. I also remain concerned that the asset-backed commercial paper market remains fragile. While investors seem to be distinguishing between conduits whose structure or underlying assets are quite risky, my sense is that money managers are watching the market quite closely. I continue to hear concerns over the possibility that some money market funds will experience losses that will not be supported by their parents, resulting in increased investor concern with the safety of money market funds more generally. On balance, the data both on the real economy and on financial markets have improved since our September meeting. That improvement makes it more likely that the economy will continue to recover gradually from the financial turmoil. However, both the real and the financial risks remain skewed to the downside." CHRG-111shrg57322--82 Mr. Tourre," Senator, I believe we have a duty to serve our clients, and as our role--with respect to our role as market maker, to show prices to our clients and to offer them liquidity. I do not believe we were acting as investment advisers for our clients. Senator Collins. Mr. Tourre, you are giving the same kind of answer that Mr. Sparks did. I understand that you are serving your clients. Do you believe that you have a duty to act in the best interests of your clients? " CHRG-111hhrg53244--312 The Chairman," The gentleman's time has expired. The gentlewoman from Ohio. Ms. Kilroy. Thank you, Mr. Chairman. And thank you, Chairman Bernanke, for being here. I had questions for you as well about the Federal Reserve's role and the need for accountability and transparency versus the conflicting need for independence and to be free of political pressures. And it seems to me what the public is more concerned about is not the Federal Reserve's role on monetary policy but the Federal Reserve's role in bailing out certain entities like AIG and Bear Stearns, and questions about how decisions get made about who is saved or who is allowed to fail. So maybe you could help me with what kind of transparency and accountability, the maximum that we can give our taxpayers that would still leave the Federal Reserve with the appropriate amount of insulation from political pressure and the appropriate independence that you need to carry out your essential mission. " FOMC20071211meeting--98 96,MS. PIANALTO.," Thank you, Mr. Chairman. The conversations that I have had with my business contacts indicate that business conditions in our region have clearly softened since the last meeting and perhaps even more than what is reflected in the Beige Book report that we prepared just a few weeks ago. A sense of pessimism about the economic outlook seems once again to be sweeping over our business community, and it is not just the financial community. This is a decided change from what I was hearing in October and is clearly an added threat to our already fragile outlook. My banking supervision staff reports that the District banks continue to address the risks in their portfolios by shifting focus away from residential and commercial real estate and by requiring more collateral, stronger covenants, and better debt-service coverage in their deals. But our examiners are not reporting that capital positions of our financial institutions have been impaired such that they cannot accommodate sound projects. A few of the corporate CFOs I talk with say that credit commitments are more difficult to come by. The CEOs of the Fourth District financial institutions advise me that what we are facing is a liquidity squeeze and not at present a credit crunch. That said, these bank CEOs have expressed concern that their capital positions could become impaired if the current pressure for more liquidity forces them to sell some of their assets at large discounts. The incoming data for the economy appear to be unfolding reasonably close to my October projection. I was fairly pessimistic about our near-term growth prospects, and that pessimism seems to have been well founded. So the economic data by themselves haven’t been enough to push me off the forecast trajectory that I submitted at our last meeting. But as I noted earlier, I do observe a sharp drop in business confidence across a broad collection of industries, not just those tied to residential real estate. What I am hearing sounds more substantial than the transitory slowing that I was projecting just six weeks ago. What I am hearing from my business contacts is probably more aligned with the prolonged slow growth outlook that I now see in the Greenbook baseline, or worse. I am somewhat thankful that I didn’t have to submit a projection for this meeting because I am torn between what my mostly data-driven model says and what I am hearing from my business sources. About the only thing that I can say with much confidence is that the reemergence of liquidity pressures, combined with the deterioration in business confidence, has increased the downside risk to growth. I think it is prudent to address that risk with our policy decision today, but I will hold my comments about our policy moves for later in the meeting. Thank you, Mr. Chairman." FOMC20060808meeting--120 118,MS. BIES.," Thank you, Mr. Chairman. Well, I’m like everybody else around the table— I have found the decision about which way to go to be a very tough call. I’m coming down on the side of a pause right now, partly because I’m more pessimistic than the staff forecast on the second-order effects of the slowdown in housing. We’re hearing from some bankers that subprime borrowers especially are having more difficulties and that delinquencies in that sector are going up. Although I don’t see a prolonged problem, as housing slows, the effects are going to bleed into other sectors, and whether into home furnishings or other things, I think there will be wider implications. I also think the optimism about the housing sector is so important to people because it’s a big chunk of their net worth. So I’m just not as positive about the outlook here. Another concern I have is what is really happening with the disruption of oil supply around the world. I think that situation is potentially more disruptive. We don’t put political things in our forecasts. A good friend in the oil industry is very concerned, aside from the political risk, about the operating risk in the industry right now, as I mentioned awhile ago. So I think there is enough uncertainty out there that I’m on the edge, and it’s that uncertainty that leads me to say, “Let’s take time out and pause.” I like Governor Kohn’s suggestion for the change in alternative B. It’s important that we signal resource utilization. It’s also important to signal that this is a pause and not a permanent stop because, when you look at the futures curve, it’s as though the market figures that once we stop we’re going to stop forever. It’s also important that we signal that we are pausing to see what the lagged effects will be." FOMC20051101meeting--107 105,MR. LACKER.," Yes. On this point, what President Poole is suggesting is well posed. It’s a forecast conditioned on replicating sort of an arbitrage-free set of observable financial asset prices going forward. I don’t want it, though, because I want a mixture of the information that is conveyed by the market and the staff’s judgment. I want a combination of that. The approach you suggest is a useful exercise to ponder. But as long as the staff is clear about how their assumptions differ from those embodied in market prices, I’d rather see a combination, personally." FOMC20060920meeting--75 73,MR. STOCKTON.," I would say you have it just about right—somewhere on the order of 1 percent in the second half and something certainly under 2 percent in 2007. Obviously, in putting our forecast together we were contending both with weaker housing and with some of these offsets that we factored in that have provided some cushion to the downside surprise that we have had in housing through greater labor income, more purchasing power from lower energy prices, and a little higher stock market. In some sense, those effects get us back to just modestly below trend growth rather than significantly below trend growth." CHRG-111hhrg48674--210 Mr. Price," And when is it that we will know that you believe it is time to leave that role? Will you announce it? " FOMC20071031meeting--37 35,MR. HOENIG.," Thank you, Mr. Chairman. I will talk a little about the District this time. It continues to perform well, with ongoing weakness in the housing sector offset by strength in agriculture and energy. As has been true for a while, construction activity remains mixed, with weakness in residential construction offset by continued strength in commercial construction. In terms of residential construction, both the number of single-family permits and the value of residential construction contracts declined in September, and home inventories rose with slower home sales, as is happening elsewhere. However, District home prices measured by the OFHEO index edged up in the second quarter and remain stronger than in the nation as a whole. On the commercial side, after a robust spring, construction activity has slowed but has remained solid. Energy regions, such as Wyoming, report strong activity. But even in the non-energy regions, activity remains solid. Office vacancy rates were stable, and absorption rates declined. In addition, developers reported more-stringent credit standards, and they expected credit availability to remain tight. Consumer spending softened in September. Mall traffic was flat, and retailers reported that sales were down slightly. In addition, auto dealers reported that sales fell further in September as high gasoline prices cut demand for our SUV sales and for vans. In other areas, though, activity appears to remain at least moderate. For example, travel and tourism remain healthy. In addition, manufacturing activity picked up slightly in October. Solid increases among producers of durable goods offset a weakening among producers of food, chemical, and other nondurable goods. Even so, purchasing managers remain optimistic about future activity, as most forward-looking indexes strengthened or held steady. Finally, we continue to see strength in agriculture and energy. District producers are selling a bumper crop at high prices as poor crop conditions in the rest of the world trimmed global inventories and boosted export demand. In addition, robust meat demand kept cattle and hog prices above breakeven levels. The sharp rise in farm income led to a surge in farm capital spending in the third quarter and is expected to rise further in the fourth quarter. Turning to the national economy, my outlook for growth is basically unchanged from our last meeting. Generally speaking, economic indicators have been a bit stronger over the intermeeting period, as described here, but financial markets continue, obviously, to exhibit some stress. The senior loan officer survey suggested moderate tightening of credit conditions. That is consistent with our estimates of slower growth in the current quarter. As before, though, I remain more optimistic than the Greenbook about both the near-term outlook and the longer-run growth potential for the economy. Specifically, I think growth over the forecast period will average about 2½ percent. My forecast is based on maintaining the fed funds rate at its current level of 4¾ percent through the middle of next year before reducing it to its more neutral level late next year or early 2009. With regard to trend growth, I continue to expect a decline in potential growth from about 2¾ percent to 2½ percent by 2010. Disappointing housing data have led me to mark down my near-term forecast for residential investment. I continue to expect that residential investment will decline through the first part of next year before turning up in the second half. Also, after strong growth in the first half of this year, nonresidential construction is likely, perhaps, to slow significantly over the next year and a half. Supporting growth in the near term will be moderate growth in consumer and government spending along with strength in exports driven by the lower dollar and robust foreign growth. Turning to the risks to the outlook, I believe they remain on the downside as far as real output but have not worsened noticeably since our last meeting, especially with that action. I believe that construction, both residential and nonresidential, and slower consumer spending from higher energy prices constitute the main risks to the outlook. With regard to the inflation outlook, recent data on core inflation continue to be, as noted here, favorable. I expect core PCE inflation to average about 1.8 percent over the forecast period—remember, assuming no change in the fed funds rate—but I also expect that overall PCE inflation next year will moderate as the effects of higher food and energy prices wear off. However, I do remain concerned about the upside risk to inflation as well. Greater dollar depreciation and higher energy and commodity prices, along with greater pass-through from all three, could push inflation higher for a period of time. In addition, I am also concerned about the implications of the gradual upcreep in the TIPS measures of expected inflation for the long-run path, and I am receiving more anecdotal information, in discussions with individuals in our region, about a change in expectations about inflation as they continue to deal with some rising prices in materials and other goods. Thank you, Mr. Chairman." FOMC20080805meeting--163 161,MR. STERN.," Thank you, Mr. Chairman. I favor alternative B and the language as displayed here. Let me say a few words about the issue of withdrawal of accommodation, which I've been giving thought to and will want to give more thought to over time. Earlier today I talked about the Greenbook forecast and indicated that I found it credible. But another virtue of it, even if you don't find it that credible, is that the cards are on the table. I mean, it has a path for the federal funds rate. It has a path for the foreign exchange value of the dollar and so on and so forth. Two of the key elements, as I indicated earlier, are, at least over the near-term to intermediate-term, that real growth is subdued and that headline inflation abates after the current quarter, and I think that's relevant. Given the current stance of policy, I think we are well positioned for that subdued pace of real growth. Indeed, even if we get contraction for a quarter or two, I would argue that we have maybe not entirely but largely already addressed that. On the inflation side, it seems to me that the key part of that forecast is the diminution of headline inflation starting in the fourth quarter. What that means as a practical matter is that in November, December, and January, when we get those data, we'll get confirmation that it is either happening or it's not. Now, assuming that there are no major, decisive surprises between now and then--and that may be heroic--we'll get confirmation of whether that inflation outlook was the accurate one. If we do, then it seems that the path of the funds rate inherent in the Greenbook looks as though it could be acceptable. If we get disappointments on headline inflation for whatever combination of reasons, it calls into question, at least in my mind, that path for the funds rate. Thank you. " CHRG-111hhrg52397--26 Mr. Hensarling," Thank you, Mr. Chairman. I appreciate the title of the hearing, dealing with ``effective regulation'' because I think there is a very big difference between effective and ineffective. Effective regulation helps make markets more competitive and transparent, empowers consumers with effective disclosure to make rational decisions, effectively polices markets for fraud, and reduces systemic risk. Ineffective regulation though can hamper competition, create moral hazards, stifle innovation, and diminish the role of personal responsibility within our economy. Now, with respect to more regulation of the OTC derivatives market, I come into this hearing with an open mind but not an empty mind. I remember that regulators and legislators do not always get it right, witness Fannie Mae and Freddie Mac; witness the credit rating agency oligopoly, and let us also remember that the former director of OTS said they had the tools to prevent AIG's position in the CDS and simply did not exercise it. Now, perhaps we should look to more enlightened risk assessment for tools for regulators, appropriate capital standards and with respect to our OTC derivatives and current economic turmoil, let's be careful we do not confuse the cause with the symptoms. With that, Mr. Chairman, I yield back the balance of my time. " CHRG-111shrg53085--169 Mr. Patterson," I think we need to be very cautious about considering the role of the FDIC as an intermediary in that process. The Deposit Insurance Fund is funded by the commercial banks. We need to maintain the integrity of that system. The FDIC, obviously in collaboration with the leadership in Congress, is looking at ways to work with their working capital, but whether it has to do with the resolution of a nonbank major systemically important institution and the cost of that resolution or whether it has to do with such an intermediary role, the Deposit Insurance Fund does not need to be a part of that process. " CHRG-109shrg21981--135 Chairman Greenspan," Well, let me tell you one of the reasons I hesitate: It is that the unified budget is not the be-all and end-all of a measure of what Government is doing because it is ultimately supposed to give us a judgment of the allocation of real resources essentially preempted by the Federal Government or, in fact, added if there is a surplus. And the trouble is there are other ways in which Government can preempt resources, either by regulation, by guarantees, which are not fully accounted for in the budget, by any of a number of different legal forms of preemption of property and the like. So you cannot take only that as a measure of what the overall issue is or its impact on interest rates. At the end of the day, the standard of how well we are doing really gets to the question of how have we financed this and what are we doing. The financial markets will tell you very quickly whether there is something wrong with the budget processes, and rather than, say, get somebody to forecast and say this is the standard, I will assure you the far more useful standard is watching what is happening to long-term U.S. Treasury rates. If long-term U.S. Treasury rates are behaving well, it is saying you do not have a significant problem over the maturity of Treasury instruments, most of the maturity. If they start to behave poorly, the markets are sending a signal which I think it is very crucial that the Congress be aware of. Senator Bayh. I agree. This is a longer discussion. I am afraid that if we wait--many observers, including myself, have been surprised the markets have not reacted more than they have to date. And I am afraid, as you know, market psychology being what it is, if we reach that tipping point, it may require more difficult steps to turn around than would be necessitated if we act sooner rather than later. But let me get to a second question, Mr. Chairman. I think you know what I am driving at here. I am looking for some benchmarks of performance against which to try and hold the Government accountable when it comes to the deficit, understanding that regulatory policy and other things also contribute to economic performance. " FOMC20070131meeting--55 53,MR. GAGNON.," Your first international exhibit (exhibit 9) covers recent market developments. As shown by the green line in the top left panel, oil prices dropped further this month, bringing the West Texas intermediate spot price back to pre- Katrina levels. The IMF index of nonfuel commodity prices (the red line) was little changed this month after a year of remarkable increases. Readings from futures markets imply a flattening out of nonfuel commodity prices and only a moderate increase in oil prices going forward. The top right panel shows that our real trade- weighted dollar indexes declined on balance last year. In recent weeks the dollar rebounded modestly against the major industrial-country currencies (the red line), but we estimate that it continued to decline in real terms against the currencies of our other important trading partners (the green line). As usual, our forecast calls for a small downward trend from current levels, reflecting our belief that the risk of significant depreciation is slightly greater than the risk of significant appreciation, owing to the unsustainably large U.S. trade deficit. The bottom panels report equity market indexes, with industrial countries shown on the left. The lines are set to equal 100 in March 2000, the previous peak month for the Wilshire 5000. Equity prices have risen broadly across the industrial countries over the past two years and are now just above their March 2000 levels in the United States, the United Kingdom, and Japan, but not in the euro area (the red line). For major emerging markets, on the right, equity indexes are well above March 2000 levels. In Mexico (the blue line), equity prices have more than tripled over this period. In Thailand (the green line), the government’s recent attempts to slow capital inflows and relieve upward pressure on the currency have taken their toll on equity prices, but contagion to other emerging equity markets has been minimal. Overall, commodity and financial market developments are consistent with expectations of strong global growth. Exhibit 10 focuses on financial flows between emerging markets and industrial countries. As shown in the top left panel, the major developing regions have continued the downward trend in their reliance on external borrowing. Fiscal deficits have declined in most countries, and many governments have turned increasingly to local, rather than external, borrowing. The panel to the right shows that yield spreads on dollar-denominated sovereign debt of emerging market countries have dropped to historically low levels. But emerging markets, in the aggregate, have gone much further than just reducing their borrowing. In recent years, emerging markets have experienced record outflows of official capital (the gold bars in the middle panel). These official outflows are composed of the accumulation of foreign exchange reserves, the servicing and paying down of sovereign debt, and the purchase of foreign assets by government-run investment funds such as the Kuwait Investment Authority. In all the emerging market regions, official capital outflows have recently exceeded current account surpluses (the blue bars), which are themselves at record levels. For example, the IMF estimates that in 2006, governments in emerging Asia invested on balance $270 billion outside their borders, a sum that greatly exceeds their combined current account surplus of $185 billion. Most of these official flows have taken the form of additions to foreign exchange reserves, as governments have built up war chests against future financial crises and sought to counter upward pressures on their currencies. The bottom panel looks at these flows from the point of view of the industrial countries, plotting aggregate emerging market net official flows (the gold bars) relative to industrial-country GDP, with negative values denoting net flows into the industrial countries. The statistical accounts do not report the destinations of all these flows, but the available evidence suggests that the overwhelming majority is destined for the industrial countries. Before 2003, net official inflows or outflows from the emerging markets had never exceeded 1 percent of industrial-country GDP. But since 2003, things have changed. Net official outflows from emerging markets are now estimated to equal 2½ percent of the combined GDP of the industrial countries. As shown in the panel, the timing of this unprecedented increase in net official flows corresponds well with the puzzling decline in real short-term interest rates in the industrial countries (the green line) that persisted long after industrial-country GDP growth (the purple line) rebounded from the slowdown early in this decade. The evidence suggests that aggregate policy-driven capital flows from the emerging markets may be an important factor behind low real interest rates in the industrial countries. Moreover, low real rates are not limited to short-maturity instruments. The top panels of exhibit 11 show that ten-year indexed bond yields are also low and have been for several years in the major industrial countries. These rates have ticked up over the past month or two, but only by a small amount. Long-term inflation compensation (shown in the middle row of panels) remains contained. Indeed, in Japan and Canada (the two panels on the right) inflation compensation has moved down in recent months. In the euro area and the United Kingdom (the two panels on the left), where inflation compensation lingers above policymakers’ targets, we project modest additional policy tightening early this year, shown in the bottom row of panels. Despite recent and expected future inflation rates close to zero, the Bank of Japan seems poised to tighten gradually over the next two years. In Canada, policy is expected to remain on hold. If these projections prove to be the peak policy rates for this cycle, they will be the lowest cyclical peaks for short-term interest rates in these countries for at least forty years. Nevertheless, we judge that these policy stances are likely to be consistent with low and stable inflation this year and next. The large capital inflows and low real interest rates in the industrial countries have contributed to rising housing prices in many of these countries. Higher home prices in turn have stimulated housing construction. The top panel of exhibit 12 shows that the extent and timing of the house-price boom differs markedly across countries. The Netherlands (the blue line) was one of the leaders of the global housing boom, with prices rising continuously since the early 1990s, though at much slower rates in recent years. Japan (the green line), on the other hand, is a notable exception to the trend of rising house prices in recent years, reflecting the lingering effects of the bursting of the 1980s asset bubble and Japan’s extended economic slump. The middle panels focus on two countries that experienced strong house-price increases (the purple lines) early in this decade but where house-price increases subsequently halted, at least temporarily. In both Australia and the United Kingdom, as in the United States, residential investment (the green lines) responded positively to higher house prices. In Australia, on the left, real house prices have been flat for the past three years, and residential investment has declined gradually about 1 percentage point of GDP, though it remains above its historical average. In the United Kingdom, on the right, house prices stabilized in 2005 and picked up again modestly last year. Despite lower house-price inflation, residential investment has continued to rise toward historically high levels. The relevance of these foreign experiences for the United States is difficult to gauge, but they provide some support for Larry’s forecast that the downturn in U.S. housing is nearly over. In light of the signals from financial and commodity markets, as well as other real-side indicators, we project continued solid growth in the foreign economies at rates that are not likely to strain resources or to put upward pressure on inflation. As shown in the bottom panel, total foreign growth (line 1) is estimated to have stepped down last year from 4½ percent in the first half to about 3½ percent in the second half, and it is projected to remain around 3½ percent over the forecast period. This projection is about 1 percentage point stronger than the staff’s projection for U.S. growth, shown at the bottom of the panel. The foreign industrial economies (line 2) overall are projected to grow at about the same rate as the United States, Japan a bit slower (line 4), and Canada a bit faster (line 5). The emerging market economies (line 6) are projected to grow at nearly twice the pace of the industrial economies over the forecast period. We expect that emerging Asia (line 7) will continue to grow very rapidly and that Latin America (line 8) will grow at a solid, though not exceptional, rate. Our forecast assumes that the Chinese government will take additional measures if necessary to reduce the growth rate of investment, and we project that Chinese GDP growth will be slower this year than last. But the risks to our growth forecast for China are probably greater on the upside. Exhibit 13 provides an assessment of what all these foreign influences mean for the U.S. economy. Overall import prices, the black line in the top left panel, fell sharply last quarter and are projected to continue to fall in the current quarter, primarily owing to the drop in the price of imported oil. As oil prices stop falling and begin to move gradually back up, overall import price inflation should turn positive. Prices of imported core goods (the red line), which exclude oil, gas, computers, and semiconductors, rose at a rate of nearly 4 percent in the middle of last year, primarily owing to sharply higher prices of nonfuel commodities. With commodity prices projected to stabilize and with only a small depreciation of the dollar in our forecast, prices of imported core goods should increase at a subdued pace over the next two years. The contributions of exports and imports to U.S. GDP growth are shown in the lower panel. We now estimate that the external sector made a positive arithmetic contribution to growth last year, the first positive annual contribution since 1995. Import growth stepped down from previous years as U.S. GDP grew more slowly. Export growth benefited from robust foreign economic activity, but exports turned out even stronger than our models project. Line 1 in the top right panel shows that, for the first eleven months of last year at an annual rate, exports of goods grew 10½ percent from the previous year in real terms. Lines 2 through 4 show that three categories of capital goods—aircraft, machinery, and semiconductors—contributed nearly half of total export growth. Although it is possible that blistering growth rates in exports of these goods may continue, we base our forecast on a return of export growth to a rate more consistent with historical relationships. With the vast majority of aircraft production being exported in recent months and with aircraft factories running at high utilization rates, further large increases in exports from this sector, at least, do not seem likely. Returning to the bottom panel, we project that the negative arithmetic contribution of imports (the red bars) to GDP growth will outweigh the export contribution (the blue bars) in 2007 and 2008 by about ¼ percentage point (the black line). This projection is driven by the historical tendency of U.S. imports to grow at a much faster rate than U.S. GDP. In addition, the larger value of imports relative to exports means that, even if imports and exports were to grow at the same rate, the negative contribution of imports would be greater than the positive contribution of exports. The projected strong growth rates of foreign GDP, discussed in your previous exhibit, are not large enough to outweigh these factors over the next two years. On balance, relative prices have little effect on net exports over the forecast period, as the real trade-weighted dollar has moved in a relatively narrow range over the past couple years and is not projected to move substantially over the forecast period. And now Larry will complete our presentation." FOMC20060808meeting--98 96,MR. GUYNN.," Thank you, Mr. Chairman. With each speaker, this discussion gets more and more interesting. I think it’s fair to say that anybody who has been involved in the policymaking process for very long has made a speech or talked publicly about how you come to the meeting with your own views and you’re always willing to listen to your colleagues and change your mind. I come probably as close to that phenomenon today as I have in my ten years at the table. As I listened to the discussion that we had earlier, I guess I was a bit surprised at how great the concern about inflation is. I share it certainly to a great extent. I think that one could, in fact, make a very strong case for a further tightening move today. It seems to me, however, that a tightening move today would have to come with an expression of continuing concern about inflation. That, I think, would imply probably additional tightening moves. If combined with the notion that we’re not satisfied that the path we’re on will get inflation down well within the range, a tightening move today implies an even greater likelihood of further tightening. I think that kind of path raises the probability that we’re going to do too much and stay too long at this. Not to “me too” your comments, but perhaps because I come from the Southeast, where housing is such an important factor—though I’m not sure I understand completely the slowdown in housing and how important that may turn out to be—it is certainly a factor in my mind. I’m willing to give more weight to the optimistic forecast on inflation than it sounds as though some are. I appreciate the pricing power discussion that we’ve heard around the table, but we have been hearing that for years, and I would hope that the same things that kept that from playing out would continue keeping it from playing out. Again, one could, in fact, make a very honorable case for a further tightening move today, but that’s not where I came in, and that’s not where I end up after the discussion. I think in some ways that’s a harder conclusion to come to, but I still favor something like alternative B. It would be very good for us to demonstrate the willingness to pause and try to understand the things that are going on a little better than we do. I am willing to trust, perhaps more than some are, that the forecast inflation is going to work its way down. I am less obsessed than some with trying to push it all the way down to 1½ percent in the very short term. I don’t think that the world would expect and insist that we do that. We have enough credibility that we should use a bit of it now to give ourselves time to see where we are. If our forecast that things are going to be okay turns out to be wrong, we can change our position rather quickly and regain whatever loss of credibility somebody thinks we may have incurred. Again, all things considered, I favor no change in policy today and language similar to what’s in alternative B. I do not intend to dissent today if the consensus is on the side of tightening, but I have a reasonably strong preference for using this opportunity to take a break in the path we’ve been on and to try to understand a bit better where we are. Thank you, Mr. Chairman." FOMC20050322meeting--121 119,VICE CHAIRMAN GEITHNER.," Careful. [Laughter] The near-term outlook appears more favorable to us, as it does to everybody else. We have moved up our forecast to reflect stronger­ than-anticipated underlying growth and somewhat greater price pressure. On the expectation that we will move the fed funds rate up at the somewhat steeper path now priced in the market, we now expect real GDP to grow at a roughly 4 percent pace in real terms this year before moderating to around 3½ in 2006. And with this tighter monetary policy assumption, we expect core PCE to come in a bit above 1½ percent but not above 2 percent. As this implies, we are very close to the Greenbook on the broad outlines of the story and quite close in the components, too. We have a bit more investment and less consumption and a little March 22, 2005 54 of 116 growth and unit labor costs a bit softer. But overall we have a very similar view to the staff forecast on the broad forces supporting the expansion. And we are quite comfortable, as a result, with the case this story presents for tightening policy further and for signaling more tightening to come. We see the risks as roughly balanced around this slightly higher path for growth and inflation. If there’s a case for asymmetry or less balance in our uncertainty, it seems more likely to be on the upside than on the downside. The rise in the two- to five-year inflation expectations in TIPS, in the face of what is otherwise reasonably encouraging news on inflation fundamentals, bears careful monitoring. We now face a lower probability that the core PCE will come in at 1½ percent rather than above, and this itself suggests a higher path for the nominal fed funds rate. The anecdotal stories seem to have improved alongside the strengthening of private forecasts. Our Empire State Survey shows greater confidence—greater optimism about the next six months—than we’ve seen in some time. I think we should be relatively comfortable, therefore, with both the direction and magnitude of the change since our last meeting in market expectations regarding the likely path of the fed funds rate. I would be somewhat more comfortable if the market were pricing in a somewhat higher probability of a 50 basis point move at some point in the near term. I say this not because I think we can make the case now that we will need to move by 50 basis points any time soon but simply because we need to make sure that we have the flexibility to do so. One of the consequences of the structure of our statements these days, at least until very recently, is that the markets have responded to stronger data or more inflation risks by raising the probability of another 25 basis point increase beyond the next meeting or two, but not by pricing in any significant probability of a steeper slope than 25 per meeting. This has contributed to a remarkable reduction in uncertainty about monetary policy expectations, which in turn has March 22, 2005 55 of 116 premia across financial markets. Part of this is due to fundamentals, but part seems due to our monetary policy signal. At the margin, this implied ceiling on the slope of the path toward equilibrium raises the possibility that we will be perceived at some point as taking some risk of getting behind inflation expectations. Buying some insurance against this prospective small cloud on our credibility is prudent risk management. This argues for adjusting our statement to condition or qualify “measured,” and for doing so ahead of when we might be forced to. This makes sense even if we don’t want to significantly steepen the implied path at this point. Buying this flexibility now may entail some modest steepening in the path, but some risk in that direction is worth it. The additional benefit in gradually exiting from the “measured pace” language as we approach equilibrium, of course, is that it will prepare the ground for a flatter path when that proves appropriate. Greater confidence in the sustainability of the main forces driving the expansion suggests that the greatest risks to the forecast, apart from some shock, still lie in the imbalances we face in our economy. Those imbalances are evident in the combination of the sustained rise in household debt, the projected increase in public debt, and the deterioration in our net international position. This probably argues for trying to get the real fed funds rate up to a more positive level than might otherwise have seemed appropriate. That will help provide more traction—or at least some traction, since we don’t see much traction yet—to the process of adjustment, allowing the forces of gravity to contribute to a more gradual unwinding of these internal and external imbalances and reducing some of the risk in the forecast. A more contractionary fiscal policy stance would make this less necessary, but this does not now seem in prospect. Thank you. March 22, 2005 56 of 116 [Coffee break]" FOMC20070509meeting--39 37,MR. STOCKTON.," Well, you could do it either way. We did not take, for example, the last month’s incredible weakness in new-home sales at face value. We take a six-month moving average, calculate what we think the months’ supply is based on that, and have months’ supply come back to a more normal level over time. So it is like an inventory-sales ratio. The production adjustments that we have incorporated in this forecast basically bring that inventory-sales ratio most of the way back toward normal by the end of 2008, but not all the way." CHRG-111hhrg46820--42 Mr. Schrader," Thank you very much, Madam Chair. Only Mr. Allison referred to the Small Business Association in a somewhat oblique manner and their role in the recovery and stimulus package. I am curious--this is the Committee on Small Business--if any of you would see an enhanced role for the Small Business Administration in terms of perhaps providing the loans that Mr. Massie is talking about, some of the cash flow that is out there, so it can go to small business and not just business in general. " CHRG-111hhrg74090--148 Mr. Gingrey," Chairman Leibowitz, as you outlined in your testimony, there will be a number of changes to the FTC as a result of the Consumer Financial Protection Agency it that becomes law. Many responsibilities will be pulled from the current jurisdiction of the FTC and to be given to this new agency. With all of these proposed changes, what then will be the role of the FTC in this new landscape and how much of that new role will be duplicative of this proposed agency? You guys have been doing a good job, you know, we are appreciative of that. " CHRG-111shrg52619--92 Mr. Reynolds," My comment would be that it is appropriate that we take a measured response. I agree with Mr. Polakoff's observation that regulators have the ability to tighten down on regulation to the point where we make credit availability an issue. On the other side, it is important that our role as safety and soundness regulators be the primary role that we play and that we are not in the business of being cheerleaders for the industry. I am certain that my bankers and my credit union managers in the State of Georgia don't regard me as a cheerleader. Senator Reed. My time has expired. Thank you. " FOMC20070131meeting--126 124,MS. MINEHAN.," Thank you very much, Mr. Chairman. The New England regional economy continues to grow at a moderate pace with relatively slow job growth, low unemployment, and moderating measured price trends. Consumer and business confidence is solid, and while retail contacts reported an uneven holiday season, manufacturers were generally upbeat about business prospects. Skilled labor continues to be in short supply and expensive. In every one of the New England states, there is concern over the long-run prospects for labor force growth, given their mutual low rates of natural increase, out-migration of 25 to 34 year olds, and dependence on immigration for labor force growth. New England is an expensive place in which to live, and concerns abound about how to attract and retain the highly skilled workers that are needed for its high preponderance of high value added industries. Obviously, there’s nothing new or particularly cyclical about the foregoing comments. But I’ve been to quite a few beginning of the year “let’s take stock of things” conferences in all the states recently, so perhaps I’ve become more impressed than usual by the medium-term to long-term challenges facing the region. In the short run, however, the positive overall trend of the regional economy does seem to be a powerful offset to the continuing decline in real estate markets. At our last meeting it seemed as though New England’s real estate problem was more significant than that in the rest of the country. But now it appears that both are similarly affected whether one looks at prices, sale volumes, inventory growth, or declining construction. As with the nation as a whole, there are signs of stabilization; but at least in New England, making any judgment about the imminent revival of real estate markets in midwinter is foolhardy at best. On the national scene, the data have been more upbeat since our last meeting. Apparently the holiday season was a bright one, with consumption likely growing at a pace of more than 4 percent in the last quarter. That’s remarkably strong given the continuing decline in residential real estate and proof—to reiterate what President Stern said—that the U.S. economy continues to be unusually resilient. Supporting consumption are tight labor markets, lower energy prices, tighter though still reasonably accommodative financial conditions, strong corporate profits and some signs of revival in business spending after declines related to housing and motor vehicle expenditures, and continuing strong foreign growth. Even inflation has moderated a bit, with three-month core price increases in both the PCE and the CPI trending down. Our forecast in Boston and that of the Greenbook are virtually indistinguishable. The last quarter of ’06 was stronger than expected. The first quarter of this year will be slightly better as well, but after that, the trajectory remains the same as it has been for the past two or three meetings. An increasing pace of growth in ’07 and ’08 as the housing and motor vehicle situations unwind, a slight rise in unemployment, and a fall in core PCE inflation to nearly 2 percent by the end of the forecast period. In many ways, this is the definition of perfection, a forecast that is seemingly getting better each time we make it, with growth a bit higher, unemployment a bit lower, and inflation ebbing slightly more. The underlying mechanics that produce this outcome are relatively straightforward, but I wonder whether we should have a heightened sense of skepticism about such a halcyon outlook. Let me focus on two reasons for such skepticism. First, all other things being equal, inflation could be less than well behaved. One reason that inflation ebbed in earlier forecasts was that slower growth brought about a small output gap and rising unemployment. Now, the output gap is virtually eliminated, and unemployment remains below 5 percent. Ebbing inflation is solely the product of recent favorable inflation readings, which are assumed to persist: lower energy prices, declining import prices, and falling shelter prices. It’s hard to tell at this point whether the recent readings on core inflation are the result of fundamentally lower inflation pressures or just luck or maybe a combination of the two. I think a similar range of uncertainty applies to oil prices and the strength of the dollar. With virtually no output gap, it seems to me that, while the baseline best guess might be lower inflation, for all of the reasons discussed in the Greenbook one should approach that analysis with some caution. Second, demand could well be stronger. The baseline forecast assumes that consumers somehow get the message some of us have been trying to deliver about the need for an increase in private saving. The saving rate moves from a negative 1 percent to a positive 1 percent, the highest saving rate in several years. As I noted before, I have to ask myself why this is likely to happen over the next coming months when it hasn’t in the wake of the housing situation in 2006. Clearly, the downturn in residential real estate, an important political issue in all our Districts and certainly devastating for subprime borrowers in particular, hasn’t affected consumer spending in general. In fact, household net worth as a share of disposable income remains quite high, buoyed in part by a likely overestimate of real housing values but also by rising equity markets. The timing of the needed increase in the personal saving rate could well be further out in the future, creating some version of the buoyant consumer alternative scenario instead of the baseline. Again, with no output gap, the potential for increased inflationary pressure is obvious. In sum, the Greenbook forecast remains in my view the most likely baseline. There are downside risks, as I mentioned before, for the seven alternative scenarios do anticipate some downside risks; but if the housing situation is beginning to stabilize, I find it hard to believe that broader anxiety about it will affect business spending or the consumer as some of these scenarios contemplate. The bigger risk may well be that business spending picks up in light of consumer strength, unemployment stays low, growth exceeds our current projections, and resource pressures become more intense. I am concerned that risks to inflation have grown somewhat since our last meeting. I think I’m still in a “wait and see” mode, as I do believe there are downside risks to the evolution of housing markets. But if the Greenbook growth forecast is right, the best risk management on our part may have to be to seek tighter policy sooner rather than later." FOMC20061212meeting--92 90,VICE CHAIRMAN GEITHNER.," Thank you, Mr. Chairman. Our forecast hasn’t changed much since the last meeting. We still expect growth to move back to potential in the first half of next year and to stay in the vicinity of potential, which we think is around 3 percent, over the forecast period. We expect inflation, as measured by the core PCE index, to fall to just under 2 percent by the end of ’08. Our view of the outlook differs from the Greenbook in two respects, as it has over the past few cycles. We have a higher estimate of potential growth, with the difference due to higher estimates of labor force growth, and we expect more moderation in inflation than the Greenbook does, principally because we believe there is less inertia, less persistence in inflation in the United States than does the staff. Both these issues, of course, deserve continued analysis and attention by the Committee. These differences in our forecast relative to the Greenbook don’t extend to the policy assumption. Both outlooks are predicated on a likely path of the fed funds rate that’s nearly flat over the next several quarters. This path, of course, is above the one currently reflected in financial markets. Of course, although some disagreement between our view and the market’s view is not unusual, the size of this gap is significant enough to warrant some attention. It’s hard to know, however, what the source of the difference is and, therefore, what the implications are for what we do in terms of policy. The risks to the forecast may have shifted somewhat in the direction of less upside risk to inflation and more downside risk to growth. But to us, the current weakness in the economy still seems principally to stem from the direct effects of the slowdown in housing on construction activity and related parts of the manufacturing sector as well as from the reduction in automobile and auto-related production. As things now stand, the softer-than-expected recent numbers don’t argue, in our view, for a substantial reassessment of the risks in the outlook. Surveys of business sentiment outside the manufacturing sector still seem consistent with reasonable growth going forward. A slowdown of investment in equipment and software doesn’t seem to be particularly troubling to us at this point. Consumer spending seems to be growing at a fairly good pace. Employment growth, of course, is still quite solid, and growth outside the United States still looks pretty good. We think the fundamentals of the expansion going forward still look good, with strong household income growth even after the lagged effects of the recent downward revisions, productivity growth in the range of 2½ percent for the nonfinancial corporate sector, and strong corporate balance sheets in the United States, and prospects for continued expansion outside the United States. Our recent financial market data don’t, in my view, provide a convincing case for a substantial increase in the probability of a much weaker path for growth going forward. Although the yield curve is inverted and long rates continue to drift down, staff research and other indicators suggest that part of that is due to a decline in term premiums, and forward rates seem to be coming down around the world still. This gradual reduction in term premiums and forward real rates globally suggests that what we’re seeing in the long-term interest rates in the United States may not be principally a sign that confidence in the U.S. growth outlook has deteriorated. It’s not clear even 18 months after the conundrum first emerged whether equilibrium rates globally have really moved substantially lower. The Bluebook estimate suggests we’re still within most estimates of equilibrium real rates in the United States. Equity prices and credit spreads are consistent with the view of sustained expansion going forward. All this seems to reinforce the case for the judgment that we have not yet induced overly restrictive financial conditions. We still face considerable uncertainty about the outlook for growth and the familiar sources of downside risk, but to us these still seem to rest mainly with the possibility that a more-acute and protracted fall in housing activity and prices will cause a significant deceleration in housing and household spending and ultimately business spending. The nature of these risks, however, hasn’t changed in our view, and the probability that the risks will materialize may have risen a bit but not much. On balance, this situation should reduce the probability that we’ll have to tighten further, but it doesn’t seem to suggest that today we need to induce a further easing in overall financial conditions. On the inflation front, we confront the familiar mix of underlying inflation still at uncomfortably high levels and considerable uncertainty about whether we’ll see enough moderation soon enough to keep expectations stable at reasonable levels. The remaining inflation risks, in other words, are about whether we get enough moderation. In the absence of a dramatically different outcome for the dollar and energy prices than what’s in the forecast, we don’t see much risk of inflation accelerating from current levels or remaining stuck at current levels. We haven’t had much evidence to justify a significant change in the expected path of inflation or in the risks of that forecast. The news on unit labor costs may be a bit reassuring. Surveys seem to suggest some evidence of diminishing pricing power, which might imply that margins will adjust downward to absorb future rises in labor compensation. The odds of an early return to above-trend growth seem to have receded a bit. Most of the alternative measures of underlying inflation that many of us look at seem to have moderated a bit after the sustained earlier period of acceleration. Inflation expectations derived from TIPS have eased a bit. These pieces of information are somewhat comforting, but they don’t change the fact that our expectation that we’ll achieve the desired moderation in inflation without further tightening of monetary policy remains just that. It is an expectation or a hope; it is not yet reality. Thank you." FOMC20081007confcall--23 21,MR. SHEETS.," Since the last Greenbook, the economic indicators for the foreign economies have generally surprised us on the downside, notwithstanding the fact that our expectations in the Greenbook for foreign growth were already pretty grim. In the euro area, measures of consumer and business sentiment have continued to retreat. Industrial production has moved down, and retail sales have been soft. Recent data for the United Kingdom have continued to point to a mild contraction during the second half of this year, and notably house prices there continue to fall. In Japan, industrial production plummeted in August, recording its biggest monthly decline in more than five years, and survey data point to further declines in business and consumer confidence. Finally, in the emerging market economies, industrial production has fallen in a broad set of countries, and exports have softened significantly. In light of these data, we now see foreign growth in the second half of this year as likely to come in at a little less than 1� percent, down � percentage point from our last forecast, with these markdowns spread about evenly between the advanced economies and the emerging market economies. We have reduced our projections for growth in 2009 almost as much. This weakening outlook for global activity has been largely driven, as Bill has described, by a marked deterioration in financial conditions in both the advanced and the emerging market economies. Since the last FOMC meeting, equity markets have fallen sharply in numerous countries. Risk premiums on many types of assets have risen, and conditions in short-term funding markets have worsened further. These difficult financial conditions threaten the outlook for foreign growth going forward both by weighing on sentiment in financial markets and by potentially limiting the flow of credit to the economy. If there is any good news for me to report, it's that the softening outlook for global growth has continued to put downward pressure on the price of oil and other commodities. Oil prices have been extraordinarily volatile over the last month, lurching up and down in response to a number of factors, including the effects of the two hurricanes, shifting expectations regarding global growth, and financial turbulence. On net, as Larry mentioned, the price of WTI is down about $13 a barrel since the Greenbook and down over $55 per barrel from its peak in mid-July. Prices for many nonfuel commodities have fallen sharply since the FOMC meeting, including price declines of more than 10 percent for copper, nickel, and rubber, and more than 20 percent for corn and soybeans. Headline inflation remains elevated in the advanced foreign economies. Notably, U.K. inflation in August reached 4� percent, a 15-year high. In contrast, the most recent CPI data for the euro area hint at some deceleration, with inflation moving down from over 4 percent in July to 3.6 percent in September. Going forward, there are good reasons to expect inflation in these economies to abate, given the recent sharp decline in commodity prices and emerging slack in their economies. Inflation rates in the emerging market economies appear to be cresting for similar reasons. In the midst of these events, the dollar has remained quite resilient, rising about 3 percent since the last FOMC meeting. In our view the currency markets earlier this year had priced in expectations that the major foreign economies would remain largely resilient despite U.S. slowing. As the growth prospects for the foreign economies have deteriorated, the relative attractiveness of the dollar has increased. This, along with the sustained demand for dollar funding in global financial markets, seems to have buoyed the dollar of late. Finally, given the weaker path of foreign activity and the stronger dollar, we now expect export growth to be somewhat less robust than was the case in our previous forecast and, consequently, net exports to be less supportive of U.S. economic growth over the next two years. Nevertheless, net exports are still expected to contribute a positive 0.5 percentage point to growth in the second half of this year and about 0.3 percentage point in 2009. We are happy to take your questions now. " FOMC20061025meeting--292 290,MR. LACKER.," With your indulgence, Mr. Chairman, I’d like to comment on the role of the dual mandate and sketch out how I’d like to see this discussion evolve. I feel motivated to do this because this consideration has played a greater role in today’s discussion than I had anticipated—this is just a byproduct of my own lack of foresight and intelligence, I think—and also because I took swipes at the dual mandate earlier in my career on the Committee and was batted back by previous Vice Chairmen and others. [Laughter] What I want to say first is that I sense a substantial convergence of views. As demonstrated by Governor Kohn’s use of the best-contribute formulation, I think there’s convergence of the sense of what it means around here. (Governor Kohn’s statement, by the way, was outstanding, and I’d associate myself with all of it, top to bottom.) But I sense that some of our policy disagreements are on occasion interpreted as differences in views on the appropriate weights to place on employment and inflation in a policymaker welfare function or loss-minimization function. Casting it that way tempts one to view those weights as reflecting value judgments analogous, for example, to my preference for grits over eggs at this morning’s breakfast. I realize that what I’m about to say runs a great risk of seeming pedantic and academic, but I think it’s important. I’ll start provocatively by saying that I don’t care about output per se, and I don’t think any one of us does, and I don’t think any one of us cares about inflation per se. We care about the welfare of the citizens of our country. That’s an obvious point to make, but I’ll just remind you that the practice of viewing policymaking through the lens of the analytical device of a mathematical policymaker facing a loss function with weights on employment and inflation arose during the 1960s. In contrast, policy analysis everywhere else in economics was grounded in models in which the consumer was actually mathematically present—that is to say, the models treated explicitly the preferences of consumers and then crafted policies to maximize those in a framework in which you could explicitly calculate what consumer preferences were. At the time, the state-of-the-art monetary policy framework did not include consumers explicitly; these were reduced-form models—you know, the Patinkin generation of models. Today, the state-of-the-art monetary models capture a rich array of inflation and output dynamics and do treat preferences of our citizens explicitly. These models are capable of deriving optimal policy, and optimal policy so derived can be represented as the solution to a maximization problem by a policymaker with given weights. But that, of course, is very different from thinking of those weights as stemming from non-economic value judgments about the utility value of employment and inflation. So, in principle, the weights that are most appropriate to use to represent policymaking can be scientifically investigated. They can be analyzed through models at this level and through the data and can be compared regarding goodness of fit and other measures as well. The congressional mandate in the ’70s codified existing practice and encapsulated the notion that we’ve got weights and that we view ourselves as having a loss function regarding these two things when we really just have one loss function and that relates to our citizens’ welfare. I’d point out that surely we have heavily influenced the interpretation of those mandates. You look at the act, and three objectives are there. I think that we’ve helped induce people to call it a dual mandate by encouraging them to drop the moderate interest rate objective. So, in principle, we could influence the evolution of popular interpretation and understanding of these other objectives as well. I’d also point out that the way the Congress codified the objectives was without weights, and so the act is not at all inconsistent with the state-of-the-art approach to monetary economics. I say this because I’d like to move us beyond the relatively sterile debates over whether my weight is higher or lower on inflation or output, and I hope that we can evolve in both our discussions about the dual mandate and our analytical approach to the use of it in meetings ahead. Thank you." FOMC20080130meeting--113 111,VICE CHAIRMAN GEITHNER.," Thank you, Mr. Chairman. Nellie, I have two questions for you. One is on exhibit 9, where you forecast in the middle right panel the rate of increase in defaults on subprime ARMs. If you compare that with your reset rate estimate and your house-price assumption or the house-price assumption in the market, I wonder whether that looks a little optimistic. Can you just say a little more about why, under the baseline scenario, given what has happened to house prices already and what is ahead, you wouldn't think that would be substantially greater? " CHRG-111shrg53822--56 Mr. Stern," Yes. As I said, I think that would be constructive. Senator Warner. Could there be even the advancement of that type of legislation? Could that have any short-term, positive---- Ms. Bair. I think it could be an important catalyst, perhaps, for more fundamental restructurings or assets sales. It could serve as a wake-up call, to perhaps move things along a little faster. Senator Warner. It might force some of our banks to move quicker into which assets they might be willing to dispose of. Ms. Bair. Right. Well, in these smaller institutions, we find that it is a viable mechanism to use. Just having that there is a good catalyst to take more aggressive action, whether it is major changes or restructurings, or asset sales or just selling the whole institution, which is more practical with the small institution. I think, absolutely, just having the lever there can contribute to some very constructive activity. Senator Warner. Well, I hope Chairman Dodd and Ranking Member Shelby get a chance to weigh in on that. I would love to see their sense of whether expedited on that would make some sense. Again, we will go very quickly, if any other member wants to ask this panel. Senator Merkley? Okay. Then I would then thank the panel for their very productive testimony and, always, your good work. Thank you. And we will move now to the second panel. Recognizing we have some votes, I will go ahead, and as the panel is setting up, I will go through a few introductory comments. For our second panel, we will hear from Peter J. Wallison, the Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute for Public Policy Research, where his research focuses on banking, insurance and Wall Street regulation. Previously, Mr. Wallison served as general counsel to the U.S. Treasury, the depository institution's Deregulation Committee, and as White House counsel to President Ronald Reagan. After Mr. Wallison, we will hear from the Honorable Martin Baily, Senior Fellow in Economics Studies at the Brookings Institution. Mr. Baily served as chairman of the Council of Economic Advisors during the Clinton Administration. Finally, we will hear from Mr. Raghuram R.J. Rajan, the Eric J. Gleacher Distinguished Service Professor of Finance, University of Chicago, Booth School of Business. He served as chief economist at the International Monetary Fund. His major research focuses in the role of finance, planning and economic growth. We were asked for Mr. Wallison to testify first, but we seem to be missing Mr. Wallison. " FOMC20060629meeting--18 16,MR. WILCOX.," Exhibit 6 turns to the outlook for compensation. The first column of the top left panel shows that recent readings on the productivity and cost measure of compensation have been quite choppy. Increases in the employment cost index, shown in the right-hand column, have been smoother but have been puzzling in their own right, in that they have been running so low. The two gauges differ methodologically in many respects, some of which are itemized in the panel to the right. Despite their differences, both measures suggest that compensation pressures have remained subdued even as the labor market has tightened. We expect that, over the projection period, resource utilization—represented in the middle left panel by the difference between the unemployment rate and our estimate of the NAIRU—will be only a small influence on compensation growth, boosting it a bit this year and restraining it slightly next year as the economy cools. A larger influence on the outlook is represented in the right-hand panel: As shown by the third pair of bars, real compensation has not kept pace with productivity during the past several years. Between now and the end of next year, as shown by the rightmost pair of bars, we expect this situation to reverse and real compensation to increase a little more rapidly than productivity, as competition for scarcer workers causes past productivity gains and higher overall price inflation to feed into compensation. As shown in the bottom left panel, the resulting increase in real compensation causes the markup of price over unit labor cost to decline slightly from its current historically high level and, as shown in the bottom right panel, causes both the ECI and compensation per hour to accelerate somewhat in nominal terms from their recent subdued rates of growth. Nonetheless, with the price markup remaining well above its historical average, we think such increases in labor costs would not prompt new upward pressure on prices. Exhibit 7 turns to the outlook for price inflation. As shown in the middle column of the table in the top left, core PCE prices increased more quickly in March, April, and May than in the preceding two months, boosting our forecast for the increase in core prices in the second quarter as a whole to 3.1 percent at an annual rate. As shown to the right, core inflation and its market-based component have tracked each other quite closely of late on a four-quarter basis and are projected to do so over the forecast period, suggesting no unusual mischief on the part of nonmarket prices. We continue to expect core PCE inflation to ease back next year. The major reason for this moderation is shown in the middle left panel; after bulging again this quarter, energy prices are expected to be roughly flat over the remainder of the projection period. On our assumptions, which I will discuss in more detail in a few minutes, that flattening takes about ¼ percentage point off core PCE price inflation next year. Several measures of inflation expectations are shown in the middle right panel. As you know, consumers’ expectations backed off in early June, according to the University of Michigan survey, and TIPS-based inflation compensation has come down a bit as well in the past few weeks. Nonetheless, as shown in line 5 of the table at the bottom of the page, the two CPI reports we have received since the May meeting boosted our estimate of core PCE inflation over the first half of this year 0.2 percentage point. And as shown in the third and fourth columns, we have essentially carried that bad news forward despite the slightly greater amount of slack in the economy and the slightly lower profile of energy prices from here forward. Exhibit 8 investigates whether the staff inflation models have been moving off track recently. As you know, we consult a broad range of models, but to keep the discussion manageable, I will report on just two of those specifications. As noted in the top panel, the first is a backward-looking model that uses lagged inflation to proxy for underlying or expected inflation. The second specification is a partly forward-looking model that uses a weighted average of both lagged inflation and expected inflation as measured in the Survey of Professional Forecasters. The bottom line from this exercise is that, although both models have certainly made sizable quarterly forecasting errors of late, neither has been substantially and consistently surprised by the performance of inflation over the past several years in a way that would signal an important structural shift. The middle panels report on the performance of the backward-looking model. The left-hand panel shows model simulations jumping off from several different points in the recent past. As you can see, the simulation trajectories are at least broadly reminiscent of the actual data. Nonetheless, it is difficult to determine with the naked eye whether the model errors have been predominantly to one side or the other. As an aid in that diagnosis, the right-hand panel uses a technique known as the Kalman filter—a statistical method for allowing a parameter estimate to evolve over time in response to new information. Here, I’ve applied the Kalman filter to the NAIRU. Here’s the guide to interpreting the right-hand panel: If this particular model agreed with the staff estimate of the NAIRU and if every other aspect of the model were correctly specified, the Kalman filter estimate would follow the same trajectory as the staff NAIRU. And, in fact, that is pretty much what you see: Like the staff estimate of the NAIRU, the Kalman-filter estimate declines noticeably from the early 1990s through the late 1990s and then flattens out. Turning up the power on the microscope, you can see that even since the late 1990s the Kalman-filter estimate has been declining ever so slightly, signifying that inflation has been running just a little lower during the last eight years or so than the model would have expected. The source of this surprise is not identified by the technique: It could, in fact, be a declining NAIRU, but it could equally well reflect a host of other subtle changes in the economic structure. The bottom panels repeat the experiment for the partly forward-looking model. Again, as you can see on the left, the model misses many of the finer points in the actual data but seems to capture at least the general drift, with errors roughly balanced to the high side and the low side. Indeed, as shown to the right, the Kalman filter estimates in this case have moved essentially sideways since the late 1990s, indicating that the model has not been disproportionately surprised to one side or the other. Exhibit 9 turns to the question of whether the recent increases in energy prices have been seeping into the structure of inflation more broadly and, if so, to what extent. The top panel focuses on inflation at the producer level. The panel compares the PPI for finished energy, the red line, with a staff-constructed aggregate of output price indexes for industries in which energy costs represent a relatively high share of total costs. If energy-price pass-through were going to show up anywhere, it would be here. And, as you can see, it does in fact show up. Indeed, this may be the statistical counterpart of at least some of the anecdotes that you have been hearing about energy-price increases being passed on to customers. On the other hand, you have also heard us report that pass-through at the consumer level has become much more muted. The middle panel documents that claim. For purposes of this exercise, we estimated the models for core PCE price inflation over rolling fifteen-year sample periods and then asked the models to tell us, based on those estimates, the predicted effect of a 10 percent increase in the relative price of energy on core PCE inflation after eight quarters. As you can see, the point estimates have been lower in recent years. The bullets in the bottom panel summarize our assessment of this evidence. Currently in the judgmental forecast we assume that a permanent 10 percent increase in the relative price of energy would boost core inflation about 0.2 percentage point after eight quarters. This assumption balances estimates derived from shorter sample periods—like the ones shown in the middle panel—against estimates derived from longer sample periods that include data from the 1970s and 1980s. Our approach is validated by the observation that models that are forced to assume zero energy-price pass-through have been a little surprised by how high inflation has been in the last few quarters. On the other hand, models that assume a larger pass-through than the one we use judgmentally, consistent with the average experience over the past four decades, have been a little surprised by how low inflation has been. Our judgmental assumption tucks us neatly in between. Exhibit 10 focuses on the price of owner-occupied housing and its role in the formulation of monetary policy. As noted in the top box, two main approaches to measuring the price of owner-occupied housing services have been outlined in the economics literature. The first approach aims to measure the user cost of owner- occupied housing. As shown in equation 1, the user cost depends on imputed interest expense, depreciation, and the expected capital gain. For many years, this was essentially the approach that the BLS took to measuring the price of owner-occupied housing in the CPI, except that they ignored the expected capital gain component. Increasingly, however, they and others became dissatisfied with the user-cost approach, partly because it ignored the capital gains component and partly because it guaranteed that an increase in interest rates would cause an increase in measured inflation. Finally, in 1983, they shifted to the rental-equivalence approach which, as summarized in equation 2, aims to measure the rents that owner-occupants would charge themselves in an assumed arms-length transaction. In a world in which all the relevant variables could be measured perfectly and house prices were always perfectly aligned with fundamentals, the two approaches would give the same answer, and equation 3 would hold. That equation shows that rents can increase even if house prices—denoted as Pt—are decreasing. Indeed, this would be expected to happen if interest rates—denoted as it—were increasing, all else being equal. In the real world, rents could also diverge from house prices if the latter were coming down after a period of overvaluation. Thus, the constellation of facts that we see today—a decelerating OFHEO price index together with an accelerating rent index in the CPI—may not be as anomalous as intuition might at first have suggested. The last two bullets in the box address the role of housing prices in the conduct of monetary policy. First, a broad range of analysts agree that something like owners’ equivalent rent (OER) is a theoretically appropriate element of a cost-of-living index. But second, and of more direct to concern to you, whether the FOMC should define its objectives relative to a cost-of-living index that includes OER depends on what costs you are seeking to minimize in your conduct of monetary policy. For example, to name just two possibilities, you may believe that the costs of deviations from price stability derive mainly from the inability of individuals to accurately take account of inflation in their long-term financial planning, in which case you might want to aim to stabilize an index of the overall cost of living, including OER. On the other hand, you may believe that the costs of deviations from price stability have more to do with the misallocation of productive resources stemming from confusions between real and nominal price changes, in which case you might want to focus on something quite different from a cost-of-living index. The bottom two panels turn to the operational question of more-immediate consequence—namely, what we expect to happen to rents in the near term. As shown in the bottom left panel, housing affordability has deteriorated sharply during the past two years, suggesting that rents may come under considerable further upward pressure. On the other hand, the rental vacancy rate, shown as the red line, remains quite high by historical standards, suggesting that any acceleration should be of moderate proportions. On balance, as shown in the bottom right, we have carried forward some of the recent higher readings in these categories but have taken the moderate view, at least for now." CHRG-110hhrg44900--62 Mrs. Maloney," Welcome, and thank you for your service. I want to give a very special welcome to Secretary Paulson who previously was a business and civic leader in the great City of New York, and it is reassuring to me and many Americans that someone who has deep experience in the day-to-day operation of financial markets is at the helm of Treasury and really initiating this conversation and discussion today. I also want to welcome Chairman Bernanke, who has brought the Fed to fully realize its role, not only managing monetary policy and guarding the safety and soundness of our financial institutions, but also focusing on curbing unfair and deceptive practices that have hurt working Americans and our overall economy. Next week we look forward and congratulate you on your new regulations to shore up mortgage lending, and I enthusiastically support your proposed role to eliminate abusive practices in credit cards. I would like to follow up on my colleague's questioning on market discipline and ask Secretary Paulson, who has a great deal of experience in this area. It's clear from recent events that many expected synergies of financial service activities, whatever benefits that they gave during times of economic prosperity, gave rise to conflicts and excessive risk taking. It appears that many firms are in so many lines of businesses that conflicts and excessive risk arise. Huge trading operations have also put more mundane activities of financial institutions at risk. For example, some have said Bear Stearns' trading operation may have caused risk to its clearing operations. And in view of these recent events and challenges, some have said that the repeal and deregulation of Glass-Steagal may have gone too far. And I would like to ask, would a financial service industry where banks, hedge funds, investment banks, and other entities were more limited to the array of business they are in help the situation by providing competitive and arm's-length checks and balances on financial activities through the marketplace? And would a more diversified financial service industry that had more specialization and less concentration offer any benefits in reducing risk and the need for regulation? " CHRG-110shrg50410--125 Chairman Dodd," Listen, I am more in agreement with your overall needs, in fact, and how we ought to look at the architecture down the road. That is a very legitimate question. I know there are a lot of different ideas as to what that ought to look like. Let me ask you, Mr. Chairman. I know your answer is look, whatever Congress decides to do, you accept those conclusions. But I need to ask you whether or not you would want this role that has been described over the GSEs. In your view of the role of the Federal reserve bank, is this--put aside whether or not we decide to give it to you or not, I want to know whether or not you think you ought to have it? " CHRG-111hhrg54867--210 Mr. Meeks," Also, the role of the IMF, and I know that President Obama and other leaders are calling for a more stable and sustainable global trade system. For example, with countries like China and Germany are recess dependent on export-driven growth, and the United States is dependent on cheap international capital to finance deficit-driven consumption. There is talk, from what I understand, of the IMF playing a greater role. Can you share your thoughts on how this would actually work and how we could make it enforceable on an international basis? " FOMC20071211meeting--150 148,MR. EVANS.," Thank you, Mr. Chairman. I favor a ¼ point reduction in the fed funds rate today. As I noted earlier, assuming some ease in policy, my forecast is that the economy will experience subpar growth stretching into the middle of 2008 but then recover as we move into 2009 and that inflation will remain contained. Our forecast assumes that the disruptions in financial markets will generate more-restrictive credit conditions for consumers and businesses than we have seen to date, though not to the degree assumed in the Greenbook baseline. In light of my outlook, I think that policy should be somewhat accommodative; and given that I think the long-run neutral nominal funds rate is somewhere around 4½ to 4¾ percent, I support further easing. Given our expectations of coming financial restraint, there is a good chance that we will ultimately want to reduce the funds rate 50 basis points, but I prefer to go slower than that and move down only 25 basis points today. The slowing in consumption that we have recently seen reflects only a couple of months of data that followed quite strong growth during the summer, and much of that softening may reflect the transitory jump in gasoline prices. So I don’t think it is clear that we have seen a real change in the trajectory of consumption. I think the degree of financial spillover built into the Greenbook baseline is a plausible scenario, but we have not seen such spillover yet. The pessimistic view is a very forward-looking one, and I applaud forward-looking thinking. I am not quite there yet, but that is definitely a risk. I hesitate to say that we will know more next meeting because it is such an obvious thing to say, but I definitely agree with Governor Kohn that by the end of January we will at least have a better idea of how the TAF funding went and how much of the recent increase in liquidity demand and related disruptions are transitory end- of-year problems as opposed to more-fundamental problems that would impinge dramatically on credit conditions for nonfinancial borrowers. We will also know more about the actual strength of consumption and investment. Another concern I have about a 50 basis point move today is that the public might see it as an indication that we have read the incoming news more negatively than I at least think we should have, so I agree with Presidents Hoenig and Fisher on that. This would have negative implications for the already fragile state of consumer and market sentiment. But from here to a 4 percent fed funds rate, I think that the inflation risks are acceptable. Beyond that, I think it depends importantly on inflation developments and also developments in the economy. In terms of the statement, I prefer alternative B. I like the additional sentence that Brian was suggesting in section 4 for the balance of risks. But however that comes out, in reading section 2, when I was asking the question, it just seemed to me natural that after “incoming information suggests that economic growth is slowing” something like “somewhat more than previously expected” might be helpful, but nobody else has really mentioned that, and I am okay with that. Finally, on the political concerns, my memory is that we raised the funds rate during the 2000 and 2004 elections, so I am not really concerned about that, although people will wonder. Thank you, Mr. Chairman." CHRG-111shrg51395--271 RESPONSE TO WRITTEN QUESTIONS OF SENATOR DODD FROM ROBERT PICKELQ.1. Transparency: Are there additional types of disclosures that Congress should require securities market participants to make for the benefit of investors and the markets? Also, would you recommend more transparency for investors: LBy publicly held banks and other financial firms of off-balance sheet liabilities or other data? LBy credit rating agencies of their ratings methodologies or other matters? LBy municipal issuers of their periodic financial statements or other data? LBy publicly held banks, securities firms, and GSEs of their risk management policies and practices, with specificity and timeliness?A.1. Transparency plays an important role in encouraging market participation. At the same time, in some instances proprietary information must be kept confidential in order to encourage market participation. There is a balancing act that must be performed with respect to when enhanced transparency will assist the proper functioning of a market (which should be the default assumption) and when it might prove counter-productive.Q.2. Credit Default Swaps: There seems to be a consensus among the financial industry, government officials, and industry observers that bringing derivative instruments such as credit default swaps under increased regulatory oversight would be beneficial to the Nation's economy. Please summarize your recommendations on the best way to oversee these instruments.A.2. Credit default swaps play an important role in facilitating financing, and ensuring their continued availability to sophisticated market participants is in the best interest of promoting U.S. economic growth. At the same time it is clear that our regulatory system as a whole is in need of reform and restructuring in order to accommodate new types of products and markets. CDS and OTC derivatives in general are currently subject to a range of oversight, extending from regulation of the primary dealers in these markets (such as banks), through to different levels of oversight by the CFTC and SEC with respect to different types of underlying products. With regard to CDS in particular, change in the current regulatory structure should be focused on ensuring the continued availability of the product while preventing potentially destabilizing regulation of certain types of CDS as insurance at the State level. ------ FOMC20081007confcall--22 20,MR. SLIFMAN.," Let me first talk a bit about the near-term outlook. Most of the economic data that we've gotten since the September Greenbook have come in to the soft side of our expectations. The PCE number for August was surprisingly weak. Auto sales dropped sharply in September. Shipments and orders for nondefense capital goods fell in August, and in the labor market, as you know, private payrolls fell about 168,000 in September. In addition, the Boeing strike is going to last longer than we thought at the time of the September Greenbook, and the hurricane effects from Hurricanes Gustaf and Ike appear to be more substantial in terms of the production adjustments than we had been thinking at the time of the September Greenbook. So all told, we now expect GDP to be about unchanged in the second half of the year, and that's down about � percentage point since the last Greenbook. In terms of the medium-term outlook, 2009-10, we've had important changes in some of the conditioning assumptions that we see as working through so-called conventional channels. As of this afternoon's close, the stock market is down about 20 percent since the September Greenbook. Corporate bond rates are up about 90 basis points, and the dollar is up about 3 percent since the last Greenbook. One good bit of news is that oil prices are down about $13 per barrel since we put the September Greenbook to bed. Of course, financial stress has greatly intensified. Using our usual method, which we described in the box in Part 1 of the Greenbook, we now think that the intensification of financial stress since the September Greenbook would subtract nearly 1 percentage point from real GDP growth in 2009. The stock market has clearly been a moving target for us as we've been trying to put this all together and assess the outlook for next year and 2010. But using this afternoon's close as the starting point, real GDP now is projected to rise only about � percent over the four quarters of 2009 and then to pick up to an increase of about 2� percent in 2010. With that growth rate, we would have the unemployment rate rising to about 7� percent by the end of 2009, and we would expect it to remain at about that level through 2010. In terms of inflation, the recent data on core inflation pushed up our estimate of core PCE price inflation in the third quarter to more than 3 percent. That's about 0.2 percentage point higher than in the September Greenbook, but we expect that to ease back off in the fourth quarter and come down to a rate of about 2� percent. For the medium term, core inflation is expected to slow over the remainder of the forecast period. We think that the pass-through from import and energy prices will abate, and of course, the additional slack that we now have in the forecast also could relieve some pressure on inflation. In terms of the overall inflation rate, we expect energy and food price increases to taper off, and so we would see PCE price inflation slowing to about the same rate as core inflation. Specifically, we would see inflation at about 2 percent in 2009 and about 1.7 percent in 2010. Nathan now has a few comments he wants to add. " FOMC20080805meeting--171 169,MR. ROSENGREN.," I support alternative B. I would actually prefer President Yellen's language but definitely believe that we should have the word ""also"" in there. Tightening at this time would sap more strength from an already weak economy, and should the forecast look like the ""severe financial stress"" scenario or the ""typical recession"" scenario, it would be extremely poorly timed. If the data indicate that inflation is not ebbing as I expect and the economy is on a surer footing than I fear, then it would be appropriate to begin what is likely to be a series of increases in the federal funds target. But the data to date don't indicate that, so I support alternative B. " FOMC20050322meeting--202 200,CHAIRMAN GREENSPAN.," Well, I had an hour and 27 minutes worth of comments prepared, but basically let me just say this: I think the reason we’re having these sorts of difficulties is because we’re running into what I suspect may well be the tail end of the stimulus that has occurred in the world economy from extraordinary changes in globalization in the past 10 years. The best way to see that is to look at how the pattern of the propensity to invest domestic saving in domestic investments has changed. That’s because one of the best measures of globalization is essentially the correlation coefficient between pairs of domestic saving and domestic investment by country. One way of stating it is to use the terminology of home bias—to look at the extent of home bias that exists in the world. Starting in the early 1990s, home bias began to break down. We’ve seen a broadening effect, which arguably has been the major factor in creating a disinflationary environment. And that essentially has enabled us to have this extraordinary period of economic growth, productivity increase, and remarkably low rates of inflation. Coupled with that, obviously, has been a partially, but not wholly, independent change in technologies that has allowed unit costs March 22, 2005 88 of 116 I suspect, but do not know, that we may be nearing the end of that process. We are now looking at a different model, at least for the United States, given the fiscal policy problems that we will have as we get into the next decade. And remember that the latter tranches of the 10-year Treasury note are moving into that decade enough to impact on rates currently. My suspicion is that we’re going to see real long-term rates and real mortgage rates begin to move up and that the capital gains we have seen in both the stock market and in housing values will become a lesser source of funds for borrowing. There will be less financing using realized capital gains—or, indeed, even unrealized gains—and that will have a significant impact on consumption expenditures. Remember, 15 to 20 percent of personal consumption expenditures do not relate to income; they are the consequence, at least econometrically, of the wealth effect. Therefore, a significant amount of personal consumption expenditures has been financed; and it looks from the way the balance sheets are coming out, that these expenditures have been financed largely from mortgage debt. The big rise in mortgage debt has essentially been the source for putting into cash for consumption purposes a fairly significant part of capital gains. Real long-term rates may go up. It’s hard to forecast, but looking at the long-term fiscal situation, I’m not exactly optimistic, especially in light of what happened last week. The likelihood that the fiscal problems will be addressed has weakened. I believe Governor Gramlich characterized it quite appropriately. So I think the longer-term issues essentially are beginning to guide us now with respect to the shorter term. In my judgment, the median forecast for the United States is reasonably well captured in the Greenbook; and it may indeed be the mean forecast. I would even venture the possibility, although it’s arguable, that the probability distribution of these outcomes may, in fact, be roughly March 22, 2005 89 of 116 earlier, if we were to become a bit more aggressive in tightening policy in this context and it turned out to be wrong—in other words, if actual unit costs and price inflation simmer down a bit so far as core inflation is concerned—the damage to the economy and to policy would not be all that great. It is obviously negative in the sense that the outcome is different from what one expected—but not compared to the policy problem we’d run into if we maintain a posture that presupposes the median outlook, namely, the Greenbook outlook, and we are wrong. In the latter case, I think the costs would be great and the damage very difficult to recover from. For those of us who remember how we struggled in 1994 with the pattern of adjustment and how we were trying to get ahead of the curve—and eventually had to move 75 basis points in one month—I trust the memory is such that we don’t want to go there again. We were very fortunate that we got a soft landing in 1995, but it was fortune, not great policy. We may have thought that we tried in advance to communicate to the market that we were going to move in February 1994. They were not listening, and we ran into all sorts of difficulties. Therefore, I conclude at this particular stage that we have to start moving in the direction where our previous conversation left us. So I would recommend a move in the funds rate of 25 basis points and the alternative B language that is in this vector." CHRG-111hhrg56767--93 Mr. Feinberg," I share that concern. My role is somewhat limited, Congressman. I do have this one opportunity to inquire shortly, and we will do so. " FOMC20061025meeting--57 55,MR. BARRON.," Thank you, Mr. Chairman. Data releases and reports we have gathered over the intermeeting period do not indicate much change since the Committee last met, so far as the Sixth District is concerned. Overall growth has been moderate, with the index of District economic activity showing a year-over-year increase of about 2.7 percent, and reports of activity varied considerably among sectors of the District economy. Retail sales have been mixed, and the outlook for tourism is reasonably optimistic. Auto sales remain sluggish, and the housing market—even beyond Florida, where both prices and sales have declined significantly— continues to show additional signs of some slowing. On the positive side, construction is shifting somewhat from residential to commercial. However, the lack of availability and the high cost of home and business insurance in Florida and along the Gulf Coast is a serious concern for our region. Manufacturing activity appears stable. Prices of some commodities are reported lower. Although gasoline prices are lower, fuel surcharges remain in place. As in the national economy, the slowdown in housing and moderation in overall activity have shown little signs of spilling over into the labor market. Employment gains through September softened somewhat. However, all states in the District, except Georgia, added jobs, and together accounted for 20,000 of the nation’s 51,000 jobs added during the month. The overall unemployment rate in the District, accordingly, moved down to 3.9 percent. Shortages of skilled labor continue to be reported in some areas, and overall labor quality, as Tom Hoenig noted, continues to be a problem, both of which I interpret as indicating a relatively firm labor market. We had a meeting this past week of our Advisory Council on Small Business, Agriculture, and Labor. Nearly to a person, participants reported things were good—not great but good—and the common problem was finding qualified workers willing to work. Most council members were willing to hire if they found the right people, but at the same time, they would forgo expanding their businesses if it meant hiring individuals who were less than qualified. One member from the construction sector noted that an individual walking around a job site with a piece of pipe, without doing anything else, would fully meet the requirements for continued employment—that is, they were carrying something, and they were moving. [Laughter] Concerning the national economy, opinions differ as to how much of a slowdown we will see this quarter and how long it will last. Most professional forecasters, as well as our own in-house models, suggest that growth will slow in the third quarter and then gradually accelerate thereafter. On the positive side, the labor market is very healthy. Corporate earnings continue to be healthy, business investment is supportive, and equity markets not only are at record highs but show no signs of letting up. At the same time, our headline inflation has come down, in the most part because of the decline in energy prices. Core inflation, especially in the service price component, continues to drift upward. Further, it’s not clear that the energy price increases have played a major role in explaining the increase in core inflation, so it may be problematic to assume that the recent decline will provide a significant downward impetus to core inflation, at least in the near term. Federal funds futures prices, the TIPS spread, and inflation expectations seem to be saying that the Fed’s credibility remains intact and are consistent with the belief that the Committee will get policy right, rather than signaling that slower growth is ahead in the foreseeable future. Thank you." FOMC20070131meeting--238 236,MR. LACKER.," Thank you, Mr. Chairman. By way of preface—I didn’t mention this yesterday, but my semiannual forecast projects core PCE inflation falling to 1.6 for ’08, and growth rising from 2.6 to 2.9 in ’08. This represents both a more-rapid return to price stability and a higher rate of trend growth than provided in the Greenbook. My forecast takes seriously the instruction to assume appropriate monetary policy, perhaps more seriously than I have taken it in the past. I think it is likely to require that the policy be more aggressive than assumed in the Greenbook and that communications be forceful about our intentions to bring inflation down. I think the forecast that I have submitted is both feasible and desirable because I think we don’t need to use the output gap as our sole means of hammering inflation expectations and we don’t need to wait nearly a decade, as in the Bluebook simulations. Although I believe that the appropriate policy is likely to require a higher funds rate path at some point this year, I’m not too uncomfortable leaving it unchanged today. I welcome the recent good news on core inflation, and like President Stern, I’m willing to wait and see whether the good news continues. However, I have been disturbed over the past year and a half, as I have told you, about the extent to which short-run core inflation and longer-run inflation expectations appear to be sensitive to energy price movements. We appear to have conditioned people to expect core inflation to rise whenever energy prices surge. This will pose a problem for us if energy prices rise substantially or if the current lull in core inflation proves to be only the transitory effect from the recent fall in energy prices. Both hypotheses seem reasonably plausible to me for the coming year or two. So I believe, as President Moskow and others have said, that we’re likely to face another inflation challenge later this year. I think it would help our cause if our policy moves were coupled with better communications, but that is a discussion for later today. For now, I’m prepared to support standing pat. I agree with President Plosser and others around the table who prefer the language in alternative C for sections 2 and 3. I also agree with President Minehan about the language in alternative C for section 4. I think that I read “predominant concern” as a little stronger and better calibrated to our views—or at least my views—than the language in B. I also agree strongly with Vice Chairman Geithner that standing pat today doesn’t imply a 2 percent target." FOMC20070628meeting--130 128,VICE CHAIRMAN GEITHNER.," Thank you, Mr. Chairman. The outlook looks a little better, I think. The United States looks okay, and the world looks very strong. Housing here seems as though it will get worse before it gets better, but the rest of the economy seems to be doing reasonably well—with output and investment spending perhaps a bit firmer than we thought they would be and employment growth and income growth looking reasonably good. We have not significantly changed our central projection. We still see an economy growing around 3 percent over the forecast period, about our estimate of potential, with core PCE inflation falling just below 2. This assumes a path for the nominal fed funds rate that is flat for several more quarters, essentially the same as in the Greenbook and in the market now. The risks to this outlook, though, have changed. We see less downside risk to growth but still believe the risks to our growth forecast are weighted toward the weaker outcomes. Although the recent inflation numbers have been good, they probably exaggerate the moderation of underlying inflation, and we see, therefore, continued upside risk to our inflation forecast. I still think this latter risk should remain our more consequential concern. Relative to the Greenbook, we have a bit more growth because of our higher estimate of growth in the labor force and a bit less inflation, but these differences are small, smaller than they have been, and they do not have significant implications for our views on monetary policy. The markets’ perceptions of fundamentals have in some respects moved in our direction in the past few weeks. I say “in some respects” because we need to be attentive to the rise in implied inflation that you see in TIPS. Our view and the markets’ view of the expansion, the risk to the outlook, and implications for monetary policy have converged. This means that the effective stance of monetary policy is a little tighter than it was. A few important issues going forward: On the growth front, I still think that the probability of weakness exceeds that of strength. There is still a significant risk that we will see a more substantial adjustment of house prices, perhaps drawn out over a sustained period of time with greater adverse effects on confidence and spending. Of course, if employment and income growth stay reasonably strong, the effects of that potential scenario should be manageable. If not, we will have more to worry about. I note that some major financial institutions are now starting to report signs of rising delinquencies in consumer credit products outside mortgages such as automobile loans and leases. This is the first time that I have heard that report in a significant sense, and maybe it is a sign of some vulnerability ahead. The strength of demand growth outside the United States has been helpful, and we agree with the Greenbook that it looks likely to continue for some time. But things could be kind of bumpy out there, particularly in places like China, and monetary policy in much of the world is only now starting to move short-term real rates higher into positive territory. On the inflation front, it seems early to declare satisfaction or victory, not particularly because of the recent reacceleration in headline inflation but just because of the role of transitory factors in the recent moderation in core and the rise in breakevens in TIPS. We cannot be fully confident yet that a constant nominal fed funds rate at current levels will deliver an acceptable inflation forecast. We do not, in my view, need to try to induce right now a further tightening of financial conditions to push core inflation down further and faster. But we need more time before we can justify shifting to a more balanced risk assessment of inflation or something equivalent, something that would have the effect, for example, of indicating satisfaction with current levels or of suggesting that the risks are balanced around the path of inflation that we see in our central tendency projections. With financial markets, we are at a delicate moment. The losses in subprime are still working their way through the system. Rating agencies are likely to downgrade a larger share of past issues, more than they have already. The marks that people show indicate that both hedge funds and dealers in a lot of this stuff may still have a way to go to catch up with the movement in market prices. This dynamic itself could induce a further reduction in willingness to finance new mortgages. You could see pockets of losses in the system, liquidity pressures in hedge funds and their counterparties, and further forced liquidations. It is possible that we will still have a bunch of that effect ahead of us, even if no big negative shock to demand occurs and induces a broader distress in consumer credit. We could also see it spread to commercial real estate. We could see a broader pullback from CDOs and CLOs as well, either from a general erosion of faith in the rating models—as Bill said, it is a possibility—or from just concerns about liquidity in those instruments. We could see a sharp, substantial widening of credit spreads provoked by an unanticipated default or two or just a general reassessment of risk at current prices. A very large amount of LBO financing that is yet to be closed, distributed, and placed is still working its way through the system. As in the past, we could see a deal or two get hung, the music stop, and that force some broader repricing. People get stuck with stuff they don’t want to hold or did not expect to hold. I think we now see more sensitivity in markets about the prospect of a diminished appetite among the world’s savers and central banks to increase their exposure to the United States, or at least we see more sensitivity to the perception out there that the dynamic might be unfolding. You can see a bit of all this in some spreads, in some reports of resistance to further erosion in covenants, in some reduced appetite for new bridge book exposure to leveraged lending. You can see it in some changes in margin terms in some instruments vis- à-vis some counterparties. For now I think it is a relatively healthy, still pretty modest, and quite contained shift toward a more cautious assessment of risk, but these things generally don’t tend to unfold gradually. On balance, though, I think we are in a pretty good place in terms of policy, in terms of the market’s expectations about policy now, and in terms of how we have been framing the balance of risks to the outlook." FOMC20061025meeting--204 202,MR. BARRON.," Thank you, Mr. Chairman. The bottom line is that I’m comfortable with the current policy stance and see no need to move until we become convinced that our forecast for inflation moderation won’t be realized. As for the wording, I’m supportive of alternative B as currently provided in the Bluebook. While I’m attracted to Governor Kohn’s suggested change, given that it has only been five weeks and there is likely to be some pull-back in the third quarter, I would be inclined to leave the wording as it currently is written. But I would be cautious about changing other wording—again, given the short duration between our last meeting and this meeting and given the lack of evidence that a lot of things have changed dramatically. As for my reasons, I think that there is clear evidence that output is slowing, but my sense is that there’s uncertainty with regard to the degree of the slowdown—that is, how slow we will grow. Despite the output uncertainty, businesses and consumers seem reasonably comfortable with their prospects. Employment gains remain positive, albeit at a slower pace, and income and spending continue to grow. There are, however, real-side concerns in the housing sector, yet none of these scenarios we’ve run seem to suggest anything approaching a recession-level slowdown. Concerns remain weighted toward an upside risk to inflation, but not necessarily one that demands immediate action. Despite the concerns on the inflation front, I think we can afford to wait a bit longer so that we can assess the actual outcomes regarding inflation and output, see how they match up against the forecast, and then determine whether the current level of the federal funds rate provides enough restraint to reduce inflation. Thank you." FOMC20061025meeting--139 137,MR. POOLE.," Right. My view of the recent news on inflation is that it has been marginally better, that it is tilted a bit in the right direction. I think that’s the view that the Chairman expressed yesterday, and that has certainly been my view. But we should want the market to respond to incoming data in a way that it would be very helpful to the policy enterprise that we’re involved in. So given that my outlook for the economy is pretty symmetrical around the Greenbook forecast, I think we should give some genuine weight to the possibility that the economy could come in weaker. We should not want to rule that out and tell the market that it’s going to take a really bad outcome for the economy for us to be willing to move." FOMC20060328meeting--134 132,MR. LACKER.," Thank you, Mr. Chairman. While we had some softer readings on our District’s economic performance early in the year, recent measures have been noticeably stronger. Our survey results from March have come in since the Beige Book, and they show continued strength in service-sector revenue growth, along with a sharp rebound in shipments, new orders, and employment for the manufacturing sector. The retail sector, in contrast, has been weaker in February and March. Some of the weakness is in furniture and may reflect cooling housing markets. However, other retailers suggest that they are still experiencing givebacks following the extraordinary sales growth they saw in January, and many remain optimistic about sales prospects going forward. Several District businesses we talked to plan to increase investment in the months ahead. Their plans include not only computers and technology but also factory machinery. Labor markets in our District seem to be getting tighter. In January, Districtwide unemployment stood at 4.1 percent, and we hear scattered reports of shortages of skilled workers, as you mentioned earlier, along with some complaints that worker shortages are constraining production. I had heard occasional references to worker shortages in past months, going back into last year, but this chatter has picked up noticeably in recent weeks. Not only have the number of reports increased somewhat, but some now come from outside the traditionally strong urban areas. We’re hearing it now in the manufacturing-dependent Carolinas, for example. Price growth measures moderated in our March survey results. District businesses report that input price increases slowed, but they continued to express concerns about future cost pressures. Our respondents also reported slower growth in their output prices, and this was broadly based across all sectors we survey. In addition, expected price increases for the next six months generally lessened. Our regional economic indicators on production, employment, and price pressures seem broadly consistent with the national picture. The data point to a strong rebound in GDP growth this quarter, perhaps stronger than had been anticipated by the Greenbook and private forecasters. While household residential investment is slowing, business investment and spending appear to be strong, suggesting that firms are adding to capacity in anticipation of healthy demand growth. The prospects for income growth, driven by continued employment gains and respectable growth in compensation, give me some confidence that overall consumer spending should hold up well, even as housing market activity moderates. Inflation has come in a bit lower than expected, and I’m increasingly comfortable with the idea that we’ve gotten beyond the risks to inflation presented by the shock associated with last year’s hurricanes and run-up in energy prices. Core PCE inflation averaged 2.3 percent from August through November but has averaged 1.8 percent from November through January. Although market-based measures of longer-run inflation expectations rose briefly last fall, they soon subsided and have remained steady since. So while I’m not entirely sanguine about the inflation outlook, I think the immediate risk of pass-through has probably passed us by. Looking back over this episode, and how we and many others feared that things might have unfolded, I think it illustrates the challenges we face in trying to understand inflation dynamics. As energy prices rose sharply last fall after the hurricanes, the fear was that a sustained increase in core inflation and inflation expectations would work its way through the economy in the first half of 2006. This bulge now appears to have been small and short-lived. A common approach to forecasting the effect of energy-price shocks on core inflation is to rely on relationships estimated over historical periods that include seemingly similar episodes. Such an exercise implicitly treats the empirical relationship between energy prices and core inflation as structural, as in models in which wages or prices are set in a backward-looking fashion. But as President Yellen and others have emphasized, this relationship is not stable in the historical data. It has largely disappeared since the late 1980s. This underscores the pitfalls of forecasting inflation based on a backward-looking approach that relies on pass-through correlations or, for that matter, Phillips curve correlations between measures of slack and inflation. In contrast, to the extent that price-setting is forward looking, these correlations must embed expectations regarding our policy behavior and so will not generally be stable across changing policy regimes. This perspective suggests that the limited magnitude of the pass-through from last fall’s energy-price shocks was influenced by the public’s confidence that we would focus on preventing broader inflationary spillovers. In other words, we may have gotten less pass-through than we feared because we were more credible than we realized, and the public’s behavior was more forward looking than we thought. Again, this is not to say that I’m complacent about inflation. The initial response to last fall’s shocks embodied expectations of a lower path for the funds rate and a greater rise in inflation. Fortunately, the combination of communication by FOMC participants and the Committee’s steady actions appears to have brought these expectations back in line. I bring all of this up because in the months ahead we are likely to see tighter resource utilization if the Greenbook is correct, and we will be concerned about the extent to which that would put upward pressure on inflation and inflation expectations. So the question of the extent to which inflation dynamics are backward looking or forward looking is going to be front and center for us." CHRG-109shrg30354--3 STATEMENT OF SENATOR PAUL S. SARBANES Senator Sarbanes. Thank you very much, Chairman Shelby. I welcome Chairman Bernanke before the Committee. I think it is fair to say this hearing comes at a particularly pivotal time for monetary policy. The economy is slowing down and the run-up in oil prices is contributing to that slowdown. An oil price spike has preceded a number of recessions since 1973, but some spikes have occurred without a subsequent recession. We look to the Federal Reserve to help avoid a recession this time around. There are a number of signs of economic weakness. Job growth has been anemic for the last 3 months, averaging just over 100,000 jobs per month. The pace is less than 1 percent a year. Over the last half century we have tended to have such slow job growth when we are going into or coming out of a recession. It is less than half the pace of job growth for the 10 years of expansion from March 1991 to March 2001. Not only are jobs growing slowly, but also all the measures of wages and compensation show gains below inflation over the last year. Total compensation, including wages and benefit costs, have risen 2.8 percent in the last year. Such pay gains are not putting upward pressure on inflation because they are almost entirely offset by productivity gains, which are up 2.5 percent. Unit labor costs, which adjust hourly labor costs for productivity gains, are up by a negligible 0.3 percent in the last year. That is shown rather dramatically in this chart, which shows compensation, productivity, and unit labor costs. Unfortunately, the only people with pay gains that are keeping ahead of inflation are those at the top of the ladder. By this stage in previous business cycle expansions, people at the middle and bottom of the wage ladder have typically been enjoying healthy pay gains. This was certainly the case from 1995 to 2000. We need to keep the expansion going so that those at the middle and the bottom of the pay scale can finally share in the exceptional productivity gains that they have helped to create. With the higher cost of fuel and little room to cut back on fuel use, consumers have been forced to cut back on other types of spending and they go into debt. Consumer spending has risen at less than a 2 percent rate over the last 4 months. To manage even that modest increase, households have had to reduce savings and increase borrowing. The household savings rate has plunged to an unprecedented minus 1.7 percent. Where is the rise in inflation coming from? Although higher prices for oil and other commodities have contributed, much more important is the surge in profit margins. At this hearing 2 years ago, Chairman Greenspan drew attention to this, stating ``from an accounting perspective, between the first quarter of 2003 and the first quarter of 2004 all of the 1.1 percent increase in the prices of final goods and services produced in the nonfinancial corporate sector can be attributed to a rise in profit margins rather than cost pressures.'' He predicted at the time that competition to create new capacity and hire more workers would bring down the profit share to more normal levels, but that has not happened. In fact, the profit share of GDP hit 12.7 percent in the first quarter, the highest profit margin since 1950. With inflation racing ahead of wages and rising interest rates, we see a serious downturn in the housing industry. The housing affordability index has plunged to the lowest level since 1989 when declining housing led to a recession in 1990. New home sales so far this year are running 11 percent below the rate for the same period last year. With sales down, builders have cut back on new home construction. They are obtaining permits at a rate of more than 1.7 million a year for 5 months last year, but that rate fell below 1.5 million in the latest months. We are now down below 1.4 million. This is new single family home permits, and it shows a rather marked decline over the last year. Last week's report on the consensus of blue chip economic forecasters should also give Federal Reserve policymakers pause. The consensus expects growth below the trend line starting with the just-completed second quarter through the end of 2007. In addition, the blue chip economic forecasters expect inflation to slow down to about 2.5 percent next year. I am hopeful that this morning Chairman Bernanke can put to rest some troubling concerns about monetary policy. The Fed's statements that future changes in interest rates will depend on new data, not an all together unreasonable statement I might say, but it has been interpreted by some commentators to mean that the Federal Reserve will raise interest rates at every meeting until inflation comes down. The headlines of the last two weekly reports from Goldman Sachs are ``The Stance of Monetary Policy, Enough is Enough.'' And the other one ``Bernanke Preview, Monetary Policy Begins to Bite.'' Two recent headlines from Merrill Lynch state that its ``getting tougher for the Fed to justify what it is doing'' and ``nearly every indicator showing signs of a slowdown.'' Merrill Lynch Economist David Rosenberg, in a report last Friday entitled, ``To Pause Or Not To Pause: That Is The Conundrum,'' expressed this concern: ``The Fed has managed to elevate a pause to something that is a pretty major event. What was normal in prior cycles, up or down, is now something that grabs headlines. The Fed paused twice in the 1999-2000 cycle and three times in the 1994 cycle, and it elicited a yawn from the markets. This time around a `pause' is being treated as an `ease,' which has basically put the Fed in a pickle.'' The 17 Fed rate hikes over the last 2 years are having an effect. You can see that in the housing sector, job growth, the blue chip forecast. Both for subdued growth and for falling inflation over the next year. I look forward to the opportunity to pursue these concerns with the Chairman in the question period. I also, just to send a warning, hope to be able to ask you about the Basel II situation which I think is a matter that calls for very close attention, which I do not think it has been receiving. Thank you very much, Mr. Chairman. " CHRG-111hhrg55811--329 Mr. Johnson," I believe that the subprime market was the catalyst, the trigger in this episode and the opacity that was associated with the collateralized debt obligations. The funny ratings from the rating agencies played a very large role. But I do not think that is the exclusive source of opacity in this very large scale derivatives markets. Nor, by the way, do I think that derivatives are--I think they play a meaningful role, but they have to be structured so that as the gentleman speaking before me said, counterparties can assess each other and not become afraid and not withdraw credit in times of crisis or shock that emanates from any source, domestic or foreign. " FOMC20070628meeting--105 103,MS. YELLEN.," Thank you, Mr. Chairman. Data relating to both economic activity and inflation during the intermeeting period have been encouraging. Economic indicators have strengthened considerably, and recent readings on core inflation have been quite tame. Although a portion of the recent deceleration of core prices likely reflects transitory influences, the underlying trend in core inflation is still quite favorable. I view the conditions for growth going forward as being reasonably solid. The main negative factors are tied to housing. The latest data don’t point to an imminent recovery in this sector, and I fear that the recent run-up in mortgage rates will only make matters worse. In addition, housing prices are unlikely to rise over the next few years and, indeed, may well fall, and the absence of the housing wealth gains realized in the past should damp consumption spending. I agree with the Greenbook that the recent run-up in bond and mortgage rates reflects primarily a shift in market expectations for the path of policy and, therefore, implies only a small subtraction to my forecast for growth in 2008. In my view, the stance of monetary policy over the next few years should be chosen to help move labor and product markets from being somewhat tight today to exhibiting a modest degree of slack in order to help bring about a further gradual reduction in inflation toward a level consistent with price stability. The stance of monetary policy will need to remain modestly restrictive, along the lines assumed in the Greenbook and by markets, in order to achieve that goal. My forecast is for growth to be around 2½ percent in the second half of this year and in 2008, slightly below my estimate of potential growth, and for the unemployment rate to edge up gradually, reaching nearly 5 percent by the end of next year. Under these conditions, core inflation should continue to recede gradually, with the core PCE price index increasing 2 percent this year and 1.9 percent in 2008. This forecast is predicated on continued well-anchored inflation expectations and the eventual appearance of a small amount of labor market slack. In addition, special factors such as rising energy prices and the sustained run-up in owners’ equivalent rent that have boosted inflation should ebb over time, contributing a bit to the expected decline in core inflation. In terms of risks to the outlook for growth, I still feel the presence of a 600-pound gorilla in the room, and that is the housing sector. The risk for further significant deterioration in the housing market, with house prices falling and mortgage delinquencies rising further, causes me appreciable angst. Indeed, the repercussions of falling house prices are already playing out in some areas where past price rises were especially rapid and subprime lending soared. For example, in the Sacramento metropolitan area east of San Francisco, house prices shot up at an annual rate of more than 20 percent from 2002 to 2005. Since then, however, they have been falling at an annual rate of 3½ percent. Delinquencies on subprime mortgages rose sharply last year, putting Sacramento at the top of the list of MSAs in terms of the changes in the rate of subprime delinquencies. Research by my staff examining metropolitan areas across the country indicates that the experience of Sacramento reflects a more general pattern. They found that low rates of house price appreciation, and especially house price decelerations, are associated with increases in delinquency rates even after controlling for local economic conditions such as employment growth and the unemployment rate. One possible explanation for these findings is that subprime borrowers, especially those with very low equity stakes, have less incentive to keep their mortgages current when housing no longer seems an attractive investment, either because prices have decelerated sharply or interest rates have risen. These results highlight the potential risks that rising defaults in subprime could spread to other sectors of the mortgage market and could trigger a vicious cycle in which a further deceleration in house prices increases foreclosures, in turn exacerbating downside price movements. The risks to inflation are also significant. In addition to the upside risks associated with continued tight labor markets, a slowdown in productivity growth could add to cost pressures. Although recent productivity data have been disappointing, I expressed some optimism at the last meeting about productivity growth on the grounds that at least some of the slowdown appeared to reflect labor hoarding and lags in the adjustment of employment to output, especially in the construction industry. Data since that meeting have reinforced my optimism concerning trend productivity growth. In particular, new data in the recently released Business Employment Dynamics report suggest that productivity growth may have been stronger than we have been thinking. This report, which includes data that will be used in the rebenchmarking of the payroll survey in January, shows a much smaller increase in employment in the third quarter of 2006 than is reported in the payroll survey; it, therefore, implies a larger increase in output per worker. A second risk to inflation is slippage in the market’s perceptions of our inflation objective. Although inflation compensation over the next five years is essentially unchanged since our last meeting, long-run breakeven inflation rates implied by the difference between nominal and indexed Treasury securities are up about 20 basis points. However, our analysis suggests that this increase reflects in good part an elevation in risk premiums or the influence of various—let me call them “idiosyncratic”—factors of the type that Bill Dudley mentioned, such as a possible shift in the demand by foreign central banks for Treasuries or special factors affecting the demand for inflation-indexed securities and not an increase in long-run inflation expectations. We base this conclusion on the fact that long-run breakeven inflation rates have also climbed in the United Kingdom—a country where inflation expectations have been remarkably well anchored over the past decade and where inflation has been trending downward. The fact that breakeven inflation rates rose in both countries, despite their different monetary policy regimes, suggests that a common explanation is needed rather than one specific to the United States. I think this conclusion is supported by the Board staff model that attributes about half of the movement in breakeven inflation to risk premiums. That said, our understanding and estimates of risk premiums are imprecise, so we must continue to monitor inflation expectations very carefully—of course, along with everything else. [Laughter]" CHRG-111hhrg53246--64 Mr. Gensler," Well, I do think that on the credit default swaps--and this is one of the reasons why we agree--the credit default swaps on single issuers like McClatchy that you mentioned, are very related to their stock, are very related to their bond. And appropriately, all of these interplay on investor protection and should be regulated, I think, jointly by the SEC. And just as they are looking very closely at the short sale roles on equity, there is some similarity of the short sale or naked sales in credit default swaps. I think as it relates to interest rate swaps and currency swaps, what really are far more about broad interest rates or broad--you know, where currencies are, that there is a role for both hedgers and speculators. And speculators play an important role in the marketplace, even if they are naked, so to speak--if that term is all right--because they provide the other side, so that hedgers can find somebody that may, in essence, provide that insurance to them who want to protect themselves in currency and interest rate markets. Ms. Waters. Thank you very much. I yield back the balance of my time. " CHRG-109hhrg28024--259 Mr. Bernanke," There is a case, I think, for the Government to be involved in basic research, that is, research that private companies would not find it in their interest to undertake because they would not feel able to capture the financial benefits of that research. Energy has been an area where the Government has played a very important role in developing new technologies, so my general answer is yes, but I would say that the Government's role should be more at the upstream end, ant more basic levels, because more downstream, the corporations will have sufficient incentive from the market to implement these new technologies and to develop them. " CHRG-109hhrg28024--196 Mr. Bernanke," Congressman, when we make policy, we have to take into account the fact that monetary policy works with a lag. It doesn't affect the economy in a day or a week or a month. It has its effects over 6 months, a year, or 18 months. And so we have to think about the forecast. We have to think about how the economy is likely to evolve over the next year or two. In addition, inflation expectations are important as an independent factor because, as I was indicating earlier, when inflation expectations themselves, as measured by surveys, for example, are low and stable, the economy itself will be more stable when it's hit by other kinds of shocks. So we do care about both inflation and inflation expectations. " FOMC20070807meeting--57 55,MS. YELLEN.," Thank you, Mr. Chairman. Data on inflation during the intermeeting period have continued to be encouraging, but the prospects for economic activity have become dicier. The results for GDP in the second quarter as a whole actually took on a positive tone, with final sales mainly accounting for the healthy growth rate. But the quarter ended on a weak note, with disappointing data for housing consumption and for orders of core capital goods. Of course, the big developments since our last meeting were in financial markets. I read them as pointing to weaker growth going forward and greater downside risk. The market for mortgage- backed securities is now highly illiquid, and there are indications that credit problems are spilling beyond the subprime sector. It thus seems likely that lending standards will tighten for a broader class of borrowers in the mortgage market. The drop in equity prices and rising rates on most risky corporate debt are further negatives for growth. There are some offsets to these negative factors, including the decline in the dollar and, most important, the steep reduction we have seen in risk-free rates. On balance, however, I expect these offsets to be only partial, providing a cushion against future weakness, because I interpret the decline in Treasury rates during the intermeeting period primarily as a reflection of weaker growth expectations and a correspondingly lower path for the expected future fed funds rate and not a consequence of the fall of the term premium. The jump in oil prices since our last meeting is a further factor weighing on aggregate demand. As a result of these considerations, I have lowered my growth forecast for the second half of this year ½ percentage point, to just over 2 percent. This rate is moderately below my estimate of potential growth, which I now put at about 2½ percent. Going beyond this year, the outlook depends on one’s assumption concerning appropriate monetary policy. I consider it appropriate for policy to aim at holding growth just slightly below potential to produce enough slack in labor and credit markets to help bring about a further gradual reduction in inflation toward a level consistent with price stability. Barring a more serious and prolonged tightening of credit market conditions or a general liquidity squeeze, I would keep the fed funds rate modestly above its equilibrium level to accomplish this goal. However, I now see the fed funds rate as well above the neutral level. So I think it likely that the fed funds rate will need to fall appreciably over the next few years. My assessment of the neutral federal funds rate declined during the intermeeting period for two main reasons—first, because of the tightening in financial conditions associated with the reassessment of risk now taking place and, second, because of the NIPA revisions, which suggest slower structural productivity growth and, in all likelihood, correspondingly slower growth in aggregate demand. I thus think that a larger decline in the fed funds rate will be needed over time than in the Greenbook baseline to achieve a soft landing. A key development during the intermeeting period was the downward revision of real GDP growth over the 2004-06 period. This adjustment reinforces the work of productivity experts at the Board and elsewhere who had previously found evidence of a slowdown in underlying productivity growth. The revision in actual productivity was big enough to lead us to lower our estimate of growth in both structural productivity and potential output, although our estimates remain above those in the Greenbook. In addition to tighter financial conditions, lower structural productivity growth was the reason that we lowered our forecast for real GDP growth to 2¼ percent in 2008. As a result, the unemployment rate edges up in our forecast, reaching nearly 5 percent by the end of next year. The modest amount of slack that this entails should help bring about the desired gradual reduction of inflation in the future. Readings on core PCE prices have been quite tame for some time now, rising only 0.1 percent in each of the past four months. Although a portion of the recent deceleration in core prices likely reflects transitory influences, the underlying trend in core inflation still appears favorable. We anticipate that the core PCE price index will rise 2 percent this year and that core inflation will gradually ebb to around 1.8 percent over the forecast period. This forecast is predicated on continued well-anchored inflation expectations and the eventual appearance of a small amount of labor market slack, as I just mentioned. For some time now, I’ve thought an argument could be made that the NAIRU was a bit lower than assumed in the Greenbook, and the new evidence that structural productivity growth has been lower than we thought for more than three years reinforces this view. It means that the relatively good inflation performance over this period occurred despite the upward pressure that must have been operating because of the deceleration in structural productivity. In any event, I also expect to see modest downward pressure on inflation in the next couple of years from the ebbing of the upward effects of special factors, including the decline in structural productivity, energy and commodity prices, and owners’ equivalent rent. In terms of risk to the outlook for growth, the housing sector obviously remains a serious concern. We seem to be repeatedly surprised with the depth and duration of the deterioration in these markets; and the financial fallout from developments in the subprime markets, which I now perceive to be spreading beyond that sector, is a source of appreciable angst. Of course, financial conditions have deteriorated in markets well beyond those connected with subprime instruments or even residential real estate more generally. It appears that participants are questioning structured credit products in general, the risk assessments of the rating agencies, and the extent of due diligence by originators who package and sell loans but no longer hold a very sizable fraction of these originations on their own balance sheets. The Greenbook has long highlighted, and we have long worried about, the possibility and potential consequences of a broader shift in risk perceptions. With risk premiums having been so low by historical standards, it would hardly be surprising to see them rise, making financial conditions tighter for any given stance of monetary policy. While it remains possible that financial markets will stabilize or even reverse course in the days and weeks ahead, the possibility that the financial markets are now shifting to a historically more typical pattern of risk pricing is very much on my radar screen. Should this pattern persist and possibly intensify, it will have very important implications for policy." FOMC20070321meeting--167 165,MR. LOCKHART.," Well, like so many others, I agree with keeping the funds rate at the current level and the language in alternative B. We’re experiencing real growth at about the rate we expected, but inflation is no longer declining. Having said that, I’m comfortable with the current policy and don’t see a need to move until we become convinced that our forecast for inflation moderation won’t be realized. In regard to the language, I’m not yet a master of the nuances, [laughter] and so I don’t have strong opinions on “predominant” versus “principal.” Because “predominant” is consistent with the past, it does strike me as being slightly stronger. Therefore, I’ll go with the consensus, but I would favor that." FinancialCrisisReport--356 Database, HBK then developed a proprietary system called the Loss Model that forecasted the likelihood of default, prepayment, delinquency, or timely payment for an individual mortgage monthly over a ten-year time horizon. The Loss Model made these forecasts based on a series of 50 loan characteristics, including whether the mortgage was a first or second lien mortgage, the type of mortgage (e.g., fixed or ARM), its geographic location, FICO score, loan-to-value ratio, and level of documentation, and projections of home price appreciation and unemployment rates. Finally, HBK merged the information from the Loss Model into a Bond Evaluation Engine, which was based on software licensed from Intex Solutions. The Bond Evaluation Engine provided information that assisted HBK traders in pricing mortgage bonds and evaluating how the bonds might perform under certain stresses. … This portion of the analysis focused on the structure and enhancements of the RMBS and how those structures would contribute to bond performance.” 1383 Mr. Jenks of HBK told the Subcommittee that HBK “never had a bond that we thought was bad that was put in a CDO.” 1384 Mr. Jenks also told the Subcommittee that he had frequent conversations with Mr. Lippmann, was aware of his “negative housing view,” but disagreed with the magnitude of Mr. Lippmann’s negative views. 1385 Mr. Lippmann told the Subcommittee that although he occasionally suggested bonds to Mr. Jenks for Gemstone 7, and Mr. Jenks at times purchased them, Mr. Jenks had strong views on the assets that should be included in the CDO and was not required to listen to him. HBK and Deutsche Bank emails confirm that Mr. Lippmann or his traders offered at times to sell certain bonds to HBK, which occasionally purchased them. 1386 Deutsche Bank sold five bonds from its inventory, with a value of more than $27 million, to HBK for inclusion in Gemstone 7. 1387 According to Mr. Lamont, his CDO Group was “agnostic” towards the quality of the assets that HBK purchased for Gemstone 7, and told the Subcommittee that investors had relied on HBK, the collateral manager, to analyze their quality. 1388 Mr. Lamont said that the role of the CDO Group was, not to select the CDO’s assets, but to structure the deal and then use models to conduct stress tests on it. 1389 1383 10/12/2010 letter from HBK’s counsel to the Subcommittee. 1384 Subcommittee interview of Kevin Jenks (10/13/2010). 1385 Id. 1386 See, e.g., 12/8/2006 email from Greg Lippmann to Kevin Jenks, DBSI_PSI_EMAIL01883072 (discussing trade they agreed to). See also 2/23/2007 email from Jordan Milman to Greg Lippmann, DBSI_PSI_EMAIL02022054 (“I’d rather just have Ilinca show hbk, he loves bonds like this.”). 1387 Assets Purchased by Gemstone VII CDO during Warehouse Period, GEM7-00001831-33. 1388 Subcommittee interview of Michael Lamont (9/29/2010). Mr. Kamat also agreed that Deutsche Bank was agnostic with regard to the quality of the assets. Subcommittee interview of Abhayad Kamat (10/8/2010). 1389 Subcommittee interview of Michael Lamont (9/29/2010). (c) Gemstone Risks and Poor Quality Assets FinancialCrisisReport--572 Grade 2006-1, Hudson Mezzanine 2006-2, and Anderson Mezzanine 2007-1. 2562 In each instance, Goldman served as the initial liquidation agent, although in several CDOs, it later transferred the role to a third party. In Hudson 1, Goldman’s dual roles as liquidation agent and sole short party in the CDO created a direct conflict of interest between Goldman and the clients to whom it sold the Hudson securities, which Goldman exploited by placing its own financial interests ahead of those of its clients. Designing the Liquidation Agent Role. According to Goldman, appointing a CDO liquidation agent was a “fairly novel idea” that was first implemented in the 2006 Hout Bay CDO. 2563 Peter Ostrem, then head of the CDO Origination Desk, oversaw the drafting of the liquidation agent feature. 2564 He told the Subcommittee that Goldman wanted to issue static portfolio CDOs, meaning CDOs whose assets did not change over time, but also wanted to protect investors from poorly performing assets. He explained that the liquidation agent feature was intended to be triggered by a specified event and provided the liquidation agent with “no discretion” other than to sell the poorly performing asset, which was referred to as a “Credit Risk Asset.” He explained that, without such a feature, poorly performing assets would “just stay there” in a CDO, further harming investors. 2565 The CDO Origination Desk also favored the approach, because it could be performed by Goldman itself at a lower cost than retaining a traditional collateral manager. 2566 The liquidation agent provisions established criteria for identifying “Credit Risk Assets” and removing them from the CDO. In a July 2006 memorandum to the Goldman Mortgage Capital Committee, the CDO Origination Desk described the liquidation agent role as follows: “As Liquidation Agent, Goldman will liquidate assets determined by the Trustee to be ‘Credit Risk Assets’ based on specific guidelines. Goldman will have 12 months to sell these assets. Sales will be made under a competitive bidding process, whereby we will solicit three outside bids and select the highest. Prior to executing Hout Bay 1, in which we also played the Liquidation Agent role, we spoke to multiple counterparties as to our role as Liquidation Agent. We received approval for our role in this transaction from legal and accounting. ... Finally, we spoke with outside counsel, Wilmer Cutler, about potential issues related to the Investment Advisor Act. They are of the opinion that our role of Liquidation Agent does not cause us to be deemed an Investment Advisor based on the exception to the Advisors Act for a ‘limited grant of discretion.’” 2567 2562 2/18/2008 Goldman presentation, “CDO Transactions (July 1, 2006 - December 31, 2007) in which Goldman Sachs acted as underwriter,” GS M BS 0000004337, at 4340; 7/19/2007 Goldman document, “GS Liquidation Agent Role in ABS CDOs,” GS MBS-E-014055117. 2563 2564 2565 Subcommittee interview of Darryl Herrick (10/13/2010). Subcommittee interview of Peter Ostrem (10/5/2010). Id. Although Mr. Ostrem helped design the liquidation agent feature, he was not employed by Goldman when its CDO assets were downgraded and triggered its liquidation agent duties. 2566 See 7/17/2006 Goldman memorandum to the Mortgage Capital Committee, “Placing debt and equity on a static high grade structured product CDO Squared with Investec (UK) Limited, ” GS MBS-E-013458155. 2567 Id. CHRG-111hhrg51591--22 FINANCIAL SERVICES, TOWERS PERRIN Ms. Guinn. Thank you. Chairman Kanjorski, Ranking Member Garrett, and members of the subcommittee, it is an honor to testify today on behalf of Towers Perrin. Towers Perrin is a global professional services firm that helps organizations improve their performance through effective people, risk, and financial management. The insurance industry is a particular focus of our firm, and I appreciate this opportunity to offer our perspective on the important issue of insurance industry oversight. Without a doubt, the financial crisis has had a significant adverse impact on the balance sheets and profitability of insurance companies. However, with the obvious exception of AIG, the insurance industry as a whole has not been as severely impacted by the crisis as has the banking industry. Insurers have benefitted from strong risk management practices, particularly in the property/casualty sector. In addition, the focus of the current State regulatory framework on solvency and policyholder protection has served the industry well. That said, the financial crisis has exposed a number of issues that raise valid questions about the adequacy of the current regulatory system. And while it is a relatively small part of the overall financial services industry, insurance has a far-reaching impact on our economy as a whole. Think of your own experience. The businesses you rely on can't open their doors each day without liability insurance, workers compensation, and various other coverages. And as individuals, we can't register our automobiles or get a mortgage without appropriate insurance. Furthermore, insurance companies are major investors in the U.S. financial markets, with trillions of dollars of invested assets. Finally, the insurance industry fills a less-well-known role as the provider of financial guarantee insurance to enhance the credit quality of a wide range of municipal bonds and structured securities. The importance of this role has been highlighted in the current financial crisis. These are sufficient reasons for the insurance industry to warrant Federal attention. Yet, in our opinion, there is no need to start from scratch. Any new Federal role in insurance regulation should build on the industry's very positive risk management characteristics and the current regulatory structure. Federal oversight also should address the challenges presented by systemic risk, regulatory arbitrage, and an increasingly complex landscape that blurs the lines between insurers and other financial services players. We have made a number of suggestions in our written testimony that I will briefly summarize. First, we recommend a more holistic regulatory framework for the financial services industry that is underpinned by economic capital requirements based on enterprise-wide stress testing. This would improve transparency into an organization's ability to withstand extreme loss scenarios on a consolidated basis. To be effective, Federal oversight of the insurance industry needs to recognize the industry's unique characteristics. We recommend that the Federal Government avoid a one-size-fits-all approach derived from the larger banking industry, and one way to do that is to build an insurance industry knowledge base with contributions from State regulators along with industry and professional associations. Next, the Federal Government should avoid direct participation in insurance markets. Except in the most dire of circumstances, the private insurance and reinsurance markets have continued to function well and are able to finance a wide variety of risks. While the State insurance guarantee associations have also performed well, we believe a Federal resolution authority for multi-jurisdictional and multi-entity conglomerates should be considered. Finally, risk management professionals with appropriate training, credentials, and professional standards can play an important role in the Federal oversight of financial services. The current State regulatory framework for insurance requires actuaries to give a professional opinion on the adequacy of an insurance company's reserves to meet its future obligations to policyholders. We can easily envision expanding this role to the evaluation of other financial obligations and hard-to-value assets. Thank you for the opportunity to express our views. [The prepared statement of Ms. Guinn can be found on page 79 of the appendix.] " FOMC20080130meeting--17 15,MR. POOLE.," Bill, could you talk about the role of foreign banking organizations? What fraction roughly are they responsible for? " CHRG-111shrg57320--278 Mr. Reich," Obviously, they have a back-up role, and they have an on-site examiner at WaMu. Senator Levin. Well, you are reminding her---- " CHRG-111shrg53085--184 Mr. Patterson," I believe it already is the prudential regulator's role and I think that is where it should be, and I think it can be very effective and I think it has been. That is not where the problem has been. " CHRG-110shrg50410--116 Secretary Paulson," I was not even--I do not believe that--I do not see a role for Treasury in the consultative regulatory process. Senator Shelby. OK. " FOMC20070131meeting--56 54,MR. SLIFMAN.," The final exhibit presents your forecasts for 2007 and 2008. I’ll be mercifully brief. The central tendency shows real GDP increasing 2½ to 3 percent this year and roughly the same next year, with the unemployment rate holding in the range of 4½ to 4¾ percent during both years. The central tendency of your projections sees the core inflation rate falling ¼ percentage point over the next two years. That concludes our prepared remarks, Mr. Chairman. I’ll be happy to take your questions." FOMC20080130meeting--110 108,MR. SHEETS.," Right. Just a word of background. The rationale for the falloff is the expected decline in these commodity prices and the expected slowing of global demand. Now, thinking about the risks, I am reasonably convinced that global demand is going to slow, which I believe will translate into reduced demand for many of these commodities that have driven up inflation. However, that says something only about the demand side of these commodity markets. There is also a lot going on on the supply side. At the last FOMC meeting, we talked about ethanol and the fact that many of these emerging-market countries are wealthier, that they want to eat better than they used to, that the relative price of energy has risen, and that it takes a lot of energy to raise these crops. So there are supply factors as well as demand factors at work in driving up these commodity prices. It is very hard for us to forecast the supply side of these markets. It is driven by things like weather and geopolitical developments and so on and so forth. On the commodities, my sense is that demand is going to shift in to some extent. As long as the supply doesn't shift in as well, we should be able to see a decline, or at least a slower rate of increase, in these prices. A very important point here is that, in order to get less of an impetus coming from commodity prices and inflation in these countries, we don't necessarily need oil prices to come down in level terms. We just need them to stop going up at such rapid rates. If we get slower rates of price increases, that will be disinflationary relative to where we have been. That is how I would characterize the risks around this forecast, mainly on the supply side of these commodity markets. " FOMC20060808meeting--183 181,VICE CHAIRMAN GEITHNER.," Thank you. I want to start by saying that I think we’re confronted with a set of issues that really aren’t principally about communication and transparency. I think they’re fundamentally about how we conduct monetary policy and the monetary policy regime we’re going to operate under. I want to say a little about what I see as the hierarchy of challenges or decisions we have to make in that context. We have to have a discussion about what objectives, particularly in terms of inflation, will guide this Committee’s decisions going forward, and I think it’s hard to do that without a discussion in quantitative terms. We also need to get in the position of thinking and talking through more directly and candidly at these meetings how we make decisions about the most appropriate path for inflation and output, especially at times when we’re way off our basic objectives. We don’t really do that now. We’ve been living with a lot of ambiguity about whether we’re operating with, in effect, an objective of getting core PCE down to some particular level at a certain time or not, and I don’t think we can be comfortable living with that degree of ambiguity much longer. In some ways, that set of issues is the first we have to confront. We may not get consensus or resolution, but we have to talk through those issues. We also have to decide what we want to disclose in terms of our objectives, our forecast, the policy consistent with that forecast, and uncertainty. We face a lot of choices in terms of what we do and how we do it regarding quantitative versus qualitative and explicit versus implicit approaches to communications. Several of you said that in our statements we should simply say what we decided and why, but I don’t think it’s quite that simple. The “why” has a lot to do with the forecast, and to say nothing about the forecast in the statement would be communicating little about the reasons for our policy decisions. But the “what” is also not simple: It is certainly not principally about whether or not we move the fed funds rate. The “what” we’re deciding has to do a lot with whether we take a view about or try to change or validate the market expectations going forward over some period. So I don’t think we can get through the choices about communication and transparency by just agreeing that we want to limit ourselves to the more-minimalist objectives of communicating what we did and why. It feels to me a little more complicated than that. The third point is a general point. If we are going to change the regime, we can’t do it piecemeal. We can’t decide that we want to announce a quantitative definition of long-term price stability without confronting the kind of disclosure regime that we have to adopt in support of that. Also, we can’t think sensibly about the evolution of our disclosure regime around the forecast, for example, without coming to some greater understanding about whether we disclose a quantitative objective for inflation. So I think they need to be viewed as a package. For a similar reason, I think we can’t approach this set of changes by saying let’s move on the things that are easy or less contentious or have more of a consensus without having a better sense of where we really want to go. That doesn’t mean that we should change all at once or, if we decide to change things, we do them all together. We can still decide to have a graduated approach to introducing the changes in the regime, but before we make an incremental move, we need to have a better sense about where we want ultimately to go. If we don’t have consensus about where we want to go, then it’s harder to decide what the incremental move should be. It doesn’t mean we should be inert. It’s very healthy to have a candid discussion about what we think is wrong with our current regime. I used to work with somebody who said to me, “Don’t bring me problems without solutions.” Therefore, discomfort with a set of attributes of our regime relative to the experience of other countries is really not enough to justify change. We have to be able to look at the proposals for change and be very comfortable that they’re going to respond to the problem without leaving us with a set of other collateral risks or disadvantages. It’s also good to have a direct and open discussion about what we do not want to try to achieve through communications. I’m very uncomfortable with what I think it would be fair to say is a substantial faction in the academic profession now, which says that the optimal communication policy of central banks should be to seek very close alignment between the market’s expectations about future policy and the central bank’s and to achieve that alignment in real time and not have long periods of wide divergence between what the market thinks and what we think is appropriate. That position strikes me as highly unrealistic and complicated and maybe difficult to achieve, but we should talk through that issue. I think it’s also unrealistic to say that we should avoid clarity about our views on the future course of the economy and policy. That pure fog alternative seems unsatisfying and uncomfortable to me. I have nothing to add to the discussion about diversity. There are great benefits to diversity. I do think we should try to avoid having, because of scheduling, many members of the Committee talking in the same period. It is difficult to achieve but worth thinking about. Finally I just want to compliment the subcommittee. The way you have laid out the issues is very nicely done. I also want to compliment the Chairman for approaching this subject very openly, having us try to think through all the difficult choices involved together, and allowing some analysis, debate, and a little competition for ideas help inform choices about how we go forward. I think that approach is admirable, and I commend you for it." CHRG-111hhrg56847--2 Chairman Spratt," We meet today to discuss the progress of the economic recovery and the challenges that still lie ahead of us. We are pleased, as I said, to have as our witness today the Chairman of the Federal Reserve system, Dr. Ben Bernanke. When the 111th Congress began and the current administration took office, the economy was shrinking, contracting at an annualized rate of minus 5.4 percent. One year and a half later, the economy is experiencing its third straight quarter of economic growth, including 5.6 percent growth in the fourth quarter of 2009 and 3 percent growth in the first quarter of 2010. We have a chart to illustrate that. A year and a half ago, the economy was losing jobs, hemorrhaging jobs. In the month of January 2009, we lost 779,000 jobs in one month alone. Now employers have added nearly a million jobs between January and May of this year. We have a chart that shows the job growth over the last span of time. The ultimate strength of our economy lies in the private sector of course, but the actions taken by this Congress and by the administration have also played a significant role. For example, in the judgment of CBO, the Recovery Act, which we passed in July and February of 2009, has contributed significantly to the economic turnaround, raising real GDP by 1.7 to 4.2 percentage points in the fourth quarter of 2010 and increasing employment by between 1.2 million and 2.8 million jobs. Meanwhile, the Treasury Department, the Federal Reserve, and the FDIC have engaged in unprecedented and coordinated efforts to stabilize banks and the financial system by injecting liquidity, capital, securing people's savings and requiring banks to raise still more capital. While we as Democrats have been focused on the economic recovery, we have also been aware of the need to restore fiscal responsibility. We want to see the economy and the budget recover ``pari passu,'' step by step. Unlike the previous administration, which inherited a $5.6 trillion surplus over 10 years and turned it into large deficits, the current administration was handed a $1.3 trillion deficit for 2010 alone and an $8 trillion deficit over the next 10 years. While the recession and recovery efforts have taken an unavoidable toll on the budget in the short run, we are focused on bringing the deficit down as the economy recovers. We passed statutory PAYGO, requiring that new mandatory spending on revenue reductions be paid for. The President has established a bipartisan commission now at work to make recommendations to bring the deficit down to a sustainable level by 2015. The President has also proposed to freeze nonsecurity discretionary spending for 3 years. Last month I introduced a bill to add to our fiscal tool box, an additional tool called expedited rescission which allows the President to sign a bill into law but at the same time recommend to us in the Congress the elimination of some items in the bill that have a budgetary cost. We will continue to pursue these and other steps towards fiscal responsibility so that over the medium and long term we put the Nation on a fiscal path that will provide a foundation for a strong economy in the future. At the same time, the key concern in the short term remains the economic outlook. As we continue to work on additional legislation to address the situation, we are fortunate to have Chairman Bernanke here to present his testimony and respond to our questions. Most fundamentally at a time when too many Americans continue to feel the effects of this recession and wonder when relief is going to come, we would like to hear Dr. Bernanke's view of how the recovery is progressing and what steps we can take, what constructive steps the government can take, to maximize the return of sustained economic strength. Before we turn to Chairman Bernanke's testimony, I would like to extend a warm welcome to the newest member of the Budget Committee, Congressman Charles Djou from Hawaii. Welcome aboard. We are glad to have you on the committee. You were sworn in last month as the newest member of the House and we welcome him to Congress and in particular to the Budget Committee. Before Dr. Bernanke's testimony, let me also turn to the ranking member, Mr. Ryan, for any statement he may care to make for an opening purpose. Mr. Ryan. [The statement of Mr. Spratt follows:] Prepared Statement of Hon. John M. Spratt, Jr., Chairman, Committee on the Budget We convene today to discuss the progress of the economic recovery and the challenges that lie ahead. We are pleased to have as our witness the Chairman of the Board of Governors of the Federal Reserve System. This economic crisis has profoundly affected the lives of so many Americans, and the task of restoring the strength of our economy and putting in place a foundation for enduring prosperity has been and remains at the top of the priority list for Congress and the Administration. While everyone agrees that more progress must be made, there clearly has been some noticeable improvement from where things stood a year and a half ago. When the 111th Congress began and the current Administration took office, the economy was shrinking at a 5.4 percent annualized rate; a year and a half later, the economy has experienced its third straight quarter of economic growth--including 5.6 percent growth in the fourth quarter of 2009 and 3.0 percent growth in the first quarter of 2010. A year and a half ago, the economy was hemorrhaging jobs--losing 779,000 jobs in January 2009 alone. Now, employers have added nearly 1 million jobs through between January and May of this year. The ultimate strength of our economy lies in the private sector--our businesses and workers--but the actions taken by this Congress and this Administration have also played an important role. For example, in the judgment of the nonpartisan Congressional Budget Office, the Recovery Act passed in February 2009 has contributed significantly to the economic turnaround, raising real GDP by 1.7 to 4.2 percentage points in the first quarter of 2010, and increasing employment by between 1.2 million and 2.8 million jobs. Meanwhile, the Treasury Department, the Federal Reserve, and the FDIC have engaged in unprecedented and coordinated efforts to stabilize banks and the financial system by injecting liquidity, securing people's savings, and requiring banks to raise more capital. While Democrats have been focused on economic recovery, we have also been cognizant of the need to restore fiscal responsibility. Unlike the previous Administration, which inherited a $5.6 trillion ten-year surplus and turned it into large deficits, the current Administration was handed a $1.3 trillion deficit for 2010 and an $8 trillion ten-year deficit. While the recession and recovery efforts take an unavoidable toll on the budget in the short run, we are focused on bringing the deficit down as the economy recovers. We have passed statutory Pay-As-You-Go rule into law--to require that new mandatory spending or revenue reductions be paid for. We have passed a health care reform bill that reduces the deficit. The President has established a bipartisan commission--which is now hard at work--to make recommendations to bring the deficit down to a sustainable level by 2015. The President has proposed to freeze non-security discretionary spending for three years. Last month I introduced a bill to add to our fiscal toolbox an additional tool called ``expedited rescission,'' which allows the President to sign a bill into law but at the same time recommend that Congress eliminate some items included in the bill that have a budgetary cost. We will continue to pursue these and other steps toward fiscal responsibility so that over the medium and long term, we put the nation on a fiscal path that will provide the foundation for a strong economy in the future. At the same time, the key concern in the short term remains the economic outlook. As we continue to work on additional legislation to address the economic situation, we are fortunate to have Chairman Bernanke here to present his testimony and answer our questions. Most fundamentally, at a time when too many Americans continue to feel the lingering effects of the recession, we would like to hear your view of how the recovery is progressing, and what constructive steps can be taken to maximize the return of sustained economic strength. Before we turn to Chairman Bernanke's testimony, I would first like to extend a warm welcome to the newest member of the Budget Committee, Congressman Charles Djou from Hawaii. He was sworn in last month as the newest Member of the House of Representatives, and we welcome him to the Congress and to our Committee. Before the witness's testimony, let me also turn to the Ranking Member, Mr. Ryan, for any statement that he may wish to make. " CHRG-111hhrg53244--209 Mr. Bernanke," Well, as Chairman Frank mentioned earlier, the economist's fallback is always the counterfactual: Where would we be without the program? And it is difficult to know. Clearly, the forecast that was made in January of this year was too optimistic. And then the question is, where would we be without the program? And it is very hard to know. Some sense of the uncertainty is given by the CBO's estimate, which has at the end of 2010 the impact of the program being anywhere between .6 of 1 percent unemployment to 1.9 percentage point of unemployment. So it is likely that it would reduce unemployment, but the scale is very hard to know. And we should know better next year, but it is very early at this point. " FOMC20051101meeting--88 86,MR. MOSKOW.," David, I had a question for you about the forecast that activity is going to slow in the second half of ’06 and ’07. You talked about the reasons for the slowdown, which were tighter monetary policy, a slowing in house price appreciation, and diminishing fiscal stimulus. In the Monday morning briefing, you threw in the stock market as well—waning impetus from household wealth in terms of both the stock market and the housing components. I thought the Greenbook had an assumption of 6 percent growth in the stock market per year. I wonder if you could talk about that." FOMC20050630meeting--341 339,MR. SANTOMERO.," This is really an extension of the first point that President Geithner made—that the context in which we’re making these policy decisions is a framework based on a forecast of inflation. To the extent that we’re getting this—I’ll call it exogenous—decline in the inflation pressures associated with imports, that says something about the optimal strategy from a monetary policy point of view. On the other hand, to the extent that that’s an assumption in which we have little confidence, the implication is that we may find ourselves back at exhibit 6 again. We would be ratcheting up our expectation of inflation because what was supposed to reduce it— June 29-30, 2005 107 of 234" CHRG-111shrg62643--165 Mr. Bernanke," On the specifics of capital there are some rules, the Collins amendment and so on. But it was very important that we have at least some flexibility in order to negotiate and collaborate with our international colleagues on developing an international set of capital standards. So that was very important. Inevitably in a bill this complex that is addressing so many complex issues, if you want it to be responsive to changes in the environment, to deal with a lot of technical details, I think inevitably the regulators have to play a role. But Congress certainly has an oversight role. You are certainly going to be seeing what we do, and if you are dissatisfied, I am sure you will let us know. " CHRG-111shrg53085--107 Mr. Patterson," Yes, Mr. Chairman, if I may. I think your points go directly to the issue and the truth of the matter as you related to your Connecticut colleagues and I to my banks throughout the mid-South, is that our prudential regulator looks at the entire organization and ought to have a key role, and I think does have a key role, in the basic commercial bank system to not only ensure safety and soundness and compliance with other regulations, but also consumer protection. And that is why the problems generally that we are talking about today came from the nonregulated sector where those gaps are. " CHRG-110hhrg41184--100 Mr. Bachus," Are investors making a flight to simplicity, or are they getting better disclosures, or is there a role that, say, the Federal Reserve plays on seeing that those disclosures are there or are other regulators? " FOMC20070807meeting--41 39,CHAIRMAN BERNANKE.," We want to acknowledge your final meeting, Vincent. It has been six years since Vincent was elected Secretary and Economist to the Committee. You took that role only three or four weeks before September 11, and your steady hand during that crisis was invaluable. Unfortunately, against all good advice and after only eighty-two FOMC meetings—a record which to his credit he has achieved without prompting accusations of steroid use—[laughter] Vincent is insisting upon returning to civilian life. So today is an appropriate occasion upon which to express our gratitude, Vincent, for your sage advice, your thoughtful guidance, and your undoubtedly well-deserved admonitions to the Committee over the years. Vincent’s legacy, of course, will live on in the meeting transcripts from his tenure, as the transcripts become public over the next few years. For example, in the May 2004 transcript, Vincent is caught using the words “cattle prods” in reference to a possible experiment involving bond market traders. [Laughter] In 2005, he suggested that the FOMC as a group was incapable of agreeing on something as straightforward as the color of an orange. [Laughter] Notwithstanding that, Vincent, the Committee does agree on this: You have our heartfelt thanks and our best wishes for the next stage of your career. Congratulations and many thanks. [Applause] Is there a rebuttal? [Laughter] If not, we can go to the economic situation, and I will call on David Wilcox." FOMC20071211meeting--109 107,VICE CHAIRMAN GEITHNER.," Thank you. The outlook for real activity has deteriorated somewhat since our last meeting. In our modal forecast we now expect several quarters of growth below potential with real GDP for ’08 a bit above 2 percent. The sources of the deterioration in the outlook for us are pretty much as outlined in the Greenbook. What separates us from the Greenbook still is about 40 or 50 basis points of different views on what potential growth is. Our view of the likely path of the output gap is similar. So as in the Greenbook, we expect a deeper contraction in housing activity and prices. We expect nominal and real income growth to slow more than we expected and consumer spending also to moderate more than we had anticipated. Part of that lower path of real spending is, of course, due to energy prices. We also expect the rate of growth in business fixed investment to slow a bit more than we had previously thought, and these changes are in part, but not solely, due to the expected effects of tighter financial conditions. For a given path of the nominal fed funds rate, they are tighter now than they otherwise would have been because of the fall in the estimated neutral rate. In our view, growth in the rest of the world will slow a bit, but along with the effects of the decline in the dollar, it will still provide enough pull for net exports to contribute positively to growth, offsetting part of, but just part of, the deceleration in domestic demand growth. Our forecast for core inflation is little changed. We expect the core PCE deflator to rise at a rate just under 2 percent over the forecast period. Like many of you, we see considerable downside risks to the forecast for growth, and they have intensified since our last meeting. The Greenbook alternative scenarios on housing and the credit crunch seem plausible, perhaps more likely to happen together than to happen independently, and I think reality is likely to fall somewhere between the baseline Greenbook scenario and these two darker alternatives. The risk to the inflation forecast still seems closer to balance in the forecast period. The higher forward curve of energy prices and the lower path of the dollar will raise headline inflation a bit and, in the near term, the core inflation path. But these pressures should be offset by the fall in anticipated pressure on resource utilization, not just here but also globally where the economies that have been growing above potential are likely to slow as monetary policy tightens. I think it’s important to recognize that breakevens in inflation at longer horizons have stayed relatively stable in the context of the fairly substantial move in the dollar, the fairly substantial move in actual and expected energy and commodity prices, and the very dramatic change in expectations of how the Fed is likely to respond to the change in the balance of risks to growth. In light of these changes to the outlook and the risks to the outlook, we’ve lowered our expected path for the fed funds rate. We now think it’s likely that the Committee will reduce the target rate to 3.75 percent over the next few quarters, and this puts our real and our nominal fed funds rate assumption for ’08 a bit under the new path in the Greenbook. We’d raise it back in ’09. But our fed funds rate path is significantly above the market’s estimate. As you’ve all recognized, conditions in markets have deteriorated substantially since our last meeting, but the basic dynamic is still the same. Actual and anticipated losses to financial institutions have risen as the prices of a large range of assets have fallen. Uncertainty over the path of housing prices in the real economy and complexity in valuing assets and structured financial instruments that are most exposed to those risks make it very hard for markets to know with confidence the likely dimension of total losses and who is most exposed to them. Financial institutions have seen a sharp increase in their cost of funds, a substantial shortening in maturities at which they borrow, and a significant reduction in their ability to liquidate or borrow against their assets. Most banks have seen a very large and unanticipated expansion of their balance sheets as they’ve been forced or have chosen to provide funding in various forms. As banks and other financial institutions have moved to position themselves to deal with a more adverse economic and financial environment, they have become much more selective in how they use their liquidity and capital. The consequence of those actions is evident in the sharp increase in the cost of unsecured borrowing and the spreads on secured financing. Now, it’s important to recognize that, although a source of this pressure is concern about macroeconomic risk and its consequence for credit loss and asset values, the consequences of the adjustment by institutions to this new reality are very severe liquidity pressures in markets. These are particularly acute in Europe, and they are—at least in the market’s expectations—likely to persist well beyond year-end. These pressures are the symptom of the underlying problem, as fever is the sign of the immune system’s response to an infection. But just as high fevers can cause organ failure before the infection kills the body, illiquidity itself can threaten market functioning and the economy. The longer we live with these conditions—large spikes in demand for liquid risk-free assets, a general shortening of funding maturities, a limited amount of available financing even against high-quality collateral, the risk of substantial liquidation of financial assets, and the chances of runs on individual institutions’ funds—the more we are vulnerable to a self-reinforcing adverse spiral that leads to a greater retrenchment in credit supply than fundamentals might otherwise suggest and with a greater effect on growth. I don’t think the past four to six months have been kind to those who have argued that this was just a mild and transitory bump. As in August, I think we have to be willing to treat both the fever and the infection and, if you step back a second, the appropriate policy response to this set of challenges will entail a mix of measures. Monetary policy will probably have to be eased further to contain the risk of a more substantial and prolonged contraction in demand growth. I think we will probably need to continue to adjust our various liquidity instruments. We may need to encourage some institutions to raise more equity sooner than they otherwise might choose to do. We need to be very careful to avoid making both types of the classic errors in supervision in financial crises. These are, on the one hand, actions that would amplify the credit crunch by forcing banks to protect their ratios by selling more assets à la New England or, on the other hand, the commission of what you might call irresponsible forbearance à la Japan in the hopes of masking weakness and stretching out the pain. We also need to be careful to keep thinking through more adverse scenarios for the economy and the financial system and the policy responses that may be appropriate if they materialize. The United States is, I think, a remarkably resilient economy still. Outside of housing, we don’t have the same imbalance in inventories with the same degree of overinvestment in other parts of the economy that we have had going into past downturns. Corporate balance sheets still seem relatively healthy. The world economy is no doubt stronger. Current account imbalance is coming down. Our core institutions entered this adjustment period with a fair amount of capital. It is very encouraging to see so many of them start to raise capital so early. The financial infrastructure is more robust. Inflation expectations imply a fair degree of confidence in our ability to keep inflation low over time. The speed and the extent of the adjustment that we’ve seen in housing and by financial institutions to this new reality are really signs of health, of how well our system works. But we need to be cognizant that the market is torn between two quite plausible scenarios. In one, we just grow below potential for a given period of time as credit conditions adjust to this new equilibrium; in the other, we have a deep and protracted recession driven as much by financial headwinds as by other fundamentals. There are good arguments for the former, the more benign scenario, but we need to set policy in a way that reduces the probability of the latter, the more adverse scenario. Thank you." FOMC20050503meeting--59 57,MR. STOCKTON.," The result of that exercise suggests, if anything, a little surprise that we didn’t get a touch more pass-through. Actually, I was surprised when I first saw those results but not after I sat back and thought more carefully. Certainly, if you had told me in late 2003, when oil prices were $25 to $28 a barrel, that they were going to be something north of $50, that the markets would perceive that as being very largely a permanent change, that we would see an ongoing depreciation of the dollar and a very significant acceleration in intermediate materials prices, I think I would have said core consumer price inflation now of just 1¾ percent would be a pretty good outcome. So, as I thought more about it, I was more comfortable with the results that we presented yesterday. Now, as we indicated in the Greenbook in an alternative simulation, while we are comfortable with our inflation forecast, we could certainly understand it if you were less comfortable with our assessment of the pass-through to core inflation, given that this has been an area where we have made persistent errors. It’s very hard to estimate these pass-through effects. I know of work done over the years at the Board and by Reserve Bank staff aimed at trying to estimate indirect energy price effects or import price effects. Sometimes the coefficients are zero and sometimes they May 3, 2005 22 of 116 could simply be a function of the fact that many of those variables were relatively stable over a long period of time. It’s just very hard to estimate precisely what the effects are. Our alternative simulation, where we doubled the size of those pass-through effects, is intended to give you a sense of how far things could get out of line if we made a rather big error in the size of the pass-through. And, as we noted, there would be a very noticeable effect going forward. So, it does seem reasonable to wonder not only about whether we have the underlying forecast right for oil, imports, and other commodities but also whether we have the pass-through of that correct." FOMC20060808meeting--58 56,MS. PIANALTO.," Thank you, Mr. Chairman. My outlook hasn’t changed very much since last spring, when I was contemplating the not-so-welcome cycle of slowdown in economic activity and some persistence in both headline and core inflation due to the lingering effects of large energy-price increases. In fact, the Greenbook projections for real GDP now reflect something close to the pessimistic end of where I thought things could be heading. The difference is that I have been thinking more of a cyclical slowdown and not so much of a slowdown in demand and supply, as reflected in the Greenbook baseline. The possibility that slack might not be widening as economic growth moves down puts the recent inflation numbers in a particularly bad light. I have been especially concerned about how broadly based the inflationary pressures appear to be. When you take energy components out of the CPI and you look at the median that Richard was referring to earlier, about 67 percent of the expenditure-weighted items in the CPI increased at an annual rate of 3 percent or more in June, which is about the same share that we have seen since March. As Richard mentioned, the PCE statistics yield basically the same results. In Procter & Gamble’s most recent earnings report, the company attributed its good earnings performance partly to the ability to pass on higher costs through to product prices, and I am hearing similar remarks about pricing power from our directors and District business contacts. Although my business contacts have been reporting some ability to pass on price increases now at the retail level, where in the past they were saying that it was very difficult to go beyond intermediate goods, they’re not so sure that they will get more than one-time catch-up adjustments. Most of my business contacts have not expressed concerns about an elevation in the long-term inflation trend. Nevertheless, I think there are clearly reasons to be worried about the risk of inflationary pressures intensifying over the balance of the projection period. I also think that there is a risk that we’re not going to see as much slack as is embedded in the Greenbook baseline. As in many other parts of the country, activity in the housing sector is slowing in the Midwest, particularly in the Fourth District, and the housing situation in the Fourth District could never be characterized as bubbly or frothy. Some of the veteran Realtors in my District with whom I have been talking are saying that this housing market is the worst that they can recall. Comments like these, although they are selected, do suggest some more uncertain prospects for the housing sector. My directors and business contacts have also been sounding a bit more cautious about the outlook for their sales, but at the same time their capital spending plans appear to be intact. They remain vocal about the ability to get productivity gains, and they remain disciplined about their hiring plans. So as I contemplate the weaker spending track that’s forecast in the Greenbook, I’m inclined to attribute more of it to the demand side of the economy than to the supply side. That is, I am expecting the Greenbook’s call for moderation in economic growth to result in a little more slack than appears in the Greenbook’s baseline. In a qualitative sense, my outlook carries lower inflationary pressure than the Greenbook baseline and thus is similar in spirit to the “lower NAIRU” alternative scenario. Separating the cyclical and structural performance of the economy, of course, is a real challenge, and it is natural, I think, to feel unsure about the real-time estimates and projection of slack. If the slower growth of potential output in the Greenbook baseline is accurate, it raises the possibility that the equilibrium real interest rate may be lower than it was in the last half of the 1990s. In summary, Mr. Chairman, I still think there are risks to both of our objectives. Thank you." FOMC20070321meeting--71 69,MR. STOCKTON.," In our forecast, we’re not too far from the bottom. We made the bottom a little deeper this time and put it off just a little bit longer. I said before that we saw signs that demand was stabilizing. In some sense, the adjustment that we’ve made for these recent subprime developments suggests to us that there will be another small step-down in demand going forward from where we currently are. That makes the process of working off the inventory, to which President Poole pointed, a little more prolonged. It also puts this housing downturn, in terms of magnitude, very close to the one that occurred in the early 1990s." CHRG-110hhrg46595--171 Mr. Nardelli," I would only answer in that our forecast for 2009 is the exit rate of 2008. In other words, we are looking at the 10.5 exit rate as an entrance rate and basically holding that depressed level, that significantly depressed level, 35, 40 percent year over year, throughout 2009. And as we were asked to also do a sensitivity analysis, we took that down another million units in the industry to 10, 10.1. And basically with the request that we have asked, even at the lower level we still would be able to repay a billion dollars back to the taxpayers by 2012. " CHRG-109shrg21981--59 Chairman Greenspan," We believe that so-called ``normative rate'' or whatever you want to call it, is not stable. It does move around, and that is the reason I say I do not know where it is. I do know that we have the capacity to examine how the market is behaving in all of its myriad manifestations so as to be able as a committee, I hope and believe, to judge where we are at all times. We may not be able to forecast it, but I do think we have enough analytical technology to be able to make a judgment as to where we are at any particular point in time. I am almost certain that that rate does move around, and we are constantly trying to get the appropriate fix because that is implicit, as you point out, in the strategy that we started to pursue last year. Senator Sarbanes. Thank you, Mr. Chairman. " CHRG-110shrg50369--127 Chairman Dodd," You raise a good point here and one I wanted to raise with you. This is a statement you made yesterday as well before the House Financial Services Committee, talking about it. And I do not disagree. It is quite constructive. And I think there has to be a sense of balance in how we look at sovereign wealth funds, and I think we run the danger of becoming a pejorative without understanding the value of it. So we have to be careful about it. And you pointed out, and you did again here just now, you mentioned CFIUS, which, of course, we developed good legislation, I think, out of the Committee on that, the IMF, the OECD, and looking at these investments from their various perspectives in terms of these issues, which are a very legitimate point. But what is the Fed's role in a sense? I mean, this is, it seems to me, while all these other institutions have an important role to play, I would make a case here that the Fed also has an important role. They are investing in bank holding companies. This is the jurisdiction of the Federal Reserve Board, and it seems to me you did not mention the Federal Reserve's obligation to be looking at these questions as well. And, obviously, we have had major investments here in bank holding companies. So tell me what you think is--what is the Fed doing about this, and what is the responsibility of the Fed in looking at this issue as well? " CHRG-111hhrg48674--208 Mr. Price," And is that opinion shared--that desire to leave that role, do you know if that is shared by the current Administration, the Secretary of the Treasury? " FOMC20060131meeting--110 108,VICE CHAIRMAN GEITHNER.," I’d like the record to show that I think you’re pretty terrific, too. [Laughter] And thinking in terms of probabilities, I think the risk that we decide in the future that you’re even better than we think is higher than the alternative. [Laughter] With that, the economy looks pretty good to us, perhaps a bit better than it did at the last meeting. With the near-term monetary policy path that’s now priced into the markets, we think the economy is likely to grow slightly above trend in ’06 and close to trend in ’07. We expect underlying inflation to follow a path close to current levels before slowing to a rate closer to 1.5 percent for the core PCE sometime out there. Relative to the Greenbook, we’re a little softer on growth in ’06 and a little stronger in ’07, but our inflation outlook is similar. The uncertainty around this forecast still seems considerable, perhaps more than the market has priced in. On the positive side, consumer and business confidence still seems pretty high, with employment growth solid and compensation growth likely to pick up. We think that household income growth is likely to be pretty strong. Investment may be strengthening, and it could surprise us with more strength. The tone of the anecdotal to us seems more positive, less cautious than it has been. And just to cite our Empire survey, the six-month-ahead numbers show a fair amount of optimism. Overall, financial conditions, of course, still seem quite supportive of continued expansion. Global growth has strengthened. And like the staff, the market seems to have looked through the negative surprises in the fourth-quarter numbers and priced in a bit more, rather than less, confidence about the strength of demand growth going forward. On the darker side, we have the familiar concerns about potential adverse shocks, energy supply disruptions, terrorism, et cetera. But even in the absence of these events, we face a fair amount of uncertainty about key elements of the forecast. The prevailing expectation of a gradual moderation in housing prices and a relatively small increase in the saving rate could prove too optimistic. Private investment growth could slow further, productivity growth could disappoint, risk premiums could rise sharply. And, of course, that could happen even in the absence of a major deterioration in the growth or inflation outlook. But this, on balance, still leaves us with what looks like a relatively balanced set of risks around what is still a quite favorable growth forecast. The inflation outlook still merits some concern—I think modest concern—about upside risk. Underlying inflation is still somewhat higher than we would be comfortable with over time. The core indexes are running above levels said to define our preference over time. Other measures of underlying inflation are running above the core rates. The behavior of inflation expectations at longer horizons has been reassuringly stable in the face of the elevated headline numbers, but the levels are still at the higher end of comfort. With the economy near potential, unit labor cost growth should accelerate. And, of course, although profit margins still show ample room to absorb more unit cost increases, their behavior suggests continued pricing power. The strength of global demand, the continued rise in commodity prices, other input costs, and the latest increase in energy prices all suggest a possibility of further upward pressure. With this outlook and this set of risks, we believe some further tightening of monetary policy is necessary with another small move today and a signal that some further tightening is probable. We’re comfortable with how the market’s expectations have evolved over the past few weeks and with the present forecast of perhaps one—maybe slightly more than one—move beyond today. It’s hard, though, to understand why the market attaches so little uncertainty to monetary policy in the second half of the year. And this underscores the fact that one of our communication challenges ahead is to make sure we convey enough uncertainty about our view of the outlook and its implications for monetary policy. In this regard, I want to compliment the recent innovations to the Bluebook presentations and hope that they persist." FOMC20080625meeting--67 65,MR. HOENIG.," Mr. Chairman, I will begin my remarks this afternoon with a brief update on the conditions in our District. Overall, District economic activity continues to expand moderately, with strengthened energy, agriculture, and export manufacturing more than offsetting the softness in our housing, retail sales, and other types of manufacturing activity. District labor markets continue to perform reasonably well. While job growth has slowed over the past few months, unemployment remains very low, and many sectors continue to have difficulty finding workers, especially skilled ones. Evidence on wage pressures is mixed. Although wage pressures have moderated somewhat in our Beige Book survey, some recent labor union contracts have built in rising profiles for hourly wage increases over the term of the contract. Rising energy and commodity input prices are continuing to negatively affect our District economic activity. Reports from businesses suggest that higher energy and food prices are being quickly passed on to the customer now. However, businesses are having mixed success in passing on other cost increases, resulting in some severe erosion in margins and profitability in some of the firms. To illustrate some of the cost�price dynamics, I would like to take just a minute and relate the recent experience of one of our Branch directors, who operates a multi-line manufacturing firm. I mention this because I am hearing it more and more. In addition to rising fuel prices, his business has seen a doubling in steel costs since January, with July quotes on steel tubing up an additional 25 percent. In response, his company recently announced a price increase of 16 to 18 percent across a range of products. Competitors immediately matched or exceeded his price increases. Notably, he made these price increases despite a decline in new orders in May. He also noted that import prices from China that he has seen have risen 28 percent this year and that ocean freight prices have risen about 20 percent. As a result, customers who previously bought Chinese products are now purchasing U.S.-manufactured goods. It is interesting--I talked with some of the folks at Union Pacific, and their shipments into the Midwest have dropped slightly, but their shipments out have increased about 3 to 4 percent. So that is what is going on in the region. More broadly, turning to the national economy, I have revised up my growth estimate for the first half of 2008, but it has made little change in my longer-run outlook. Compared with the Greenbook, I see somewhat stronger growth in the second half of this year and somewhat weaker growth next year and in 2010. Most of the difference from the Greenbook in 2009 and 2010 comes from the policy path assumptions. I assume that policy accommodation is removed at a more rapid pace than does the Greenbook. Recent economic data suggest that, although downside risks to growth remain, they have diminished. I continue to judge that the potential spillover effects from the financial distress have understandably been overestimated in this Committee's recent decisions and in Greenbook forecasts in recent months. In my view, the greater risks to the outlook come from rising energy and commodity prices and less from the financial distress as we go forward. In my view, current policy accommodation is greater than needed to address these risks. As I indicated at the last meeting, I believe that the upside risks to inflation have increased considerably over the past several months. Like the Greenbook, I expect both overall and core PCE inflation to move higher in the second half of this year. If this happens and we maintain the current level of the funds rate, I believe we are likely to see further erosion in inflation expectations, which will undermine our credibility with financial markets and the public. In this event, I judge we will greatly increase the likelihood that we will need to raise rates more aggressively, taking rates above neutral, in order to achieve our longer-run inflation objectives; and that is of significant concern to me, Mr. Chairman. Turning to the issue of long-term projections, let me comment that I have felt somewhat constrained by the current three-year horizon for our quarterly projections. Of the options presented by the subcommittee, I am most comfortable with providing estimates of the values for total inflation, output growth, and unemployment at which the economy is likely to converge. I am not sure, however, how we want to label these estimates, if they are included in the table. I understand that putting these estimates out might be interpreted as a move closer to inflation targeting, but I think that this is a bridge we are ready to cross since we adopted the enhanced projections process. The other options seem less desirable. Given the resources required, by my staff at least, I doubt that we could provide a meaningful forecast at a four-year or five-year horizon, and I am not sure how projections for average values over a period of five to ten years ahead would be interpreted by the public. In my view, appropriate policy should be expected to return the economy to its long-run equilibrium over a three-to-five-year period, with the length of the period depending on the nature of the shock. Setting out a five-to-ten-year horizon could be construed as a weakening in our commitment to achieve our mandate in a timely manner. Thank you. " FOMC20080130meeting--272 270,MS. PIANALTO.," Thank you, Mr. Chairman. Like the Greenbook, my projection for the real economy incorporates a sharp decline in the equilibrium real fed funds rate. Given the large risks facing the real economy, I think we need to take precautions against having a restrictive fed funds rate target. I think a 50 basis point cut in the target fed funds rate today may be large enough to eliminate that possibility, although there is plenty of uncertainty around that estimate, as we have been discussing. Based on my analysis, comments from my business contacts, and what I have heard from all of you at this meeting, I feel very comfortable supporting this position today. The economic environment has been volatile and highly uncertain, and I realize that my outlook could change appreciably in the weeks and months ahead. I can imagine that my economic projections will evolve in a way that supports even further reductions in the fed funds rate target. At the same time, as I said yesterday, I am concerned about inflation risks and that they may now be elevated. I can also imagine scenarios that would lead me to want to pursue a more restrictive policy than would be appropriate based on the downside risk to growth alone. At some point, on the margin, inflation concerns could become my dominant concern. We know that inflation expectations play a crucial role in determining the inflation outlook. We have been talking about that. But, unfortunately, we don't really know all that much about what it is going to take to unanchor inflation expectations. It is hard to know for certain how far out on the ice we can skate without needing to worry that the ice has become too thin. I know that we are bringing our best thinking to bear on this issue by developing diagnostic tools such as the decomposition of inflation compensation into its component parts, as we talked about yesterday and this morning. I hope that we are going to come to learn that these tools are useful guides to policy, but we just don't have enough experience with them to know how much confidence to place in their estimates. Yesterday Governor Kohn told us about his conversation with Paul Volcker and that Paul Volcker told him that unfortunately we do have experience of seeing the erosion of public confidence in our ability to meet our price stability objective, and we know from this experience that it makes the attainment of price stability more costly. But today I support the policy directive expressed in alternative B. My concerns today are more with the downside risk to economic growth. Given what I know today, I think it is the right course of action. I have discovered during the past couple of weeks that I can be very nimble when it comes to the reduction in our fed funds rate target. If inflation developments require, I want to be just as nimble in the other direction. Thank you, Mr. Chairman. " CHRG-110shrg50410--38 Secretary Paulson," Well, again, what I am saying is--because I really do need to be clear. There is not a plan to do that at this time. I would sure hope, like you, that if there is one, that as our markets recover and if the shareholders put money in, they end up making a lot of money, as was the case in Chrysler. But, remember, this is not Chrysler, and there is not a plan to put equity in these institutions at this time. Senator Carper. And if I could, one last quick question. I think you are proposing a more formal role for the Federal Reserve, working in conjunction with the new GSE regulator. How would that work? " Secretary Paulson," OK. Let me--because I think this is important, and it is something that we have thought about for a long time, and we suggested it that other countries--the U.K. has taken this up with their central bank. I need to step back and say if you really look at what the market has come to expect, they have come to look at the Federal Reserve and saying if there is an issue that threatens market stability, we expect them to play a role. And so one of the things we have asked is not that they supplant other regulators. Not at all. That they have other--but have asked that they have some line of sight, they have a visibility and they are able to play a consultative role. So they--and it is only fair when you look at what--and fair to our country, what might happen. And so what this--to be very specific for you, this is not designed in any way to undercut the authority of the new regulator. This regulator has got to be world class, got to be a strong regulator. You will be working with a new regulator. You will be working with a new regulator to address the issues that so many people have talked about. But I would warrant that you and other Americans and people around the world will feel more confident--I sure will--knowing that the Fed is there to play a consultative role and be able to give their comments also. And that is the purpose. Senator Carper. All right. Thanks so much. " CHRG-111shrg49488--31 Mr. Nason," Yes, the model in the United States, it is a difficult way to think about it, but if you take the consumer elements of the banking agencies, put them under the business conduct regulator, take the bulk of the responsibilities of the SEC, put them under the business conduct regulator, and leave the prudential or financial regulation in a separate regulatory body, those are the two peaks. And then I think there is an important role that is not demonstrated in those two peaks: Someone taking the ownership of systemwide risks, and that is the important role that we give to the Federal Reserve in our Blueprint. " FOMC20070918meeting--199 197,MR. ROSENGREN.," A lot of us this morning discussed tail risk, and it does seem that the tables we have right now might not capture the nature of tail risk that actually was critical to a lot of that discussion. Some things that are related to your ability to forecast variables are tied to uncertainty. But looking forward, there are also the kinds of risks, which I don’t think we’re capturing, that were central to some of our discussion. Is there a way to capture tail risk or the distribution—kind of like the scenarios that are done in the Greenbook, but, in effect, what people were talking about with tail risk? I don’t think we’re quite there yet, and I don’t know that we need to do it for the first round. But we need to give some more thought to what tail risk means and what we actually mean when we talk about insurance." FOMC20050322meeting--111 109,MR. STERN.," Thank you, Mr. Chairman. The broad-based expansion in our District March 22, 2005 50 of 116 growing rapidly. Demand for construction equipment reportedly is very strong. Backlogs are building in that sector, and there are long lead times. There is an emerging scarcity of some skilled labor. The mining and energy sectors, not surprisingly, are strong. Housing construction activity remains robust, although sales have slowed a bit year-over-year. The concerns expressed by business leaders are the usual suspects: medical insurance costs, rising raw material prices— including energy, of course—and rising transportation costs. Turning to broader issues, based on the tenor of the incoming information on the economy and on my earlier forecast, the national economy continues to look quite good to me. It’s still early in the game, of course, but 4 percent real growth this year looks like a reasonable forecast. It would not be a stretch but simply a continuation of what we’ve experienced in the previous two years. As far as inflation is concerned, I do not expect a material acceleration in core measures of inflation this year. Nevertheless, I do see signs that there is some buildup in price pressures. Therefore, it seems to me that the risks we are confronting are in the process of shifting, mostly because the risks of a subpar or disappointing performance of the real economy have diminished but also because the inflation pressures have perhaps ticked up a notch. I think the policy implication of this is that we can continue for now with the program that we have been on of ¼-point increases in the funds rate. But I do think we need to modify the language in the announcement to reflect changing circumstances and to preserve internal consistency." FOMC20060328meeting--165 163,MR. REINHART.,"2 Carol Low will be handing out some material. Market participants expect you to take another ¼ point step today along the journey started in June 2004. As can be seen in the top left panel of exhibit 1, the current March and April fed funds futures contracts, plotted as the first two observations along the black line, are consistent with the funds rate target moving up to 4¾ percent this afternoon. Compared with what was expected just after your January meeting (the red line) financial prices indicate increased expectations of an additional ¼ point firming in coming months. This ratcheting up of the policy path was due in part to economic data that mostly ran on the strong side of expectations and to the absence of a signal from any of you that the tightening cycle was drawing to a close. The Desk’s survey of primary dealers, highlights of which are noted in the top right panel, is also consistent with the certainty of action today and suggests the anticipation of little change to the statement and the retention of the assessment that the risks to the outlook are tilted to the upside. As plotted in the middle left panel, options contracts on fed funds futures settling after the June FOMC meeting put the largest probability weight on one more ¼ point firming after today and about equal but less weight on the process of tightening ending after today or continuing after May. The dotted staircase in the middle right panel shows how far you’ve come along the path begun at the June 2004 FOMC meeting: ¼ point steps at fourteen successive meetings. The solid line plots the expected federal funds rate derived from money market futures price prevailing just before the June 2004 meeting. As can be seen, your policy firming through last winter about matched the track anticipated at the onset of the cycle. It has been only in the past five meetings that you picked up the pace relative to market expectations of nearly two years ago. As to why you might have tightened more than investors originally expected, the answer is not evident in the bottom left panel, which gives the evolution of the staff forecast for real GDP growth for 2005, 2006, and 2007 over successive Greenbooks. If anything, the outlook for real growth has moved a touch south over that period. But as shown at the bottom right, the staff outlook for inflation back in June 2004 was decidedly more favorable than what has materialized since, reflecting, among other factors, the more-favorable prospects at the time for the prices of oil and other imported items. If investors also underestimated the extent to which inflation would rise, then it wouldn’t be surprising that they would also have underestimated the extent of your policy tightening thus far. Concerns about the prospects for inflation lie at the heart of the case for adding another ¼ point step to this tightening episode, the subject of exhibit 2. Policy tightening to date has brought the real federal funds rate, the solid line in the top panel, past the middle of the range of staff estimates of its equilibrium. Bringing the nominal federal funds rate to 4¾ percent would put the real funds rate at the top end of that red range, although still well in the middle of the confidence band around 2 The materials used by Mr. Reinhart are appended to this transcript (appendix 2). those estimates. Such a stance, though, would be called for if you viewed inflation as uncomfortably high in your preferred range or poised to rise from its current level. How deeply those possibilities are felt marks the difference between alternatives B and C in the Bluebook—that is, between signaling a modest or a strong inclination to tighten at the May meeting. Market participants, to be sure, are confident of a tightening today and put high odds that you will follow with another such action in May, in line with the assumption in the Greenbook. Alternative B was designed to validate those expectations and would be preferred if you viewed the staff forecast in the bottom left panel of an unemployment rate under 5 percent and inflation near 2 percent to be both plausible and acceptable. The Committee might want to project a firmer stance of policy—that is, a sure tightening in May and a chance of further action as in alternative C—for several reasons. Chief among them might be some mistrust of the main mechanism producing slowing in consumer spending in the staff forecast—namely, the deceleration in house prices plotted at the bottom right. Although anecdotes of slowing in the housing market abound, you might not be ready to sign on to that outlook until more convincing evidence is in hand. I now turn to the question posed at the top of exhibit 3. When are you going to stop? According to surveys and, as shown in the top left panel, futures markets predict that you’ll most likely cease tightening by June. The policy rules plotted at the top right would predict a quicker end than that—indeed, they see some odds that you would already be done. Another perspective is given in the middle panel, which plots as the red line the long-run expected short rate consistent with the staff’s arbitrage-free model of the term structure. The current short rate, the dark solid line, has already marched up to that long-run level. You might view arguments for further tightening to be problematic for a number of reasons. The solid line in the bottom left panel plots the Greenbook forecast for real GDP growth. It not only slopes downward, but its historical confidence regions also encompass a significant possibility of subpar growth, as in the lower shaded region. True, there is an upper shaded region, too, but if your own outlook lies below the Greenbook path or you weigh the lower outcomes more heavily than the higher ones, then you would want a lower, not higher, federal funds rate. The standard argument for further policy action is that its absence would risk inflaming inflation expectations. As shown in the bottom right panel, however, inflation compensation at a long horizon has remained very subdued. The Committee’s choice of the funds rate target is only part of its decision. Some wording issues are considered in exhibit 4. In alternatives B and C in the Bluebook, we kept the risk assessment tilted toward tightening, as in the top panel. But as shown directly below, the confidence bounds surrounding estimated policy rules (the green region at the left) or inferred from money market options (the blue region at the right) are quite wide. This suggests that the time will soon arrive when you will no longer be confident in predicting the likely future direction of your next action. If any of you thinks that time is now, we did offer words for a balanced risk assessment in alternative A. Another sentence offered in alternative A is in the third row of the exhibit. The statement could end, “Nevertheless, future policy action will be determined by the evolution of the economic outlook as implied by incoming information.” I admit that those words don’t mean anything different from what appeared at the end of the January statement—and were repeated in alternatives B and C. I had the hope, though, that changing the language might draw attention to the sentiment. Despite the presence of that data-dependent clause in previous statements and its reinforcement in successive minutes, market participants seem more focused on the messages they are receiving from you than from the economic data. For instance, as noted in the bottom row, the response of the two-year note, measured along the vertical axes, to surprises in nonfarm payrolls, measured along the horizontal axes, had been elevated from 2003 to 2004 (that’s the middle scatterplot). However, over the past 1¼ years, as can be seen at the far right, the response has been more subdued, perhaps necessitating a reminder to markets to look to the data. I’d like to point out another design aspect of alternative A, which is provided in the latest version of table 1 at the end of your handout. As is evident, we squeezed a lot of words into that column. We did it for two reasons. First, it seemed appropriate for the Committee to offer an extended rationale for ending a tightening phase that has lasted nearly two years. Second, as you become less sure of your future policy action—remember, this alternative has a balanced risk assessment—you might want a fuller description of the economic outlook. By the way, a longer statement might give you the opportunity to rely less on imprecise adjectives and more on a recitation of key facts. We tried that out last week with our first draft of table 1, but the few of you who commented were deeply enough opposed that we struck the numerical reference. I’d also like to point out changes made in the table overnight in light of your discussion yesterday, which are provided in blue and seem mostly consistent with what was said earlier this morning. Meeting participants emphasized that growth rebounded strongly and appears likely to settle to a pace consistent with that of the economy’s potential to produce. As a result, the risks to the growth outlook appear roughly balanced. In alternative B, we added some forward-looking language to that effect in row 2. Because many of you seemed a bit more optimistic about the prospects for inflation, we repeated the qualifier “possible” from the January statement in front of “increases in resource utilization” in row 3 for alternatives A and B. The other minor changes were made for stylistic reasons." FOMC20070131meeting--306 304,MR. KOHN.," Thank you. President Minehan said much of what I was going to say. The minutes will indicate the tenor of the discussion, which was that, despite some good inflation news, we still see plenty of upside risk. That will convey the basic view here. I’d be very concerned about being explicit about an interest rate increase down the line. We will be discussing this topic in a few minutes, I hope, [laughter] about how explicit the Committee should be in its forecasts about the future path of interest rates. We haven’t made that decision yet, so I’m a little nervous about making it really explicit or even implicit in the minutes. Thank you, Mr. Chairman." FOMC20060328meeting--84 82,MR. MOSKOW.," Okay. Well, most of my contacts this time were upbeat about current conditions. Though the Midwest continues to underperform the rest of the nation, the U.S. economy seems to remain on solid footing. So we tried to assess whether the strength in January and February was just a transitory bounceback from the fourth quarter or whether it represents some persistent forward momentum. And while a few contacts expressed concerns about higher energy prices and softening housing markets—as we were just discussing—most pointed to an economy with substantial staying power. A bit of good news is that the Chicago purchasing managers’ index, which will be released on Friday, will show a significant increase—from 54.9 to 60.4. The persistent momentum in the economy appears to be creating some pressure on resources. One example is the airline industry. Business and leisure travel are at very high levels, with strong bookings for the past few months. Load factors are at near-record highs, in part reflecting a reduced capacity in the industry. There continue to be more reports of fare increases, and surprisingly the increases are now being led by the low-cost carriers. We’re hearing about tightening labor markets. Manufacturers continue to have difficulty finding skilled workers. In the temporary-help area, Manpower—headquartered in our District— said that wage growth is accelerating nationally. Three months ago wages were basically flat on a year-over-year basis. Now they’re expecting increases of 4 to 5 percent in the second quarter of this year. Kelly Services, also headquartered in our District, reported steady nationwide increases in the 3 percent to 4 percent range. But both companies noted that labor markets were still nowhere near as tight as they were in the late ’90s. Speaking of labor markets, to update the GM–Delphi–UAW saga, Rick Wagoner, General Motors’ CEO, thinks that the GM buyout plan will take the heat off the poor Delphi–UAW relations, lessening the chance of a strike there. He expects a significant number of GM and Delphi workers to sign up for the plan. This will allow them to reduce the size of their workforce more quickly. One aspect of this agreement that parties are not publicizing widely, for obvious reasons, is that GM and Delphi should have more flexibility in hiring temporary workers and outsourcing in the future. The temporary workers will have lower wages, and they won’t have the full GM benefit package. Turning to the outlook, I feel that the near-term risks to the forecast have changed somewhat since our last meeting. On the growth front, I had previously thought that high energy prices and sticker shock from heating bills might damp spending substantially. And on the price front, I was concerned that pass-through of higher energy prices and other costs could boost core inflation and feed through to inflation expectations. Neither risk has materialized so far. Private domestic demand appears to be growing at a solid pace. The recent price news has been favorable, and inflation expectations have moved little. So what are the risks now? I do not see many immediate downside risks to growth; to the contrary, I personally think that the risk may have tilted to the upside. It’s true that housing appears to be moderating, but the softening seems to be happening much as we expected it to. In contrast, consumption growth continues to be quite strong. This may be a signal that households are more confident about their permanent income prospects, perhaps because of healthy labor markets and the strong underlying productivity growth. If so, then we could be in for some continued robust consumer spending. In addition, growth abroad has improved. Notably, Japan and Europe are showing some life. Thus, we could see more demand emanating from abroad. So in the short term, growth will likely exceed potential. But given a funds rate path like that in the Greenbook, which I would characterize as a touch restrictive, my outlook and the Greenbook’s get growth back to potential by 2007. Despite the recent good readings on inflation, the current strength of the economy is showing through in our simple indicator-based forecasts of inflation. We run about two dozen forecasting models that encompass common statistical indicators of future inflation. These are not structural models. They are simple regression forecasting models that use only current data, and they have no explicit conditioning assumptions regarding future policy, oil prices, or other such factors. And this contrasts with a more structural methodology like the FRB/US model. Nearly all of these indicator models predict some uptick in core inflation over the next two years—not a big one but to something a bit above 2 percent in 2007. Looking ahead, these projections would probably move down with a further string of good news about prices and more-balanced prospects for resource utilization. Nonetheless, given the models’ forecasts and the fact that we currently are operating with very little resource slack in the economy, I see a risk that inflationary pressures will be somewhat greater than what is currently built into the Greenbook." FOMC20080805meeting--60 58,VICE CHAIRMAN GEITHNER.," I have a question similar to President Plosser's. Both the financial shock--the housing adjustment--and the big relative price shock you could say all in different forms could hurt the rate of growth of the economy's productive potential. You could say that they all might, in some dimension, reduce the near-term expected path of potential growth. I guess my question is that you have this ""costly sectoral reallocation"" alternative scenario--do you attribute any effect on potential growth over the forecast period in your baseline to the combined effect of the housing adjustment and the big relative price shock from energy? " FOMC20070321meeting--111 109,VICE CHAIRMAN GEITHNER.," Thank you, Mr. Chairman. Our view of the outlook has changed since our last meeting, but more in the balance of risks and the sources of uncertainty than in our actual forecast for growth. But just to go through the changes quickly, we’ve reduced our forecast for growth in ’07 a bit, to something less than 3 percent, and we see more downside risks to that forecast. We’ve moved up the expected path of core PCE inflation just a bit in light of recent numbers, but we have maintained essentially the same view as before—that inflation will moderate to around 2 percent by the end of this year and a bit below that in ’08. We see the risk to this forecast still to the upside. We face greater uncertainty about the near-term outlook than we have over the past few meetings. Looking to the medium term, although we haven’t yet reduced our estimate of potential growth, we’re a bit more concerned than we’ve been about the strength of underlying structural productivity growth going forward. We have also changed our view of the appropriate path of policy a bit, introducing a gentle move down now in the fed funds rate beginning around the middle of the year. So this puts us a bit below the assumed path in the Greenbook, but we assume a slower, smaller reduction in the nominal fed funds rate than the market does today. Our forecast is quite close to that of the staff’s in the Greenbook, and the basic story is similar. Our differences are the same as they have been for some time—we have slightly more growth and slightly lower inflation. That reflects things we talked about before, different views about information dynamics and about potential growth. Our view of the output gap and its evolution, however, is similar. I have just a few points on some issues. On the growth front, the recent numbers suggest both a deeper adjustment in housing and a broader weakness in the economy than we anticipated, notably in capital goods orders. The effect of these developments on our forecast is not that large, however. Their significance is more in the risk to the outlook and the uncertainty, the puzzle that the investment weakness presents for the medium term. On housing and consumption, the probability of the dark scenario is still small, but it is higher than it has been and deserves some attention. The dark scenario is the risk that the reduction in credit to the household sector amplifies the decline in housing demand, which leads to a greater adjustment in prices, with a risk of a more- pronounced, prolonged decline in growth and spending. Monetary policy should not be directed at trying to put a floor on housing demand or on prices, only at limiting the risk that the weakness accumulates substantially or spreads to overall demand. Regarding capital spending, we just don’t have a good explanation for why—with margins that are still pretty good, reasonable earnings growth, solid growth in aggregate demand here and globally, relatively low interest rates, and reasonable levels of business confidence—spending has continued to come in well below our expectations. This series of disappointments, of course, has been going on for some time; it’s not just about the latest numbers for durable goods orders. Perhaps this situation will prove transitory, but it justifies a bit more caution to the outlook. Of these two risks—in housing and in investment—I’d say the latter matters more and is potentially more consequential. But both of these effects are offset, in our basic view, by the expected strength in personal income growth going forward, by what are still fairly favorable overall financial conditions, and by fairly robust external demand. Regarding productivity, productivity growth per quarter at an annualized rate has, over the past ten quarters, come in significantly below 2 percent, kind of close to the estimates of the trend rate for the period between ’73 and ’95. Some of the analysts who spend a lot of time thinking about this are starting to lose conviction that trend growth is still in the neighborhood of 2½ percent for the nonfarm business sector. We’re still viewing the recent weakness as transitory or cyclical, but the risk that trend growth is below our estimate is, I think, increasing. On inflation, despite the higher recent numbers, not much has really changed in our view. We still expect core PCE to move to below 2 percent over the forecast period, and we still see the risk as not getting quite that moderation. The sources of the recent negative surprises in the core data, which seem concentrated in medical services, probably don’t say much about monetary policy or broader inflation dynamics, and inflation expectations remain stable at reasonable levels. So our view of the growth outlook has changed a bit, but our view of the inflation outlook hasn’t changed much based on these numbers. On the markets, as many people have said and as Bill discussed at the beginning, I don’t see much that’s been troubling thus far. Although correlations across asset markets have risen, overall liquidity seems fine. There’s been very limited contagion from mortgages into other credit markets. Debt issuance seems to be continuing. People are able to raise money to finance corporate restructuring investment. There is very little concern, I think, about substantial losses, on the basis of what’s happened to date, in the core of the financial system and very limited evidence of stress among the various funds. But it’s still early in some ways, and the fundamental outlook for growth is a bit weaker and more uncertain. Risk premiums, credit spreads, and volatility still look potentially vulnerable to a more substantial reversal. The weakness in the subprime market will take some time to work through the full range of securities issued against pools of collateral that include mortgages. The complexity in valuing structured mortgage products, the difficulty in designing hedges that actually work against exposure to that risk, and uncertainty about the shape of the adverse tail and that part of the credit spectrum are all conditions that apply to a range of other structured credit markets and credit products. In the debate about the implications of this prolonged yield-curve inversion, we have tended to side with those who have found comfort in the contrary signal you see in lower levels of risk premiums and credit spreads. Yet it’s possible that the forces that may have been holding down forward rates are also holding down credit spreads and holding up the value of other assets and, therefore, may be masking weakness in the economy rather than masking strength. On balance, although the outlook still looks fundamentally positive, we see a more complicated and less benign set of risks to the outlook, more downside risks to growth, and some continued concern that we won’t get enough moderation in inflation. To us, this outlook justifies a stance of policy with a path for the fed funds rate somewhat above what is now priced into the markets. This doesn’t mean, in our view, that we need to signal that nominal rates going forward are more likely to rise than to fall from current levels; it means only that we should convey the sense that our view of the most likely evolution of policy still implies a higher path than is now priced into the markets. We can afford to be patient before adjusting policy, as Sandy said, but we need to have as much flexibility as possible going forward. This suggests that we acknowledge that the overall balance of risks has shifted a bit toward neutral, toward a flat stance of policy, but not all the way there. A delicate task for us is to do this without inducing a reaction in the market that pulls forward significantly more easing than has already occurred." CHRG-109shrg30354--49 Chairman Bernanke," Senator, the forecasts that I gave you earlier are based on our analysis of the future of the economy, taking into account the policy actions that we have already taken. So based on those actions, or actually based on appropriate monetary policy more specifically, the Members of the FOMC see the economy cooling slightly relative to the last 3 years to a sustainable pace consistent with underlying productive capacity. And they also see inflation moderating to a level more consistent with price stability over the next 2 years. Senator Bennett. Is there a further lag between the slowing of the economy and changes in core inflation? If so, how long is that lag? " CHRG-110hhrg46591--385 Mr. Ellison," Mr. Ryan, maybe you can elaborate on that. What are some of the other instruments besides credit default swaps that are out there that played a role in the current financial meltdown? " FOMC20070131meeting--29 27,VICE CHAIRMAN GEITHNER.," I think we should rule out humor. [Laughter] This is an important annual process, and New York plays an important role." FOMC20070321meeting--28 26,MR. DUDLEY.," Well, another explanation is that the economists who make the dealer forecasts are not the traders who execute the Eurodollar futures positions. So that’s a possible alternative explanation. Generally, there’s a disequilibrium. A number of people that I’ve talked to in the markets have said that this is what they thought was going on, and they advised me not to take what was going on in the Eurodollar futures markets literally because they felt that some of them were putting on these positions in case of a bad scenario that led to significant reductions in short- term interest rates. So I’m basically taking the explanation somewhat on the advice of market participants who told me that they were doing this." FOMC20061025meeting--121 119,MR. STOCKTON.," If you think about the extension of the staff forecast—basically, if you look at beyond the 2008 period—it’s easy to see how you get back to 2 percent. Beyond that, I guess our underlying assumption would be that you will have to get inflation expectations down if you want to have inflation below 2 percent over that longer term. Now, given the way that we typically run these simulations, you have to create an output gap. There could be other channels that the model can’t capture—perhaps talk or communications or something could shift that. As we have indicated, we don’t know the evidence that we would be able to present to you to assure you that that would be the case. But it looks as though, to get below 2 percent, more work would have to be done to get at those expectations." FOMC20070321meeting--242 240,MR. FISHER.," Well, Mr. Chairman, I’ve given this a lot of thought. If you remember, in the last round I asked for a compelling argument for adopting a stated specific inflation target. I noted that it was not at all obvious that the countries that have adopted a specific inflation target have done better than we have in terms of economic performance over the past decade or, for that matter, better than countries that have not adopted a target. One could make the counterargument that it’s not at all obvious that countries that have adopted numerical definitions have done worse than we have. I understand and respect tremendously the theoretical arguments that can be made to validate adoption of a numerical inflation objective. However, to my mind our vulnerability is not with economists or even with what we used to call the “quant jocks” on Wall Street. Our vulnerability is with those to whom we are accountable—the people and the representatives of the people. Also, I’m not convinced that a numerical target is necessary at this stage. I do note that others have done this. I raised four children. One of my first instructions to my children was, “Just because everybody else is doing it doesn’t mean you have to do it.” I’m mindful of that today. [Laughter] I’m mindful of the fact that other countries have adopted this for different reasons. We know about the U.K.’s “Great Moderation.” I understand the use of a numerical target in terms of the ECB, given the complexity of many countries, non-uniform data, and a population base that keeps changing. I understand that the Bank of Japan had been so totally discredited that it was necessary to adopt such a target. I understand that the New Zealand government was so grossly incompetent that they had no choice but to adopt a target. I consider other countries a bit too small to be persuasive. We talked about one of them last time. So my real issue is that I can’t find a compelling case for or against, but I’m not of the nature that I like to join the crowd for the sake of joining the crowd. I don’t think it is a sufficient reason—and I can say this because I am the least academically prepared at this table—to do so at this time for the purity of what are very respectable theoretical arguments. I’m mindful of the politics. You and I have talked about this personally, Mr. Chairman. I am grateful for the comments that you made at the beginning of this discussion. Let me just state parenthetically that Barney Frank is one of the smartest men I know. He would actually understand that the word “stochastic” derives from the Greek “stochasticus,” which means “skillful in aiming,” and he probably knows more than any other congressman about this subject, even though he has drawn what appears to be a line in the sand. But that’s not what I’m worried about. I am worried about whether or not we’ve accumulated sufficient political capital to sell this to the rest of the Congress and to the representatives of the people, and I’m a little concerned about the timing of our doing so. We spent the past two days talking about downside risk to the economy. Some of us feel, as I stated in our earlier discussion, that we may be just a revision away or perhaps a shock away from some economic turbulence, some economic weakness, and perhaps a recession. I wonder about the optics, Mr. Chairman, of our dwelling on this subject at this time, given that there doesn’t seem to be a compelling need because we don’t have the same conditions that the United Kingdom, the ECB, the Bank of Japan, New Zealand, and others faced. Having said that—and I’m going to just shoot everything at once and then I’ll be done—I think it is implicit in question number 1 that we are going to adopt this, which I am not in favor of. But if I had a gun put to my head and someone said, “You must adopt this. What is your preferred index?” I would say, being someone who has an M.B.A. and not a Ph.D., that, first, it is important that we adopt whatever target we adopt such that businessmen, businesswomen, financiers, and other economic agents do not need to take inflation into consideration in their decisionmaking. Second, it must be politically palatable and credible and easy to understand. Ordinarily I would argue, if it weren’t for those two conditions, for what we love in Dallas, which is the trimmed mean; but that is way too complicated to explain to the public. But I would also argue against the PCE excluding energy and food. I would argue for adopting the CPI. I would argue for a 1 percent target over a three-year to five-year period. Over time they all converge at any rate. By the way, as far as I’m concerned, if my math is still correct, 1 percent means that prices double every 72 years, which is a reasonable lifetime, and given the ½ percentage point measurement bias, that might actually mean they double every 140 years, which is about as much as I would like to see. So I would argue for a 1 percent target based on the CPI—if you put a gun to my head, which I hope you don’t—over a longer time frame. As far as Committee participants arriving at a consensus view on this goal, I don’t think consensus is essential. In fact, you could have the Committee report a central tendency or some range. I’m not going to get into questions 5, 6, and 7. I want to go to the forecast narrative, which concerns me. As we’ve talked about before, I’m not in favor of full frontal views. I took note of Governor Kroszner’s comment about “kabuki” earlier; I think it’s good to preserve a little kabuki. If we are going to communicate with the public, we need to communicate in understandable language. I don’t wish to give offense, but I know I will—I would not be in favor of the staff drafting that statement. I would be in favor of writing it in the simplest possible language. I suggest, Mr. Chairman, that it would be more appropriate for, say, our communications staff or Michelle or somebody like that to draft this statement so that we communicate to the public in a way that is comprehensible. I was taken aback at even the use of the word “stochastic” at the end. We know what that means. The people have no idea what “stochastic” means. Again, I return to my root question. With whom are we trying to communicate? We talk about the markets. The markets are what—economists, theoretical economists, econometricians, ourselves, people on Wall Street, sophisticated operators of financial markets, businesswomen and businessmen, or the public in general? My greatest fear is doing anything that would impugn the integrity or threaten the preservation of this institution, and so I want to plead with you and with the rest of the people around this table: (1) to consider whether we really need to adopt an inflation target at this time and (2) should we do so, to make it as simple and comprehensible and easily communicated as possible and to do so in the same way with the forecast that we are discussing the possibility of issuing. Thank you, Mr. Chairman." CHRG-111hhrg46820--19 Mr. Therrien," Thank you Madam, Chairwoman and members of the Committee. Thank you for the opportunity to testify on behalf of the National Roofing Contractors Association. I am Rob Therrien, President of the Melanson Company, a roofing contractor based in Keene, New Hampshire; and I now serve as President of the National Roofing Contractors Association. The roofing industry is uniquely positioned to play a significant role in quickly stimulating economic growth and job creation across this Nation. However, the Tax Code contains an obstacle that is limiting economic activity in the emerging green building sector. Congress can address this problem by including the Green Roofing Energy Efficiency Tax Act, or GREETA, in the economic stimulus legislation now being considered. This investment in the emerging green economy will immediately help jump-start our economy. By accelerating demand for green roofing systems, GREETA will create 40,000 new jobs in the manufacturing and construction industry; add $1 billion in taxable annual revenue to the economy; reduce the U.S. energy consumption by 13.3 million kilowatt hours annually; cut carbon dioxide emissions by 20 million pounds per year; and save small business millions of dollars through a simpler and more equitable system of taxation and lower energy costs. GREETA amends the Internal Revenue Code to provide a 20-year tax depreciation schedule for commercial roof systems that meet specific energy efficiency standards. Passage of GREETA is necessary because between 1981 and 1993 the depreciation schedule for non-residential property was increased from 15 years to 39 years. However, the current 39-year depreciation schedule is not a realistic measure of the average life expectancy of a commercial roof, which is about 17 years. The large disparity between a 39-year depreciation schedule and 17-year average life span of a commercial roof serves as a major disincentive to building owners to replace their failing roofs. A building owner who replaces a roof before 39 years have elapsed may have to continue to depreciate for tax purposes, even though their roof no longer exists. As a result, many building owners choose not to only do piecemeal repairs, most often with outdated technology, but they do this rather than replace their failing roof in its entirety with new, energy efficient materials. This problem is slowing the adoption of more advanced energy efficient roofs. GREETA will rectify this situation by reducing the tax depreciation schedule for commercial roof systems from 39 years to 20 years on roofs that meet benchmark energy efficiency standards. Enactment of this legislation will accelerate the adoption of energy efficient commercial roof systems by eliminating the disincentive in the Tax Code for building owners to install such systems. Enactment of GREETA would also benefit millions of small business owners by eliminating the need to depreciate more than one roof in instances where the roof must be replaced before the 39-year depreciation schedule has been completed. Given the many economic as well as environmental benefits of GREETA, this legislation enjoys strong support among business groups as well as organized labor. NRCA greatly appreciates your support, Madam Chairwoman. As a co-sponsor of GREETA, it looks forward to working with you and other members to enact this legislation into law. A related short-term incentive to increase employment in the commercial roofing sector could be to provide a 50 percent bonus depreciation for energy efficient roof replacements. This would permit an owner to deduct 50 percent of the adjusted basis of the qualified roof replacement placed into service in the years of 2009 and 2010. This would provide a greater incentive for building owners to initiate energy efficient roof replacements in the economic downturn, and I would say also supports funding for green infrastructure improvements in our Nation's building sector and in the economic stimulus legislation you are looking at. We believe that current trends towards the adoption of green buildings are keen drivers in the economic growth of our industry. We are working to maximize economic, environmental and energy conservation benefits of green buildings. Roof services, for example, across this Nation offer an economic, ready to use platform for the production of renewable solar energy. The U.S. Right now possesses 225 billion square feet of stable roof surface among its existing commercial and residential buildings. If only one-third of this area could be used for solar energy production through photovoltaic systems, our roofs would generate over 50,000 megawatts of power annually, or approximately 8 percent of our current generating capacity. In conclusion, including GREETA for funding for green infrastructure improvements in the economic stimulus legislation will immediately create more jobs and more green collar jobs while also benefiting the environment and conserving energy. Again, thank you for this opportunity to testify today. I would be pleased to answer any questions the members of the Committee may have. [The statement of Mr. Therrien is included in the appendix at page 92.] " CHRG-111hhrg56776--271 Mr. Nichols," Chairman Watt, Ranking Member Paul, thank you for the opportunity to participate in today's hearing, to share our views regarding the Federal Reserve, and specifically, the relationship of supervisory authority to the Central Bank's effective discharge of its duties as our Nation's monetary authority. By way of background, the Financial Services Forum is a non-partisan financial and economic policy organization comprised of the chief executives of 18 of the largest and most diversified financial institutions doing business in the United States. Our aim is to promote policies that enhance savings investment in a sound, open, competitive financial services marketplace. Reform and modernization of our Nation's framework of financial supervision is critically important. We thank you, Mr. Chairman, Ranking Member Paul, and all the members of this committee for all of your tireless work over the past 15 months. To reclaim our position of financial and economic leadership, the United States needs a 21st Century supervisory framework that is effective and efficient, ensures institutional safety and soundness, as well as systemic stability, promotes the competitive and innovative capacity of our capital markets, and protects the interests of depositors, consumers, investors, and policyholders. In our view, the essential elements of such a meaningful reform are enhanced consumer protections, including strong national standards, systemic supervision ending once and for all ``too-big-to-fail,'' by establishing the authority and procedural framework from winding down any financial institution in an orderly non-chaotic way in a strong, effective, and credible Central Bank, which in our view requires supervisory authority. On the 11th of December, your committee passed a reform bill that would preserve the Federal Reserve's role as a supervisor of financial institutions. On Monday of this week, Chairman Dodd of the Senate Banking Committee released a draft bill that would assign supervision of bank and thrift holding companies with assets of greater than $50 billion to the Fed. While we think that it is sensible that the Fed retains meaningful supervisory authority in that bill, we also believe the Fed and the U.S. financial system would benefit from the Fed also having a supervisory dialogue with small and medium-sized institutions, a point which is well articulated by Jeff Gerhart in his testimony. You will hear from him in a moment. As this 15-month debate regarding the modernization of our supervisory architecture has unfolded, some have held the view that the Fed should be stripped of all supervisory powers, duties which some view as a burden to the Fed and distract the Central Bank from its core responsibility as the monetary authority and lender of last resort. Mr. Chairman, we do not share that view. Far from a distraction, supervision is altogether consistent with and supportive of the Fed's critical role as the monetary authority and lender of last resort for the very simple and straightforward reason that financial institutions are the transmission belt of monetary policy. Firsthand knowledge and understanding of the activities, condition and risk profiles of the financial institutions through which it conducts open market operations, or to which it might extend discount window lending, is critical to the Fed's effectiveness as the monetary authority and lender of last resort. It must be kept in mind that the banking system is the mechanical gearing that connects the lever of monetary policy to the wheels of economic activity. If that critical gearing is broken or defective, monetary policy changes by the Fed will have little, or even none, of the intended impact on the broader economy. In addition, in order for the Federal Reserve to look across financial institutions and the interaction between them and the markets for emerging risks, as it currently does, it is vital that the Fed have an accurate picture of circumstances within banks. By playing a supervisory role during crises, the Fed has a firsthand view of banks, is a provider of short-term liquidity support, and oversees vital clearing and settlement systems. As former Fed Chairman Paul Volcker observed earlier this afternoon, monetary policy and concerns about the structure and condition of banks and the financial system, more generally, are inextricably intertwined. While we don't see eye-to-eye with former Chairman Volcker on everything, we sure do agree with him on that. As Anil Kashyap noted, U.S. policymakers should also be mindful of international trends in the wake of financial crisis. In the United Kingdom--I'll point to the same example as Anil--serious consideration is being given to shifting bank supervision back to the Bank of England, which had been stripped of such powers when the FSA was created in 2001. It has been acknowledged that the lack of supervisory authority and the detailed knowledge and information derived from such authority likely undermined the Bank of England's ability to swiftly and effectively respond to the recent crisis. Thank you for the opportunity to appear before you today. [The prepared statement of Mr. Nichols can be found on page 96 of the appendix.] " FOMC20061025meeting--13 11,MS. JOHNSON.," Once again I find myself reporting to you that movements in global oil prices are among the developments during the intermeeting period that were factors in our deliberations about the external sector. Global crude oil spot and futures prices fell further following our September projection but by differing amounts over the maturity spectrum. When we finalized the current baseline forecast, spot prices and very near term futures prices had moved down more than $4 per barrel; futures contracts that mature at the end of 2007 had recorded price declines of about $2; those maturing at the end of 2008 had price declines of about 50 cents. Indeed, for contracts maturing beyond 2009, prices actually rose such that the far-dated contract for December 2012 had moved up about $1 per barrel in price. We adjusted our projection for U.S. oil import prices by amounts similar to these changes in futures prices. The differential movement in prices implies that, even though prices have moved down all along the path through the forecast period, this path now slopes up more steeply than it previously did. So our outlook is for oil prices to rise rather sharply over the forecast period, although from a lower starting point than in the September Greenbook. The reasons for the additional decline in prices during September and October include the return of production to near previous rates at Prudhoe Bay, the absence of any sign of late-season hurricanes in the Gulf of Mexico, and awareness of current high inventory levels. These inventories are by their very nature transitory; hence, market participants seem to believe that some of the current abundant supply will diminish over time, leaving limited spare production capacity and chronic risks to production in Nigeria, Iran, Iraq, and elsewhere. Late last week, OPEC announced production cuts of 1.2 million barrels per day as of November 1. Although the size of actual cuts by individual OPEC suppliers remains to be seen, we judge that significant cuts, albeit not as large as those announced, are needed for prospective demand to be consistent with prices in the futures curve. Those prices remain elevated—around the levels expected at the start of this year. We again asked ourselves how the substantial drop in oil prices since their August peak matters for the U.S. economy. As Dave mentioned, some of the near-term variance in U.S. real GDP growth reflects the path of real imports, including oil imports. The nominal trade deficit is clearly narrowed as a consequence of lower oil prices. We expect that the average oil bill in the fourth quarter will show an improvement from the third quarter of $60 billion at an annual rate. The net trade balance on nominal goods and services will improve by just about the same amount as other trade components experience small, offsetting changes. As oil prices rise going forward, the nominal value of oil imports should move back up; but for 2007 as a whole, we expect that the total figure will be about the same as the total for this year, followed by a moderate increase in 2008. With respect to our forecast for exports, we again expect that real exports of goods and services will expand at an annual rate of about 4½ percent through early 2008 and then will accelerate slightly, to about 5 percent, over the second half of 2008. We see this pace of export growth as reflecting moderately strong growth of trade in both services and merchandise. These components in turn reflect solid average growth of around 3¼ percent in foreign real GDP. The projected acceleration in real exports in 2008 reflects a boost from relative prices as U.S. export price inflation moderates. This projected pace of export growth is somewhat below that observed in recent years, particularly in the first half of this year. To some extent, the double-digit growth of U.S. real exports early this year reflected rapid real GDP growth abroad at that time. But our models cannot explain all the strong growth, and a sizable positive residual has emerged in our model. During the first quarter, exceptionally rapid growth of real GDP was widespread abroad as most industrial countries and many emerging-market economies in both Asia and Latin America recorded particularly robust real expansion. The rapid growth moved many foreign economies closer to potential and was not sustainable over the long run. We read recent indicators of activity abroad as generally confirming our expectation that slowing from those very rapid rates would occur through the year. According to the data, among the industrial countries, Canada and Japan have GDP already decelerating in the second quarter. In contrast, the pace of expansion strengthened in the euro area; but with further tightening of monetary policy and an increase in the value-added tax in Germany to take effect at the start of next year, our outlook calls for a slowdown in growth there as well. For the emerging-market economies, the most important news is Chinese third-quarter real GDP growth, announced just after the Greenbook was distributed. Based on the data and our best estimate of a seasonally adjusted series for the level of Chinese GDP, real growth in China was at an annual rate of about 5½ percent in the third quarter from the second quarter, following two quarters of growth above 12 percent. These data are only approximate as they are inferred from the annual growth rates published by the Chinese authorities. However, it does seem clear that the measures implemented by Chinese officials to cool the economy have had some effect. We are projecting that growth going forward will return to rates between 8 and 8½ percent. Of course, the band of uncertainty around this forecast is significant. We judge growth at that pace to be consistent with Chinese potential and acceptable to Chinese officials. This picture of real output growth abroad is a benign soft landing. We are projecting slowing that does not overshoot in many foreign economies, including importantly the euro area, Japan, and China. We believe that domestic demand growth in Canada, Japan, the euro area, and Mexico will continue to sustain their domestic expansions and growth in the global economy and will underlie ongoing moderate strength in U.S. exports. With respect to the current quarter, trade data for August surprised us with the strength of exports and led us to revise up by more than 2½ percentage points our estimate of the annual rate of growth of real exports in the third quarter. The surprise was widespread across categories of merchandise trade other than computers and semiconductors and included strong exports to most of our trading partners, with the important exceptions of Canada and Mexico. With no special stories or specific components of interest, we have projected that real export growth will revert to its historical relationship with foreign output and relative prices. However, the positive surprise in August reminds us that there is upside risk to our forecast for real exports as well as downside risk should foreign growth slow more than expected. Real merchandise imports in August came in above our expectation as well. We have accommodated that surprise in part by reducing real imports projected for the fourth quarter, particularly real oil imports. All in all, our baseline forecast for the combined contribution of imports and exports to U.S. GDP growth over the forecast period is for a small negative effect during the second half of this year that becomes slightly more negative through the second half of 2008, reaching about 0.4 percentage point as strengthening U.S. real GDP growth boosts import growth above that for exports. David and I will be happy to answer any questions." FOMC20060629meeting--115 113,MR. KROSZNER.," Thank you, Mr. Chairman. At the last meeting I believe Dave Stockton, when he was describing the outlook, said that he was a bit schizophrenic about it. Given the comments of President Moskow, it is clear that he is no longer schizophrenic but that one side has taken over—the dark side. [Laughter] That does not seem to reflect exactly where everyone is, but I think the issues that have been brought out in the Greenbook are extremely important to consider. I, too, have knocked down my growth estimates a bit, although not quite as much as the Greenbook; and I, too, as many people have said, share a concern that some of the numbers coming in on both headline and core inflation are a bit higher than I had hoped, although I think they are still not out of a manageable range. Obviously, payroll employment growth is a bit less robust than in the previous forecast. Since that forecast, we’ve had a little more cooling in housing and some softening of retail demand. I take a slightly different view of the high tax receipts that have been pouring into the Treasury because they are not only corporate tax receipts but also individual tax receipts. In some sense that’s putting a bit of a drag on real disposable income because people seem to be paying a little more in taxes and, at the same time, labor costs and pay have not been going up. So taxes are potentially a bit of a drag, and the Administration seems able to pursue a tighter expenditure policy this year than it has in the past, so we won’t be getting as much of a boost on the fiscal side as we have had. A number of bright spots have been mentioned here, particularly related to business fixed investment, durable goods orders, and business confidence. But what are some of the key risks that we have before us? Obviously, housing has been discussed in great detail, and so I won’t go through it in more detail. I noted, as Governor Bies did, the importance of cancellations in suggesting a change in the way people are dealing with these markets. If cancellations go up significantly, then a lot more housing stock that is searching for a buyer could be left on the market. Anecdotally, I’ve heard the same kinds of things that President Guynn mentioned, that the equivalent of the toaster is perhaps being given out. Such incentives are not showing up in the reported housing price, but other adjustments are. I’m not quite as optimistic about world economic growth as the forecast is. I think a lot of uncertainties exist there. We have seen and are seeing a lot of elections, particularly in emerging markets. Mexico obviously has one coming up very soon, which could have a significant effect on a very important trading partner of the United States. Also, as a number of people have mentioned, we’re seeing a lot of policy tightening around the world. The obvious question is whether the central banks outside the United States are behind the curve or ahead of the curve. Well, wherever they are, they are moving along a curve, and they seem to be moving more aggressively than they have in the past. I think the tightening is going to have more of an effect than has been embedded in a number of the forecasts, not only here but also at the IMF. Another concern that I have relates to something that President Pianalto mentioned—a disconnect between the numbers that we’re seeing on consumption and business optimism about investment. My concern is about what’s going to be happening to demand for their products down the line. It’s certainly disconcerting to hear that one of the largest private institutions in the world—Wal-Mart—is missing its growth targets fairly significantly. They are a very important part of retail sales. One could even say that they effectively know what retail sales are before the numbers are reported because their sales are so highly correlated with overall retail sales. So my concern is that we’re having the economy do the right sort of thing by moving more toward business investment and a little away from consumption, but if we move too much away from consumption, the demand won’t be there to make the investment pay off. We saw a bit of this in the late 1990s as we moved much more in the investment direction, but the investment turned out not to have the kinds of returns that people were expecting. Now we’re in a very fortunate situation because, even if those returns decline dramatically, a lot of profitability is out there, as Governor Warsh said. So profits could drop quite significantly, but we’re not going to see a real problem in the corporate sector, as we might have in other circumstances. I don’t want to overemphasize this concern, but to me it’s a bit of a puzzle, and I see it definitely as a risk. Turning to the inflation outlook, people have mentioned both here and publicly a cavalcade of concerns about the upticks in PCE and CPI core numbers, which have helped in turn to reduce inflation expectations. Term premiums continue to remain low, and forward rates continue to remain low. Often inflation seems to have a bit of momentum—it continues to move up or stays elevated—even as the economy begins to slow a bit. We have to be careful in deciphering what will continue to move up and what is just inflation that is lagging a bit as the economy slows. We have seen a dramatic change in commodity prices since our last meeting. Basically, within a few days of the meeting on May 10, almost all the major commodities, whether copper, gold, or whichever one you want, came to a peak. Since then, oil has come down a little, although not all that much. I think it’s heartening for the inflation outlook going forward that those elevated levels didn’t stay that elevated. Although those commodity prices are much higher in 2006 than they had been previously, oil prices have not increased that much during 2006. So what’s going to happen to core inflation going forward? I think the excellent presentation that we had, in particular the discussion of the attempts to see how well we are modeling historical inflation and inflation going forward, shows that we have a long way to go and that we don’t really understand those dynamics very well. I share Governor Kohn’s intuition, for the reasons that he articulated, that core inflation going forward will soften a bit more than the Greenbook projects. I’m not going to repeat those reasons; but as Governor Kohn said, there’s a lot of uncertainty about them, and we don’t understand all that much. Ultimately, as a number of people have mentioned, it comes down a lot to the type of statements that we make, the credibility that we have. That’s true not only here but around the world, where we are seeing inflation rates and expected inflation rates come down quite a bit. That’s something that ultimately we control very directly. In today’s circumstances, when inflation is not really out of control but is moving up a little, being very clear about what our concerns are can have benefits in bringing down expectations and perhaps changing the inflation dynamic. Thank you, Mr. Chairman." CHRG-111hhrg48868--219 Mr. Polakoff," Congressman, I would only offer that from an OTS perspective, we are not involved in that role and we are not involved with the communication requests from Members of Congress. " CHRG-111hhrg51591--120 Mr. Hunter," Well, again, I think this is the role of a solvency regulator, solvency/systemic risk regulator, and that there should be specific limits on leverage. " FOMC20071031meeting--227 225,MR. POOLE.," I’m not saying I would ignore the costs, but maybe we need to be clear about what this probability distribution is supposed to mean. I thought that this was supposed to mean simply the weights that I would give on various possible outcomes in terms of the probability that the forecast might be 1 percentage point below or 1 percentage point above the central tendency, however I described it. Now, I agree that a full analysis requires that you also add the costs to those, but I would interpret that as not being part of the projections process for GDP and inflation but rather you’d fold that in through the policy decision as to how you weight those various possible outcomes. But I have interpreted it all along as being really a statement about your probability distribution on the outcomes unweighted by the severity of the outcome." fcic_final_report_full--566 Fed could have granted up to three one-year extensions of that exemption. 15. FCIC staff computations based on data from the Center for Responsive Politics. “Financial sector” here includes insurance companies, commercial banks, securities and investment firms, finance and credit companies, accountants, savings and loan institutions, credit unions, and mortgage bankers and brokers. 16. U.S. Department of the Treasury, Modernizing the Financial System (February 1991); Fed Chair- man Alan Greenspan, “H.R. 10, the Financial Services Competitiveness Act of 1997,” testimony before the House Committee on Banking and Financial Services, 105th Cong., 1st sess., May 22, 1997. 17. Katrina Brooker, “Citi’s Creator, Alone with His Regrets,” New York Times, January 2, 2010. 18. John Reed, interview by FCIC, March 24, 2010. 19. FDIC Institution Directory; SNL Financial. 20. Fed Governor Laurence H. Meyer, “The Implications of Financial Modernization Legislation for Bank Supervision,” remarks at the Symposium on Financial Modernization Legislation, sponsored by Women in Housing and Finance, Washington, D.C., December 15, 1999. 21. Ben S. Bernanke, written testimony before the FCIC, Hearing on Too Big to Fail: Expectations and Impact of Extraordinary Government Intervention and the Role of Systemic Risk in the Financial Crisis, day 1, session 1: The Federal Reserve, September 2, 2010, p. 14. 22. Patricia A. McCoy et al., “Systemic Risk through Securitization: The Result of Deregulation and Regulatory Failure,” Connecticut Law Review 41 (2009): 1345–47, 1353–55. 23. Fed Chairman Alan Greenspan, “Lessons from the Global Crises,” remarks before the World Bank Group and the International Monetary Fund, Program of Seminars, Washington, DC, September 27, 1999. 24. David A. Marshall, “The Crisis of 1998 and the Role of the Central Bank,” Federal Reserve Bank of Chicago, Economic Perspectives (1Q 2001): 2. 25. Commercial and industrial loans at all commercial banks, monthly, seasonally adjusted, from the Federal Reserve Board of Governors H.8 release; FCIC staff calculation of average change in loans out- standing over any two consecutive months in 1997 and 1998. 26. Franklin R. Edwards, “Hedge Funds and the Collapse of Long-Term Capital Management,” Jour- nal of Economic Perspectives 13 (1999): 198. 563 27. “Hedge Funds, Leverage, and the Lessons of Long-Term Capital Management,” Report of the Pres- ident’s Working Group on Financial Markets, April 1999, p. 14. 28. Edwards, “Hedge Funds and the Collapse of Long-Term Capital Management,” pp. 200, 197; and CHRG-111hhrg50289--83 Mr. Cohen," Franchise businesses are poised to help lead the economy on the path to recovery. Studies show that the franchise industry consistently out performs the non-franchise business sector creating more jobs and economic activity in local communities across the country. A 2008 IFA report, for example, documents that franchising grew at a faster pace than many other sectors of the economy from 2001 to 2005. Franchise business output over this period increased 40 percent compared to 26 percent for all businesses. The message is clear, Madam Chairwoman, provide small business entrepreneurs and franchisees with access to capital and we will create jobs. We are not looking for a bailout. What we need is functioning credit markets. If the commercial markets cannot function, Congress needs to figure out a way to use the SBA as a temporary alternative. There are several steps that Congress could consider to make it easier for entrepreneurs to access capital, and I have detailed these recommendations in my prepared statements. I have one final note. Unbelievably, the SBA has actually created new roadblocks for small businesses during this recession. In March it shifted policy on goodwill financing of transfers and acquisitions and placed a cap on the amount that can be financed under the guaranteed loan program. Since the true value of most businesses is tied to the cash flow rather than the value of the assets on the books, the policy has placed an arbitrary limit on the valuation of some businesses. Finally, I would like to suggest the best solution for the struggles facing small business is more lending, not more government spending. As shown in my experience in the hundreds of thousands of small franchise businesses in every local community, lending leads to more sustainable renewable job growth and economic recovery. Thank you for the opportunity to participate in today's important hearing on small business capital. I think you will agree with the franchise business community can play a vital role in this recovery. [The prepared statement of Mr. Cohen is included in the appendix.] " CHRG-110hhrg44903--17 Mr. Geithner," Thank you, Mr. Chairman, Ranking Member Bachus, and other members of the committee. I appreciate the opportunity to be here with you today. We are dealing with some very consequential issues, and I think as a country we are going to face some very important questions going forward. I am particularly pleased to be here with Chairman Cox from the SEC. We are working very, very closely together in navigating through the present challenges. And I want to express appreciation for his support and cooperation. The U.S. and the global financial systems are going through a very challenging period of adjustment, an exceptionally challenging period of adjustment. And this process is going to take some time. A lot of adjustment has already happened, but this process will necessarily take time. And the critical imperative of the policymakers today is to help ease that process of adjustment and cushion its impact on the broader economy, first stability and repair and then reform. Looking forward though, the United States will look to undertake substantial reforms to our financial system. There was a strong case for reform before this crisis. Our system was designed in a different era for a different set of challenges. But the case for reform, of course, is stronger today. Reform is important, of course, because a strong and resilient financial system is integral to the economic performance of any economy. My written testimony outlines some of the changes to the financial system that motivate the case for reform. These changes include, of course, a dramatic decline in the share of financial assets held by traditional banks; a corresponding increase in the share of financial assets held by nonbank financial institutions, funds, and complex financial structures; a gradual blurring of the line between banks and nonbanks, as well as between institutions and markets; extensive rapid innovation in derivatives that have made it easier to trade and hedge credit risk; and a dramatic growth in the extension of credit, particularly for less creditworthy borrowers. As a consequence of these changes and other changes to our financial system, a larger share of financial assets ended up in institutions and vehicles with substantial leverage, and in many cases, these assets were financed with short-term obligations. And just as banks are vulnerable to a sudden withdrawal of deposits, these nonbanks and funding vehicles are vulnerable to an erosion in market liquidity when confidence deteriorates. The large share of financial assets held in institutions without direct access to the Fed's traditional lending facilities complicated our ability as a central bank, the ability of our traditional policy instruments to help contain the damage to the financial system and their broader economy presented by this crisis. I want to outline a core set of principles, objectives that I believe should guide reform. I offer these from my perspective at the Federal Reserve Bank of New York. The critical imperative is to build a system that is a financial--that is more robust to shocks. This is not the only challenge facing reform. We face a broad set of changes in how to better protect consumers, how the mortgage market should evolve, the appropriate role of the GSEs and others, and how to think about market integrity and investor protection going forward. I want to focus on the systemic dimensions of reform and regulatory restructure. First on capital, the shock absorbers for financial institutions, the critical shock absorbers are about capital and reserves, about margin and collateral, about liquidity resources, and about the broad risk management and control regime. We need to ensure that, in periods of expansion, in periods of relative stability, financial institutions and the centralized infrastructure of the system hold adequate resources against the losses and liquidity pressures that can emerge in economic downturns. This is important both in the institutions and the infrastructure. And the best way I think that we know how to limit pro-cyclicality and severity of financial crises is to try to ensure that those cushions are designed in a way that provides adequate protection against extreme events. A few points on regulatory simplification and consolidation. It is very important, I believe, that central banks and supervisors and market regulators together move to adopt a more integrated approach to the design and enforcement of these capital standards and other prudential regulations that are critical to financial stability. We need a more consistent set of rules, more consistently applied, that substantially reduce the opportunities for arbitrage that exist in our current very segmented, fragmented system. Reducing moral hazard is critical. As we change the framework of regulation oversight, we need to do so in a way that strengthens market discipline over financial institutions and limits the moral hazard risk that is present in any regulated financial system. The liquidity tools of central banks and, to some extent, the emergency powers of other public authorities were created in the recognition of the fact of the basic reality that individual financial institutions cannot protect themselves fully from an abrupt evaporation in market liquidity or the ability to liquify their assets. Now the moral hazard that is associated with these lender-of-last-resort tools needs to be mitigated by strong supervisory authority over the consolidated financial entities that are critical to the financial system. On crisis management, the Congress gave the Federal Reserve very substantial tools, very substantial powers to mitigate the risk to the economy in any financial crisis. But I think, going forward, there are things we could put in place that would help strengthen the capacity of governments to respond to crises. As Secretary Paulson, Chairman Bernanke, and Chairman Cox have all recognized, we need a companion framework to what exists now in FDICIA for facilitating the orderly liquidation of financial institutions where failure may pose risks to the stability of the financial system or where the disorderly unwinding or the abrupt risk of default of an institution may pose risk to the stability of the financial system. Finally, we need a clearer structure of responsibility and authority over the payment systems. These payment systems, settlement systems, play a very important role in financial stability. And our current system is overseen by a patchwork of authorities with responsibilities diffused across several different agencies with significant gaps. It is very important to underscore that, as we move to adapt the U.S. framework, we have to work to bring a consensus among the major economies about complementary changes in the global framework. Moving forward will require a very complicated set of policy choices, including determining what level of conservatism should be built into future prudential regulations and capital requirements; what institutions should be subject to that framework of constraints or protections; which institutions should have access to central bank liquidity under what conditions; and many other questions. A few points, finally, about how to think about the role of the Federal Reserve in promoting financial stability. First, the Federal Reserve has a very important role today, working in cooperation with bank supervisors and the SEC in establishing the capital and other prudential safeguards that are applied on a consolidated basis to institutions that are critical to the proper functioning of markets. Second, the Federal Reserve, as the financial system's lender of last resort, should play an important role in the consolidated supervision of those institutions that have access to central bank liquidity and play a critical role in market functioning. The judgments we are required to make about liquidity and solvency of institutions in the system requires the knowledge that can only come from a direct, established, ongoing role in prudential supervision. Third, the Federal Reserve should be granted clear authority over systemically important payments or settlement systems. Fourth, the Federal Reserve Board should have an important consultative role in judgment about official intervention in crises where there is potential for systemic risk as is currently the case for bank resolutions under FDICIA. And finally, the Federal Reserve's approach to supervision and to market oversight will need to look beyond the stability just of individual banks to market developments more broadly, to the infrastructure that is critical to market functioning, and the role played by other leveraged financial institutions. I want to emphasize in conclusion that we are working very actively now today in close cooperation with the SEC and other bank supervisors and with our international counterparts to put in place steps now that offer the prospect of improving the capacity of the financial system to withstand stress. We are doing this in the derivative markets. We are doing it in secure funding markets, and we are doing it with respect to the centralized infrastructure. I very much look forward to working with you and your colleagues as we move ahead in working to build a more effective financial regulatory framework in this country. Thank you very much. [The prepared statement of Mr. Geithner can be found on page 55 of the appendix.] " FOMC20080430meeting--54 52,MR. SHEETS.," Much as Dave just described for the domestic economy, our forecast for economic activity abroad also is little changed from the last Greenbook. Recent data have come in consistent with our view that the slowdown in U.S. activity and the ongoing financial turbulence will leave an unmistakable imprint on economic growth abroad. But the extent of this imprint appears to be somewhat less pronounced than was the case in the high-tech-led recession earlier this decade, particularly for the emerging market economies. Thus we continue to see foreign growth stepping down from last year's 4 percent pace to near 2 percent during the second and third quarters of this year, as foreign activity is constrained by the weakening U.S. economy and headwinds from the ongoing financial turmoil. With these factors projected to abate, we see growth abroad rising back to near its trend rate of around 3� percent in 2009. Suffice it to say, the risks around this forecast remain significant. On the upside, China's surprisingly strong first-quarter GDP growth--which we estimate was nearly 11 percent at an annual rate--highlights the possibility that growth in emerging Asia, and perhaps elsewhere as well, may remain more resilient than we anticipate. On the downside, the softer-than-expected German IFO data last week and the negative tone of the Bank of England's recent credit conditions survey suggest that growth in Europe may slow more than we now project. The exchange value of the dollar, after falling sharply in the month before the March FOMC meeting, has rebounded somewhat during the intermeeting period. Against the major currencies, the dollar is up almost 2� percent, with a particularly sizable gain against the yen. Going forward, we continue to see the broad real dollar depreciating at a 3 percent pace, reflecting downward pressures associated with the large (albeit narrowing) current account deficit. This depreciation is expected to come largely against emerging market currencies (including the Chinese renminbi), which have moved less since the dollar's peak in early 2002. Turning to the U.S. external sector, we now see the arithmetic contribution from net exports to first-quarter U.S. real GDP growth as likely to be around 0.3 percentage point, down a few tenths from the last Greenbook. Recent readings on exports have continued to point to strength, but imports in February bounced back from their December and January weakness more vigorously than we had expected. For 2008 as a whole, we continue to believe that the demand for imports will be significantly restrained by the weak pace of U.S. activity and, to a lesser extent, by the depreciation of the dollar and rising prices for imported commodities. We thus see imports contracting nearly 2 percent this year. In contrast, exports are expected to post 7 percent growth this year, supported by the weaker dollar. The projected contraction of imports, coupled with still-strong export growth, suggests that net exports will contribute nearly 1� percentage points to U.S. GDP growth this year-- the largest positive contribution from net exports to annual growth in more than 25 years. In 2009, import growth is expected to bounce back to around 4 percent as the U.S. economy recovers, and the positive contribution from net exports should accordingly decline to just under � percentage point. Oil prices have continued their apparently relentless march upward, with spot WTI now trading at $115 per barrel. Since your last meeting, the spot price of WTI has increased $6 per barrel, and the far-futures price has moved up almost $5 per barrel. Over the past year, spot oil prices have risen a staggering 80 percent. While the high level of oil prices appears to be taking a bite out of oil demand in the United States and other industrial countries, the demand for oil in the emerging market economies--particularly in China and India--has been supported by the resilience of GDP growth there. In addition, fuel subsidies in some countries (including India) have sheltered consumers from the effects of higher oil prices. In line with these observations, India's state-owned oil company recently released projections indicating that oil demand in the country will increase 8 to 10 percent this year. The supply-side response to the rising demand for oil has been only tepid. Stated bluntly, OPEC remains unwilling--or unable--to increase its supply to the market. Indeed, OPEC has actually cut its production over the past two years. In addition, oil production in the OECD countries has been on a downward trajectory, primarily reflecting the decline in the North Sea fields and in Mexico's giant Cantarell field. Mexico's state-owned oil company recently indicated that, for the sixth consecutive year, additions to its reserves had failed to keep pace with production. The grim outlook for Mexico's oil industry has prompted the government to consider allowing foreign investment in the country's energy sector, a move that would require constitutional reform. Finally, although the potential supply from non-OECD nonOPEC countries is substantial, production continues to be hampered by inadequate infrastructure and by uncertainties about property rights and the stability of tax regimes. In the absence of any better approach, we continue to base our forecast on quotes from futures markets, which see oil prices as likely to remain high--at or above $110 per barrel--through the end of the forecast period. But the confidence bands around this forecast are exceptionally wide given uncertainties surrounding the outlook for oil supply and demand. Nonfuel commodity prices have also been on a wild ride of late. The prices of many of these commodities increased particularly sharply in January and February, before peaking in early March. On balance, our index of nonfuel commodity prices rose at a hefty annual rate of 50 percent during the first quarter. We project a further 13 percent rise in the second quarter, but--again in line with quotes from futures markets--we see these prices flattening out thereafter. The underlying drivers of the sustained run-up in the prices of nonfuel commodities have been broadly similar to those for oil--sharp increases in demand (particularly from emerging-market economies) coupled with typically lagging and often muted supply responses. Notably, however, moves in nonfuel commodity prices since the March FOMC meeting have been quite varied. For example, copper and aluminum prices are up whereas nickel and zinc prices are down. For foods, corn, rice, and soybean prices have risen while wheat prices have declined substantially. The overall strength of commodity prices continues to put upward pressure on inflation in many countries and to complicate life for central banks. Notably, in the euro area, 12-month headline inflation in March rose further, to 3.6 percent, well above the ECB's 2 percent ceiling. In the United Kingdom, inflation pressures stemming from rising utility, gasoline, and food prices are likely to push inflation toward 3 percent during the summer, raising the risk that Mervyn King will be required to write another letter to the Chancellor of the Exchequer explaining why inflation has deviated from the 2 percent target. Concerns about the inflation outlook have limited the willingness of both the ECB and the Bank of England to cut policy rates to address slowing growth. Perhaps even more striking, faced with upward pressures on inflation from rising food and energy prices coupled with still-solid economic growth, central banks in a broad array of emerging market economies tightened policy over the intermeeting period. This group included China, Singapore, India, Brazil, Russia, Poland, Hungary, and South Africa. In addition, some countries have recently responded to social unrest and other strains brought on by higher food prices by restricting exports of foodstuffs, particularly rice, and this has exacerbated upward pressure on the global prices of these commodities. The run-up in commodity prices, coupled with the weaker dollar, has pushed up U.S. core import price inflation of late. Core import prices are now estimated to have increased at a 7� percent annual rate in the first quarter, more than twice the pace of increase in the second half of last year. Prices of material-intensive imports (including industrial supplies and foods) are seen to have surged at a surprisingly rapid pace of 20 percent in the first quarter, on the back of the rapid rise in commodity prices. Prices of imported finished goods (including consumer goods, capital goods, and autos) are estimated to have risen at a comparatively muted rate of 3� percent, but this also was up sharply compared with recent quarters. The acceleration in finished goods prices seems well explained by recent moves in the dollar, however, and does not suggest any notable increase in the extent of exchange rate pass-through. Going forward, we see core import price inflation remaining elevated in the second quarter, at around 6 percent. Thereafter, core import price inflation should abate, given the projected flattening out of commodity prices and the slower pace of dollar depreciation. " FOMC20070807meeting--98 96,MR. KOHN.," Thank you, Mr. Chairman. Building on what the Vice Chairman just said, I have been listening in on that Morning Call. I’ve found it very useful, and it’s certainly an opportunity to ask questions if you have them. My forecast for the most likely outcome for output over the next few years is close to that of the staff—growth a little below potential for a few quarters, held down by the housing correction, and the unemployment rate rising a little further. Although some recent data for housing, consumption, and capital spending have been a bit to the soft side, we need to view those data against the background of a lower path for potential GDP and recall the tendency we’ve seen over the past several quarters for short runs of data that are a little hotter or a little cooler than we expected. I think this is sort of what it feels like when the economy is running at about 2 percent. I see a number of reasons to think that moderate growth remains the most likely outcome going forward. First, as President Stern has stressed from time to time, is the natural resilience of the economy, its tendency to grow near potential unless something is pushing it one way or another. If anything, this resilience has probably increased over the past couple of decades, reflecting more- flexible labor and product markets. Second, global growth remains strong, supporting the growth of exports. I don’t think this growth should be undermined by the fact that some unknown quantity of losses in the U.S. mortgage market is being absorbed by investors overseas, and the recent declines in the dollar will reinforce the effects of good foreign demand for U.S. goods and services. Third, the most likely factor to throw the economy off its potential is the financial markets. My most likely forecast assumed that the credit markets would begin to settle down over coming weeks with some, but limited, net tightening of conditions. I’ll return to the subject in a bit, but my outlook in this regard does rest fundamentally on the very strong financial condition of the nonfinancial business sector and commercial banks and my expectation that most households accounting for the vast bulk of consumer spending will not find credit availability newly constrained. Finally, a resumption of growth in consumption should be supported by moderate growth in jobs and household income as the rebound in productivity is limited by the slower path for trend productivity and as income shares shift a little toward labor. I also assumed that households would not face a repeat of the rise in gasoline prices that has taken something out of recent consumption demand. Then moderate growth in consumption along with good export markets should, in turn, support business investment spending. I expect this path for output to be associated with core inflation remaining in the neighborhood of 2 percent. If energy prices follow the path in futures markets, total inflation would come down to 2 percent as well. Basically I don’t see anything in my central tendency forecast for the economy that would push inflation very much one way or another. The economy produces around its long-run potential. My NAIRU was 4¾ percent. Inflation expectations as best we can judge are anchored at something like 2 percent PCE inflation. I’m encouraged that the most recent data on prices have tended to confirm that core inflation remains fairly low. Most measures of compensation also do not show a marked acceleration that might be associated with producing appreciably beyond the economy’s sustainable level of production. Risks around my inflation forecast remain to the upside, provided that output follows my most likely path. Utilization is tight. The recent run-up in energy prices could still feed through to expectations. The damped increase in productivity growth implies greater pressure on business costs and margins. Historically, nominal wages have tended to respond more sluggishly to changes in trend productivity than do prices, and this could be especially the circumstance when workers have seen real incomes held down by higher energy prices and business profit margins have been high. At the same time, like many around this table, I think that the downside risks around the forecast of moderate growth and production going forward have increased. For some time I thought that the risk of a shortfall from our central tendency outweighed the risk of an overshoot, mainly centered on housing and consumption. But the financial developments of the last intermeeting period have appreciably increased those risks. As many have remarked, and Bill said so nicely, problems have spread from the subprime sector to a good part of the mortgage market more generally, including a severe restriction on securitization of nonconforming mortgages. Some business credit has been affected. Spread are widening across a broad array of instruments and ratings. This has occurred in an atmosphere of greatly increased volatility and uncertainty, partly related to the questions about the pricing of complex structured credits that weren’t well understood and compounded by a loss of confidence in the rating agencies. The uncertainty is also a reflection of the perception that activity and prices in the housing market have not yet shown any signs of beginning to stabilize. I agree that we need to keep our focus on the effects of these developments and the financial markets on the economy, not on the distribution of wealth in the financial sector. The relationship of financial markets to real activity is multifaceted, not easily modeled with interest rates and stock prices, especially when markets are reconsidering risk. Tightening nonprice terms of lending, the reduced availability of credit, and simply the pervasive sense of uncertainty about the price of assets and cash flows can also affect spending. In such an environment, it wouldn’t be surprising if businesses and households postponed capital investments. I agree that this reassessment is a fundamentally healthy but somewhat messy correction to more-sustainable term and risk premiums. The most likely outcome is that it will be limited in duration and effect, and that’s what I assume for my forecast. Well-capitalized banks and opportunistic investors will come in and fill the gap, restoring credit flows to nonfinancial businesses and to the vast majority of households that can service their debts. In the end, credit conditions will be tighter than they were a little while ago, for the most part justifiably so, and the effect on output will probably not be very large. To be sure, the latest episode comes on top of a rise in term premiums over the May to June intermeeting period. As a consequence, financial conditions have tightened noticeably in the past few months, even abstracting from market disruptions of the last week. The federal funds rate has been as high as it has been in part to offset the accommodative effects of low volatility and tight term and credit premiums. I think that, even in the relatively benign adjustment scenario, we’ll need to look at whether that rate is still sufficiently supportive of economic activity. But in the circumstances—that is, the benign adjustment—that reassessment can await further information about aggregate demand and further assurance that inflation will remain low. I assumed an easing of policy in 2008 and 2009 in my projections to take account of this. But we can’t know how the market situation will evolve. I also believe that there’s a non-negligible chance of a prolonged and very messy adjustment period that would feed back substantially on confidence, wealth, and spending. With the rating agencies discredited and markets vulnerable to adverse news on the economy, the period of unusual uncertainty could be prolonged. The greatest risk is in the household sector, where uncertainty about valuations of mortgages could continue to feed back on credit availability, housing demand, and prices in a self-reinforcing cycle. Moreover, as lenders and borrowers revise assumptions about house prices even further, credit from home equity lines of credit and mortgage refinancings will become even less available and more expensive, putting to the test the hypothesis that I have been working under—that the feedback from housing on consumption can be approximated by a wealth effect, not something more serious working through housing equity withdrawal. As I noted, I don’t think this is the most likely outcome, but this tail of distribution is a lot fatter than it was only a month or so ago. Thank you, Mr. Chairman." FOMC20060629meeting--176 174,VICE CHAIRMAN GEITHNER.," Thank you, Mr. Chairman. I would read our discussion yesterday as implying a central tendency to our forecast of an economy that’s growing basically at potential over the forecast period with a trajectory for inflation that is higher than we’d like if it were to extend over time and that moderates slowly and modestly over that period, and the risks of that forecast are still slightly to the upside. Even if we were all quite confident about that basic forecast and had the same view of the risks around it, we couldn’t say that we actually know at this point how much more tightening we will need to achieve our target. I think it’s obvious that we should move today. I think we need to send a signal that we want the fed funds rate to have a positive slope going forward. Achieving the probability of 50-50 around a move in August would be terrific, but I don’t know if we can do that. We want to have as much flexibility as we can have. We want the market’s expectations about policy to be responsive to the data going forward, not sticky because of anticipation of what we’re going to do; and I think, of course, that we don’t want to pre-commit. I believe that alternative B actually does a very nice job of achieving this objective. But it’s all about the alternatives, and I think that alternative B, like democracy, is better than the alternatives. [Laughter] I think we face two types of risk now. One risk, which I think Janet articulated best yesterday, is that we may already be in the midst of what will prove to be a more acute adjustment in housing and a much more dramatic response by households to the change in expectations about future income and wealth and that the saving rate has been unsustainably low and will have to rise more significantly. That is a plausible scenario going forward. A second risk is that, under an expectation that we stop at 5.25, we may be left below the optimal path for policy. I want to say two things emphasizing that risk, even though I don’t think we can judge it as the predominant one. First, to echo what I said yesterday, if you look back at where we thought we would end and where we thought prevailing estimates of the neutral rate were, we have been way under and the market has been way under. The Bluebook estimate of now-prevailing equilibrium illustrates a basic 200 basis point move in estimated equilibrium over this period, and the market’s expectations of the terminal rate have moved a lot. So we may have been too loose for too long, and we may have to do more moves to adjust for the effect that our stance has had on inflationary behavior, inflation acceptance, psychology, and momentum. The optimal control exercise—and I thought the memo that you gave us before the meeting was very helpful—left me a little troubled because you can read those exercises as saying that, if our objective for inflation really is 1.5, we’re going to have to be tighter than 5¼ percent; and if you relax the assumption around smoothing, you get a significantly higher near-term path for the fed funds rate that is judged to be optimal. But even with that, those exercises imply a view about inflation persistence that says we’re going to be above 1.5 percent for a very, very long time. That situation, as I said, does create some risk that people will read the persistence of inflation as implying that we have higher inflation tolerance than we do or it may make us vulnerable to some further gradual erosion in credibility. So it’s possible that we’re going to need to be higher than the funds rate path assumed in the Greenbook, but we just don’t know, and we don’t need to make that judgment today. We do not want to try to cap expectations at any particular level and hold them down. Just a few things on the suggestions made. All the suggestions were very thoughtful, but I would oppose all of them. [Laughter] The rise in core inflation would be unwelcome if it was sustained or if it represented an expected path for inflation that was significantly higher than the central forecast. To say that a bulge like the one we’ve seen today, given what we think is driving it, is unwelcome increases our vulnerability to the perception that we’re going to be a little too backward-looking. We need the flexibility to stop at the point where core inflation is still accelerating, and “unwelcome” would limit our capacity to do that. I think Governor Kroszner was exactly right in resisting the suggestion that we characterize our current stance of policy as somewhat restrictive. We don’t know how restrictive policy is; but even if we did, we should not be in the business of calibrating a judgment in our statements about how restrictive we are. Most important, the statement says implicitly what I think, Bill, you’re trying to achieve, which is to convey that we see monetary policy as getting some traction on the economy today. We also don’t need to be quite as vivid in saying our expectation is to bring core inflation down over the medium term to some implicit level. “Medium term” does have a lot of flexibility in it, but as the optimal control exercises suggest, we don’t really know what the costs are of adopting a specific horizon now for bringing inflation down from what is only a very small deviation from our implicit target. I think that alternative B strikes a good balance now, and each suggestion would alter that balance in a way that would not be as good at capturing the consensus about the trajectory that was described yesterday. So I support moving 25 today and the language in alternative B." FOMC20080318meeting--70 68,MR. PLOSSER.," Well, I've been supportive of those, and I want to compliment the New York Desk and the people who have worked on this because I think they are very innovative. I'm not clear how successful these instruments will be, and they are not without their own set of risks of creating some potentially dangerous expectations regarding future Fed behavior, which eventually we must deal with. But I think they are worth trying as long as they are removed in due course. I can also support a further narrowing of the spread between the funds rate and the primary credit rate, although I would eventually like to see a review of what we think that spread ought to be in more normal times and what our exit strategy might be like as we move toward that. Giving some thought down the road to that I think would be helpful. So while I believe that we have appropriately reduced the funds rate in response to the worsening economic outlook for the real economy, I am less convinced that reducing the funds rate further will do much to stem the liquidity problems in the market or to lower risk premiums. Uncertainty about valuations seems to be the root cause of liquidity problems. The price discovery process needs to continue, and it may take a while. In this case, I think the Fed needs to continue to do its job to reassure markets that it will act as an appropriate lender of last resort, but we must be careful that a lower funds rate, if that is the path we take, doesn't become just a form of forbearance that contributes to delaying the necessary writedowns and the price discovery process itself. Yes, the financial markets can have spillovers to the real economy to which the Fed needs to react with monetary policy, and I believe we have. At the same time, we need to keep focused on both parts of our mandate. We put our credibility at risk if we do not do so, and this would be a cause for severe problems later when we may need to act to regain it. We will have to face the fact at some point that we will disappoint the markets with their ever-increasing forecast of a lower funds rate. Thank you, Mr. Chairman. " FOMC20080916meeting--124 122,MR. PLOSSER.," Thank you, Mr. Chairman. New data and survey and anecdotal information in the Third District suggest that the economy in our District continues to be weak. There have been further declines in some industries and deceleration of growth in others, but generally data are coming in as expected. Employment growth was flat over the three-month period ending in July, and I expect that unemployment rates in our three states will tick up in August, when the regional data come out, much as it did in the national data. Overall, the activity in our region, as I said, has remained weak since the last meeting. Housing construction continues to be weak. Sales of existing homes remain sluggish, and inventories remain high. One builder said, ""Things don't feel very good. I feel as though I am in a tar pit. My feet are maybe now on the bottom; my nose is still above the level of the tar; and while I may feel the bottom, it still doesn't feel very good."" On the commercial real estate side, we saw a slight uptick in the value of July contracts, but they are not very high. In fact, they really remained at the average level of the last seven years. Retailers remain pessimistic in the latest Beige Book. District banks saw loans rise slowly but steadily in August. The Beige Book reports from them see slight gains in consumer and real estate lending and C&I loans essentially flat. The good news is from our business outlook survey for September, which will be released to the public on Thursday at 10:00 a.m., but the results are in. The survey is from the first two weeks of September. The general activity index has been negative, if you recall, for the last nine months--since December 2007. The last value was minus 12.7. The September number, not to be released until Thursday, is a positive 3.4, so that's a swing of 15 points to the good. This is clearly somewhat encouraging, although we don't want to get too excited about one month--but it is good news. Furthermore, both the new orders and shipment indexes in the survey improved in September. Price pressures have abated somewhat with the fall in commodities and oil, but they remain. The six-month-ahead outlook indexes also improved substantially in the new survey. This is the best picture that the survey has painted in certainly quite a while--about the last six or eight months. In summary, the economic conditions of the Third District remain weak and sluggish but are not materially different from what we and our business contacts had been expecting over the near term. While a lot of attention in the short run is being paid to financial markets' turmoil, our decision today must look beyond today's financial markets to the real economy and its prospects in the future. In this regard, things have not changed very much, at least not yet. Indeed, the Greenbook forecast has changed only modestly since the last Greenbook. The economy remains weak but not appreciably different from what I anticipated or even what the Greenbook anticipated at the last meeting. I agree that the recent financial turmoil may ultimately affect the outlook in a significant way, but that is far from obvious at this point. We also need to acknowledge the long lag times associated with the effect of monetary policy actions on the real economy. Actions today will not help us very much in the very, very near term where the real economy is concerned. On the inflation front, there has been some good news. The decline in the retail price of gas has contributed to a decline in headline inflation in August. In my view, the price declines in commodities and oil have mitigated somewhat the upward pressure on expectations and have reduced the likelihood that inflation expectations will become unanchored, at least in the near term. Nevertheless, I remain concerned about the inflation outlook going forward. In part, my concern stems from the fact that I do not see that the ongoing expected slowdown in economic activity is entirely demand driven. As I noted before, the impact of financial shocks and high commodity prices can plausibly lead to a decline in the growth rate of potential output. If so, there will be less offset to inflation going forward than incorporated in the baseline Greenbook forecast, which relies heavily on slack variables to control inflation. The Greenbook simulation entitled ""costly reallocation"" provides some welcome effort from the staff in this regard, and I appreciate that. Yet the details of that experiment were a bit sketchy for me, and at some point I would be interested in a little more detail as to how that actually plays out. In my view, the main driver for the outlook of future inflation over the next two years is not, nor has it been, oil prices per se, but the path of monetary policy that the Committee will adopt over the next several months and quarters. I appreciate the memo that the staff produced regarding the stance of monetary policy. According to the memo, the current stance of policy is not unusually accommodative. However, I would like to note that that conclusion depends critically on the specific forecast and the nature of the FRB/US model. A different model, one that says that inflation expectations are more forward looking, may well lead to a very different conclusion. But I take the message of the memo to be that the assessment of the stance of monetary policy is dependent, at a point in time, on a model, and I very much agree with that assessment. Given that my model is somewhat different from the staff's model, I continue to believe that monetary policy at its current level is accommodative and that, if this current stance is sustained, the economy will experience faster inflation in the medium term. Clearly, we must pay attention to the adverse effects of the financial disruptions. But we also must recognize that our policy actions today and over the next several months will affect the outcomes of inflation over the medium term. As I said, it is my view that the current stance of policy is inconsistent with price stability in the intermediate term and so rates ultimately will have to rise. Now, I acknowledge that there are risks to economic growth going forward. The slowdown and the financial market turmoil could turn out to be worse than I expect. I also recognize that, given the events over the weekend, now is probably not the time to shock markets by raising rates. But neither is it a time to panic and lower rates. A cut today may be reassuring to some in the financial markets, but it also may serve to scare markets by sending a signal that we are much more worried than perhaps they are. There is just way too much volatility and dust blowing around to make such snap judgments on monetary policy. We have been aggressive with our liquidity provisions, and we will continue to be so, and I support that. Stability coming from monetary policy is an important attribute, and I think we have an opportunity to provide some stability here. However, I am uncomfortable with the current Greenbook baseline path that has the funds rate remaining unchanged well into the second half of next year. In my view, that will not deliver an acceptable path of inflation outcome over the medium term. At the same time, I do not perceive an immediate threat to the unanchoring of expectations, so I can accept keeping the funds rate at an unchanged level at this meeting. But at some point, before the unemployment rate begins to improve substantially, I believe this Committee will need to raise rates in order to deliver on our inflation objectives. Regarding language, I can live with the language in alternative B. Thank you, Mr. Chairman. " CHRG-110hhrg46596--370 Mr. Kashkari," Well, I think that the banks have an important role to play. But I think that the non-bank financial sector is also really important, and we need to try to get both working. " CHRG-111hhrg74090--139 Mr. Barr," Well, as you know, the States have long played an important role in consumer protection. I think one of the upsides of living in our country is that we have independent States that---- " FOMC20050630meeting--250 248,MR. LEAHY.," The top left panel of exhibit 11 presents our outlook for foreign real GDP growth. We forecast total foreign growth to move back up this quarter from a soft first-quarter pace and to rise a bit further going forward. The pickup is modest and reflects our assessment of the balance between some opposing forces. On the one hand, higher oil prices, while supportive for some economies, are expected to damp activity, on balance, for our foreign aggregate, which is weighted by U.S. exports. On the other hand, financial conditions appear to be more uniformly supportive of growth abroad. Many foreign currencies have depreciated against the dollar since the beginning of the year and, as shown on the right, stock prices in emerging-market and industrial economies have moved up since the middle of last year. Emerging-market bond spreads, shown in the bottom left panel, backed up a bit from their lows earlier this year but are still tight by historical standards. And benchmark long-term interest rates abroad have moved substantially lower, as shown by the red line in the bottom right panel. The widespread decline of long-term rates has been a prominent topic of discussion recently, and many hypotheses have been offered to explain it. I do not propose to resolve that debate. [Laughter] However, the extent to which rates have declined has varied across countries. Why this might be so is the subject of your next exhibit. As shown in the top left panel, the yield on the German government bond was essentially equal to the 10-year Treasury yield in October 2003, a date that falls before any of the central banks discussed on this page began tightening monetary policy. Since then, the bund yield has declined about 120 basis points and is currently just off its record low of 3.10 percent. The yield on the Canadian bond, shown in the next column to the right, has declined nearly as much, at 110 basis points over the 20-month period. These developments contrast with the smaller net decline of 80 basis points in the United Kingdom, and the much smaller net declines of 40 basis points in the United States, and 20 basis points in Japan. The size of the decline may have been more limited in Japan than in the other economies because of the proximity of the zero lower bound on nominal interest rates. June 29-30, 2005 89 of 234 The relative size of these real and nominal yield movements appears to reflect monetary policy actions taken during the period as well as expected future actions. With the exception of Japan, long-term rates have fallen more in economies where tightening has been the least. None of the major foreign central banks has tightened monetary policy as much as the FOMC has over this period. As shown in the first panel of the bottom row, monetary policy in the euro area, where the largest decline in bond yields occurred, has been on hold since June 2003. Market expectations that the ECB might soon raise rates, a view heavily promoted in ECB rhetoric of only a month ago, have all but vanished. In Canada, where bond yields have declined substantially also, the Bank of Canada has lowered policy rates on net since October 2003, but markets appear to expect the tightening that occurred in September and October of last year to resume in future months. In contrast, the Bank of England, the first of these central banks to start tightening, in November 2003, has raised its policy rate 125 basis points over the period, and at this point markets appear to expect that the next move for the Bank will be to lower the policy rate. Nonetheless, long-term rates are down whereas short-term rates are up. Monetary policy at the Bank of Japan (BOJ) has not changed significantly. The BOJ has continued to pursue quantitative easing, and reserve balances stepped up over the period. The low level of real long-term interest rates in the euro area and Japan should help smooth the way for more robust expansion of activity in those economies. Other financial factors, presented in your next exhibit, should also lend support. Positive equity earnings forecasts, shown at the top left, should help lift stock prices and reduce the cost of equity finance for firms. Forecasts of earnings per share, drawn from surveys of equity analysts in mid-June, put earnings this year above last year’s, and forecasts for 2006 show further increases. BBB corporate bond spreads, shown to the right, are relatively low, which implies that corporate bond financing costs have generally followed government yields down. And the recent depreciation of the euro and yen in foreign exchange markets, shown in real effective terms in the middle left panel, should provide some boost to net exports going forward. June 29-30, 2005 90 of 234 Your next exhibit examines the potential implications of recent changes in the behavior of Chinese trade. The top left panel shows a 12-month moving sum of China’s merchandise trade balance over the past 20 years. In recent months, the Chinese trade surplus has jumped to record levels. As shown on the right, exports have continued to grow along trend, but imports appear to be decelerating. The counterpart of the lower import growth is showing up elsewhere in Asia as a slowing of exports to China. As shown in the middle left panel, the growth of exports to China from Taiwan, Korea, and Japan, three of the region’s largest economies and also three of China’s top trading partners, has dropped from very rapid rates to near zero. We see two developments that are consistent with this shift. One is that economic activity in China is decelerating. Policy measures adopted a year ago to restrain runaway investment spending, which had increased more than 40 percent over the four-quarter period immediately prior to the implementation of the measures, may be beginning to show through to GDP. Our forecast for growth in China, shown in the middle right, has growth stepping down to 7½ percent by the end of this year, as we regard the double-digit GDP growth rates of the recent past as unsustainable. The other development is that China may be turning inward for some items that it had been importing, including heavy industry items like iron and steel and road vehicles. As shown at the bottom left, exports of road vehicles have ramped up since 2002, and exports of iron and steel rocketed up last year, as capacity to produce steel internally came on line. As shown in the bottom right panel, China’s extraordinary growth does not seem to have triggered broad-based inflation pressures. The consumer price inflation bulge in 2004 came almost entirely from increases in food prices, and they have not persisted. Your final exhibit presents our outlook for commodity prices and the U.S. external accounts. As shown by the black line in the top left panel, prices of nonfuel primary commodities have increased substantially in the past three years, boosted in part by global growth but lifted also by the depreciation of the dollar, shown at the right. The metals price component of this index (the red line) has registered the largest price gains. Over the next year and a half, primary commodity prices are forecast to change little, as world demand is expected to stay strong and supply response comes on line. The spot price of oil, shown in the middle left panel, has continued to rise, as has the price implied by futures contracts maturing about six years out, shown by the red line. Increasing doubts about future supply from Russia, Venezuela, Iran, and Iraq have apparently cooled expectations that oil prices will retreat much from their current, elevated levels. Potential supply shortfalls are of particular concern because OPEC has little spare capacity and world oil demand is expected to continue to be strong. June 29-30, 2005 91 of 234 $960 billion, or about 7¼ percent of U.S. GDP, by the fourth quarter of 2006. With the dollar projected to depreciate only modestly from its current level, U.S. GDP growth on a par with or above aggregate foreign growth, and oil prices remaining high, the trade balance, shown at the bottom left, deteriorates $113 billion further over the forecast period. The projected decline in net investment income is almost as large, at $79 billion. The growing negative contribution of net investment income to the deficit reflects expanded net holdings of U.S. liabilities and an assumed increase in U.S. short-term interest rates." CHRG-111shrg57322--1140 Mr. Blankfein," Clearly, the world needs more regulation. Senator Tester. And I think part of this, as I look at it as a regular person, you have a guy by the name of Paulson who is picking out--who had a role in it. He may not have been the only person, but he had a role in picking out these securities and I firmly believe, from what I have read, he picked them so they would fail so he could sell them short, and I think somebody else may have not been told the story that Paulson knew on the one side of the equation. And I think that is where the problem is, also. Thank you very much. I appreciate it, Mr. Chairman. Thank you for being here, Mr. Blankfein. " FOMC20070131meeting--98 96,MS. MINEHAN.," Yes, you were. All kudos to you guys. Four of the simulations have slower GDP, higher unemployment, and a lower fed funds rate. In a couple of cases you had, even in the context of slower growth and higher unemployment, somewhat higher inflation. Then you have three or so that show stronger paths. I’m wondering, do you weight these alternative scenarios equally? You know how DRI (DRI is the wrong name now, but I mean the successor company) does it: They give their baseline forecast a certain rate of probability, and then they give alternative rates of probability to the various scenarios. Do you have a sense of that? Would you weight the stronger consumption scenario somewhat higher than the rest or no?" FOMC20061025meeting--111 109,MR. REINHART.,"2 Thank you, Mr. Chairman. The pulse of the market regarding your policy action today is the flat line in the top panel of your first exhibit. [Laughter] Not weakish data releases early in the period, nor stronger ones later, nor speeches by some of you interpreted as hawkish shook the belief that the intended federal funds rate would remain at 5¼ percent after this meeting. Expectations about the policy rate at the end of next year, proxied by the December 2007 Eurodollar futures rate—the dotted line—showed more life, falling about 20 basis points by the middle of the period but ending up 5 basis points higher, on net. As can be seen in the middle left panel, market participants still anticipate almost ½ percentage point of policy easing next year. Once again, as denoted by the green shaded area, the 70 percent confidence interval derived from options prices is quite narrow. We routinely track the economic forecasts of a subset of nine of the primary dealers, and their average path for the federal funds rate through 2007 is plotted as the dashed line in the middle right panel. Those dealers and the forecast from market quotes—but not the Greenbook assumption plotted as the horizontal line—call for policy easing next year. The primary dealers’ policy call occurs against the backdrop of forecasts for the unemployment rate (the bottom left panel) and core CPI inflation (the bottom middle panel) that about match the Greenbook’s. What is different is plotted at the bottom right: These dealers expect real GDP growth to track about ½ percentage point higher than does the staff. One possibility is that these market participants, compared with the staff, foresee both more drag on domestic spending and faster-expanding potential output. If so, dealers would correspondingly view policy ease as necessary to generate economic growth that will be acceptable to you. 2 Material used by Mr. Reinhart is appended to this transcript (appendix 2). Your own view as to the economy’s potential to produce no doubt influences your views on policy, as do your interpretations of the three factors described in exhibit 2. The top left panel plots existing and new home sales as the solid and dotted lines, respectively. You might see in that chart that house sales have declined sharply and view the resulting weakness as a risk to the outlook, as has been the case at the past few meetings. Alternatively, you might see that home sales appear to be bottoming out amid generally strong fundamentals. As one newsletter put it—and I think that the author meant it to be good news about the prospects for spending—that “the point of maximum deterioration in housing activity has probably passed.” The middle panel plots the real federal funds rate, which some of you may emphasize has risen considerably and take its level now to be restrictive. Others, however, might stress that the real federal funds rate remains below its average of the late 1990s. A third potential source of alternative interpretations might be the measures of inflation compensation plotted in the bottom left panel. For some, the chart shows that inflation compensation remains contained and has declined of late at shorter horizons. Others may find only cold comfort in this because inflation compensation nevertheless remains above the range consistent with their price stability objective. The policy choice today depends on your assessments both of the economy in the near term and of the appropriate path of inflation over a longer time frame—the subject of exhibit 3, which repeats some material from the “Medium-Term Strategies” section of the Bluebook. The solid line in the top left panel plots the setting of the nominal funds rate that, in the FRB/US model, best achieves the objective of minimizing deviations of the unemployment rate from the NAIRU and of core PCE inflation from a goal of 1½ percent, while avoiding jarring adjustments in the nominal funds rate. The forces shaping the outlook are the same as in the extended Greenbook baseline, and investors are assumed to understand the entire path of policy—which they deem credible when determining asset values. Wage and price setters, in contrast, base their expectations on less information and alter their views on long-run inflation only sluggishly in response to actual inflation. As is familiar from such exercises in previous Bluebooks, it thus takes a long time to work down inflation when the goal is below prevailing inflation expectations at the start of the simulation. With the Phillips curve as flat and inflation expectations as inertial as in the FRB/US model and with equal weights placed on the objectives, policymakers find it optimal to trade off a persistent miss of the inflation goal (the bottom left panel) for smaller cumulative labor market slack (the middle left panel). In this simulation, progress may seem especially glacial because the steady dollar depreciation that is required to rein in the deterioration of the current account generates persistent upward pressure on domestic inflation. But even the modest progress that is made on inflation under this scenario requires about ¾ percentage point of firming over the next year. We explored two modifications of the standard framework to help speed disinflation. In the first, and as plotted as the dashed red lines on the left, policymakers are assumed to put much more weight on the inflation goal relative to maximum employment. Indeed, progress in reducing inflation is notable, but the unemployment rate is also notably elevated. The simulation underlying the dotted green lines maintains the assumption of equal weights in the objective function but changes the assumption about the information that wage and price setters use so as to create a more favorable inflation-unemployment rate tradeoff in the short run. This variant assumes that the level of the nominal funds rate conveys a noisy signal to wage and price setters about policymakers’ inflation goal. It is optimal, then, to impose policy restraint early on so as to send inflation expectations down and accomplish a quicker and less costly disinflation. The credibility you attach to such a channel may play some role in your willingness to firm policy in the near term. But you may not see any need to do so if you are drawn to the dashed blue lines in the right-hand column of charts. Those lines summarize macroeconomic outcomes for policymakers with an inflation goal of 2 percent. Because current inflation expectations about comport with that goal, policymakers can keep the nominal funds rate at 5¼ percent for some time and still observe declines in inflation given the other forces of disinflation in the baseline. Exhibit 4 considers some aspects of the wording of your statement to be released after this meeting, starting with the rationale portion in the boxes at the top. As noted at the left, in drafting the Bluebook, we proposed including in row 2 of all the draft statements that “economic growth appears to have slowed further in the third quarter.” This wording seemed to have the advantage of acknowledging the upcoming release of the initial third-quarter estimate of real GDP on Friday, which by the staff’s reckoning is likely to be weak. Some of you may be concerned, however, that this mention might heighten market scrutiny of that data point or potentially set up the Committee for failure if the release proves surprisingly strong. As noted in the top right box, we simplified the language about inflation pressures in row 3 of alternative A, partly in response to earlier criticism that the Committee could be interpreted as having slipped a derivative. The statement has been pointing to the levels of the prices of energy and other commodities as having “the potential to sustain inflation pressures.” Even if you are not drawn to the phrasing of the rest of the alternative, you might see some merit in this simplification for row 3. Or you might not, [laughter] given the focus in markets of changes in the wording of the statement. The Bluebook effectively offered four alternatives this time, the three in the table and a possible middle ground between B and C mentioned in the text. These are laid out in the remainder of the exhibit. In recent statements, the risk assessment has pointed to upside risks to inflation and the possible need to firm policy further. Market participants nevertheless appear to attach greater likelihood to policy easing than tightening. To protest that view and to underscore its commitment to reduce inflation, the Committee might choose to modify its words to note, as in alternative B+, that “although the Committee both seeks and expects a gradual reduction in inflation, it continues to view the risks to that outcome as remaining to the upside.” Some of you, however, may view this as change for the sake of change that unnecessarily risks confusing market participants as to the Committee’s intent. For the sake of reference, the last exhibit repeats, with no change, table 1 from the Bluebook. That concludes my prepared remarks." FOMC20060328meeting--291 289,VICE CHAIRMAN GEITHNER.," Thank you, Mr. Chairman. I would be comfortable deciding now that we are going to do two-day meetings as a matter of course going forward, even though we may not want to fill the time, in part because I think it’s important to give us time to do special topics as many of you have said. I would generally be in favor of that. And I think we should figure out how to reconcile our director meetings’ calendars with that. I think the idea of separating the discussion about the outlook from policy is a good thing to do, but it’s a little awkward to have these conversations about the forecast without people actually revealing what their conditioning policy assumption is, and it is slightly artificial to separate them completely. So in some sense I think, as the Greenbook does, that we should all take on the obligation in talking about our view of the forecast and the outlook to be a little more explicit about what we think at that stage is the conditioning assumption of the policy. It doesn’t always matter a lot, but it probably does matter. In a two-day meeting, it’s probably good to make sure that we have enough time on the first day that everybody has a chance to do an initial statement. I think chopping it up as we were forced to do today is a little suboptimal. It’s nicer to give everyone a chance to put their basic views on the table at the beginning, and that may require, as Tom said, that we all be a little more selective in how much we say in that initial round. It is in some ways a better basis for give-and-take once people have been able to make their initial statement. Compliments to Dave Stockton for the evolution in the Greenbook presentations of alternative scenarios. I think that, as Dave implied, there’s probably room for further evolution in how the staff structures its contributions to the meetings. As we think about it and as you pointed out, Mr. Chairman, how we think about evolution in our monetary policy regime and our communications regime, we should give some thought at this stage to what kind of supporting material we want to have to underpin that evolution. I think that’s all I’ve got." FOMC20061212meeting--61 59,MS. YELLEN.," Thank you, Mr. Chairman. I have to admit that this time around I found it pretty challenging to read the tea leaves on economic activity. The data are providing distinctly contradictory signals. For example, several key indicators of aggregate spending have come in below expectations, and the Greenbook now sees real GDP growth this quarter and the next averaging a mere 1½ percent. At the same time, the labor market continues to be strong and shows no clear signs of weakening, as evidenced by the November employment report. The latest information on inflation has been fairly favorable; but even with some signs of easing, the underlying trend in core consumer price inflation remains above my comfort zone. The last time we met I described the situation as a bimodal economy with strength in most sectors and weakness limited to just two sectors, housing and domestic auto production. This description by and large remains apt. The correction in the housing sector has continued, even sharpening somewhat compared with our expectations. Still, there are some encouraging signs that the demand for housing may be stabilizing, probably assisted by recent declines in mortgage rates. After a precipitous fall, home sales appear to have leveled off. In addition, equity valuations for homebuilders have continued to rise in the past couple of months, suggesting that the outlook for these businesses may be improving. Finally, the gap between housing prices and fundamentals may not be as large as some calculations suggest because real long-term interest rates have fallen quite a bit recently, raising the fundamental value of housing. That said, the housing sector on balance is a source of downside risk, and the risk could be magnified if mortgage rates were to rise again as foreseen by the Greenbook. Outside residential investment, GDP growth has remained solid. Consumption has continued to be strong; indeed, I think there are upside risks to consumer spending, given the Greenbook’s forecast of a significant rise in the saving rate. But recent indicators of nonresidential investment and activity in the manufacturing sector have come in below expectations. The key question is whether these data hint at a crack in the economy’s armor that could widen. It’s obviously too early to tell, but these weaknesses bear careful monitoring. Overall, the data on spending paint a clear picture of an economy growing well below trend, but it seems as though the BEA hasn’t delivered this message to the BLS. [Laughter] The very latest data show payroll employment growing steadily. The household data are even more alarming. The unemployment rate has declined ½ percentage point over the past year and now stands at 4½ percent, ½ percentage point below our estimate of the NAIRU. My business contacts tell me the same thing. Labor markets are tight, and jobs are hard to fill, especially for skilled positions. But some other indicators suggest that labor markets may have softened a bit. In particular, the Conference Board index of job market perceptions, based on a survey of households, declined in both October and November. This index is historically very highly correlated with the unemployment rate, but now it’s sending a different signal, suggesting that labor markets are roughly in balance. Similarly, in November fewer firms reported openings that are hard to fill. The fall in the unemployment rate this year is hard to square with Okun’s law. Over the past four quarters, GDP growth has averaged 3 percent, just 0.3 above the Board’s estimate of potential GDP growth. A standard Okun’s law calculation suggests that this should have led to a decline in the unemployment rate of only about 0.1 percentage point. In fact, however, it declined 0.5 percentage point. Of course, labor markets do adjust with a lag, so we may just need to be patient and wait for Okun’s law to reassert itself as assumed in the Greenbook forecast. An alternative possibility is that the output gap is more positive than assumed in the Greenbook because of lower growth in potential output or more-rapid growth in actual output. In his presentation, David noted the possibility that the growth rate of potential output may be lower than even the downwardly revised estimate in the Greenbook. It is also possible—and, in fact, there are indications—that actual output growth may have been faster than the pace reflected in measured GDP. Growth in domestic income has outpaced GDP growth by ¾ percentage point over the past year. Now I know that when someone mentions the statistical discrepancy, eyes start to glaze over. But I raise this issue because it could have important implications for the outlook. If the gross domestic income measure ends up being more accurate, then the decline in the unemployment rate this year would not be surprising. Going forward, more-rapid output growth would imply a lower path for unemployment, potentially adding to inflation pressures. Turning to inflation itself, the news has been pretty good on balance since our last meeting. We expect core PCE price inflation to edge down from just under 2½ percent this year to about 2 percent in 2008. We came to this forecast balancing two main pieces of news. On the one hand, recent labor market data point to a lower path for the unemployment rate than before, and all else being equal, this boosts our inflation forecast a bit. Offsetting this effect, on the other hand, is the huge downward revision in compensation per hour. When these data came out, I let out a big sigh of relief. The revised data are more consistent with the indications we were getting from the employment cost index and suggest that wage growth has remained contained. In contrast, my contacts report intensifying wage pressures, resulting in part from more-frequent employee quits and outside offers. Even so, my contacts do not report that these developments are exerting significant pressure on their profit margins or prices, suggesting continued strong productivity growth. But that, in turn, conflicts with the data on productivity growth in the nonfarm business sector, which have been weak, not strong. Output per hour in the nonfarm business sector increased only about 1½ percent over the past year, well below its trend. But there is reason to believe that this decline may overstate the slowing in productivity growth, given continued strong growth in productivity in the nonfinancial corporate sector. At least part of this discrepancy between nonfinancial corporate and nonfarm productivity growth reflects the gap I mentioned before between gross domestic income and gross domestic product. If the GDI numbers are, in fact, more accurate, that alone could add nearly 1 percentage point to nonfarm business productivity growth, perhaps reconciling the reports by my contacts of intensifying wage pressure along with an absence of pressure on prices and margins. In summary, I continue to view a soft landing with moderating inflation as my best-guess forecast, conditional on maintaining the current stance of policy. But there are sizable risks on both sides to the outlook for growth, and the downside risks are now more palpable. There is, likewise, a great deal of uncertainty about inflation going forward; in this case, the risks remain biased to the high side." FOMC20050322meeting--92 90,MR. STOCKTON.," As I indicated, one of the refinements that we undertook in this modeling effort was that, in addition to tracking age and sex, we tried to look more carefully at cohort effects. Basically, what we are now seeing is that the participation rates of women coming into the working age population relative to the participation of those exiting it are not as different as they were in years past. In earlier years the participation of women entering the labor force was so much higher than those who were leaving that it was driving an aggregate March 22, 2005 25 of 116 been in the past. So our forecast for the participation rate of women is a little flatter, going forward." FOMC20080130meeting--154 152,MR. STOCKTON.," A big chunk of this is due to the stock market, so I don't know what we can do other than to take that on board in our forecast. As Dave noted, there are a few other, small wrinkles, and we didn't just invent those extra wrinkles this time around. They have always been there. But most of this is working through the wealth effect on the consumer spending side. So it is a weaker stock market and much weaker consumption. That is the aggregate demand channel. The other piece is housing, which I don't want to minimize because, in fact, that is another nontrivial factor holding down demand and, we think, depressing our estimate of the equilibrium funds rate here over the intermediate term. " FOMC20070131meeting--186 184,MR. STOCKTON.," So, Mr. Chairman, this was sort of done on the fly. Unlike the BEA, I won’t be able to go back and revise these remarks. [Laughter] Total GDP this morning came in at 3½ percent. That was 0.9 percentage point stronger than we had forecast in the Greenbook. There were really two sources of our miss in the fourth quarter. Of that miss, 0.5 was the net export component, which Karen will speak about in a second, and 0.4 was nonfarm inventory investment. So perhaps Karen will give the quick story on the net export side, and then I’ll complete the report." CHRG-110shrg38109--97 Chairman Bernanke," Well, it depends on what your definition of ``income'' is. We have seen real wages growing the last half of 2006 by about 3 percent in real terms. I hope to see continued strong growth in real wages. I am not quite sure whether it will be quite that strong, but I think as long as energy prices do not rise quickly again, we should continue to see good growth in real wages. Broader measures of income should grow broadly at the same pace as GDP, and our forecasts are for something between 2.5 and 3 percent. Senator Sununu. And when you talk about broader measures of income---- " CHRG-110shrg50414--249 Chairman Dodd," I will exercise---- Senator Tester. I appreciate that. Chairman Dodd [continuing]. Imperial authority I have here. Senator Tester. Man, you are top flight. I will buy you a cup of coffee. [Laughter.] I want to talk a little bit about foreign entities and possible dollars going to them. It has been brought up several times. And I think in your testimony, I heard--and correct me if I am wrong--that you have been talking to the folks in the G-8 around the world about the United States's role in propping up our markets, and have you talked about their role in us propping up their markets? " CHRG-111hhrg56847--13 Mr. Bernanke," Mr. Chairman, forecasting is very difficult and I can make no promises in any particular direction. But it appears to us that the recovery has made an important transition from being supported primarily by inventory dynamics and by fiscal policy toward recovery being led now more by private final demand, including consumer spending. That is encouraging in terms of the sustainability. So our current most likely outlook is that the economy will continue to recover at a moderate pace. Of course a double dip can never be entirely ruled out, of course. But right now our expectation is that the economy will continue to grow at around a 3 to 4 percent pace this year. " CHRG-111shrg56262--13 Mr. Davidson," Good afternoon, Chairman Reed, Ranking Member Bunning, Members of the Subcommittee. More than 2 years since the collapse of the Bear Stearns high-grade structured credit enhanced leverage fund, its name a virtual litany of woes, we are still in the midst of a wrenching economic crisis, brought on at least in part by the flawed structure of our securitization markets. I appreciate the opportunity to share my views on what regulatory and legislative actions could reduce the risk of such a future crisis. I believe that securitization contributed to the current economic crisis in two ways: First, poor underwriting led to unsustainably low mortgage payments and excessive leverage, especially in the subprime and Alt-A markets. This in turn contributed to the bubble and subsequent house price drop. Second, the complexity and obfuscation of some structured products such as collateralized debt obligations caused massive losses and created uncertainty about the viability of key financial institutions. Now to solutions. Boiled down to the essentials, I believe that for the securitization market to work effectively, bondholders must ensure that there is sufficient capital ahead of them to bear the first loss risks of underlying assets; that the information provided to them is correct; that the rights granted to them in securitization contracts are enforceable; that they fully understand the investment structures; and that any remaining risks they bear are within acceptable bounds. If these conditions are not met, investors should refrain from participating in these markets. If bondholders act responsibly, leverage will be limited and capital providers will be more motivated to manage and monitor risks. If this is the obligation of investors, what then should be the role of Government? First, Government should encourage all investors and mandate that regulated investors exercise appropriate caution and diligence. To achieve this goal, regulators should reduce or eliminate their reliance on ratings. As an alternative to ratings, I believe regulators should place greater emphasis or reliance on analytical measures of risk, such as computations of expected loss and portfolio stress tests. Second, Government should promote standardization and transparency in securitization markets. While the SEC, the ASF, and the rating agencies may all have a role in this process, I believe that transforming Fannie Mae and Freddie Mac into member-owned securitization utilities would be the best way to achieve this goal. Third, Government can help eliminate fraud and misrepresentation. Licensing and bonding of mortgage brokers and lenders, along with establishing a clear mechanism for enforcing the rights of borrowers and investors for violations of legal and contractual obligations, would be beneficial to the securitization market. However, I believe that there are superior alternatives to the Administration's recommendation of retention of 5 percent of credit risk to achieve this goal. I would recommend an origination certificate that provides a direct guarantee of the obligations of the originator to the investors and the obligation of the originator to the borrowers coupled with penalties for violations even in good markets and requires evidence of financial backing. This would be a more effective solution. If the flaws that led to the current crisis are addressed by Government and by industry, securitization can once again make valuable contributions to our economy. I look forward to your questions. Thank you. " FOMC20051213meeting--75 73,MR. LACKER.," Thank you, Mr. Chairman. On balance, economic activity is growing at a solid pace in the Fifth District, though auto sales are faltering and housing markets are cooling. On the upside, employment conditions have been strengthening, with signs that the job numbers are increasing even at District factories. Outside of autos and big-ticket items though, retail sales strengthened substantially this month. Retailers indicate that holiday sales are solid, and they’ve become more optimistic about prospects for the first half of ’06. Auto sales are weak, though, and December 13, 2005 41 of 100 revenues and employment growing over the last two months. Home sales remain at high levels but we are receiving widespread reports that activity is decelerating, particularly in northern Virginia where markets have been quite robust in recent years. A number of independent reports describe “a return to normalcy” in residential real estate markets, with houses actually being on the market and not getting multiple bids on the first day. Manufacturing continues to hold its own. Although shipments and new orders were softer in early December, the hiring index was up for our District, and firms have become notably more optimistic about their early ’06 prospects. District price pressures seem to have eased somewhat in December. Although retail prices were reported to have advanced at the same strong pace as in November, outside the retail sector services’ prices have decelerated from October to December. Manufacturing price gains peaked in November in our series, and our preliminary numbers show that both prices paid and prices received slowed sharply this month. Turning to the national economy, we’ve received a string of favorable data since our October meeting, suggesting both that the economy had considerable momentum prior to this fall’s storms and that the effects of the storms on economic activity outside the affected region and the energy sector have not been as large as feared. I’m particularly encouraged by the continued strength in business investment spending in the present quarter, as evidenced by capital goods orders and the ISM numbers. I’m also encouraged by anecdotal reports of a cooling in District and national housing markets. These reports are consistent with a continuing handoff from residential to business investment. That said, I’m tempted to paraphrase Solow, though, and say that the slowdown in housing appears to be visible everywhere but in the housing activity data. [Laughter] Consumer spending has held up quite well. My sense is that the most important source of this December 13, 2005 42 of 100 reason, given the Greenbook forecast for income growth in the near term, I would not expect a flattening of housing prices to seriously dampen consumer spending. Rather, I expect, consistent with the Greenbook, consumer spending growth to come in on the strong side going forward, with the saving rate rising only slowly. The inflation picture has also improved notably since our last meeting, in my mind. The October core PCE number was heartening, and inflation expectations have been well behaved. Both survey measures and TIPS compensation spreads have come down off the post-Katrina highs they reached earlier this fall. While the inflation picture is somewhat better, it does leave some room for concern, in my view. This Greenbook forecasts a 2.2 percent core inflation rate for the first half of ’06, less than the last Greenbook, but it still makes me somewhat uncomfortable. With oil prices appearing to have found a stable range in the neighborhood of $60 a barrel and with natural gas prices remaining high and volatile, I think it will be several months before the risk of pass-through can be completely put to bed. As for the econometric evidence about pass-through, I’d note that expectations regarding our policy response represent a latent variable that of necessity is omitted in most econometric exercises. I take less comfort from the econometric evidence than you do, President Yellen. Our preemption may be required for the pattern you found in the ’90s to actually continue to be confirmed in the data. In the meantime, I think we need to ensure that the public understands our resolve with regard to inflation. And the real funds rate in the neighborhood of 2 percent is very likely too low for an economy that’s in a sustained expansion with relatively full resource utilization. So I think it’s appropriate to follow through today with a 25 basis point increase in the funds rate. December 13, 2005 43 of 100" CHRG-111shrg54533--23 Secretary Geithner," Senator, I just want to agree with you that I think a better basic education about economics and finance is a very important thing for us to work to promote. I think it has to happen early in life. It has to happen in what we teach people in schools. Experience is the best teacher, and this experience will be a searing--this crisis provides a searing set of lessons that will, I think, change behavior fundamentally. But I think we can do a better job as a government in trying to support programs that do a better job of promoting financial literacy and I think the best thing I can say is they are going to work closely together to try to make sure that we are using the taxpayers' money as effectively as possible in support of those programs. Senator Akaka. Mr. Secretary, I appreciate all of your efforts to better protect, educate, and empower consumers. I look forward to continuing to work with you, the rest of the administration, and the Members of the Committee to better educate, protect, and empower consumers. This issue is so important because it has tremendous potential to improve the quality of life for our working families. Mr. Chairman, I also appreciate all of your efforts to protect consumers. Thank you very much, Mr. Chairman. Senator Johnson [presiding]. Senator Vitter. Senator Vitter. Thank you. Thank you, Mr. Secretary, for being here. Mr. Secretary, did Fannie Mae and Freddie Mac, problems there, play a role in the recent financial crisis? " CHRG-111hhrg49968--169 Mr. Bernanke," The Federal Reserve needs to be part of that process. But given our expertise, given our historical role in financial crisis management, given the fact that we are the lender of last resort, we should have a substantial role in that. The exact structure of the arrangements I think remains to be discussed. The administration hasn't even come out with their proposal yet. Ms. Moore. I want to ask a question about what monetary policy should we be pursuing, given that the Chinese seem to be putting up a challenge to the dollar as the reserve currency. This would be a great loss to us were we seriously challenged. What should we be doing to maintain the dollar as our reserve currency? " FOMC20060131meeting--83 81,MR. MOSKOW.," With restraint, Mr. Chairman, most of our contacts this round were positive about current business conditions. However, they were cautious about the prospects for ’06, largely because they didn’t see any obvious drivers for growth. With regard to current conditions, national labor markets appear to be solid. Both of the temporary-help firms headquartered in our District reported that their business was very good. Of course, they mentioned that it was softer in the Midwest, primarily because of the problems of the Big Three automakers and their spillovers and because of suppliers in the regional economy. One mentioned that Michigan was the only state in which he had seen a drop in the demand for business and technical workers. I mentioned last time that things could get worse if the Delphi negotiations result in a strike, and all three parties—Delphi, UAW, and GM—are talking. Delphi has toned down its rhetoric, and the deadline has now been pushed back to February 17. Turning to cost and price pressures, wages and benefits continued to increase at a moderate pace. With regard to other costs, I heard the usual concerns about prices for energy and energy- related inputs in shipping, but the reports about other material costs were mixed. There was one interesting case in which capacity considerations were showing up in higher prices, and that’s the airline industry. United reported that the reduced capacity in the industry has made it easier for them to raise prices, particularly when it comes to passing through fuel costs. And, as you know, they are scheduled to exit bankruptcy shortly. As I mentioned in the past, I’m concerned about the high amount of liquidity circulating in financial markets. For example, one of our directors who heads a major private equity firm noted that such funds were having no trouble attracting investors. He said that the amount of new money invested in private equity firms is expected to expand 50 percent this year, and there is a slightly ominous look to some of the new investors, such as underfunded state pension funds that are “reaching for return,” as he described it. Similarly, early last week we held our semiannual meeting of academics and local business economists, and I heard comments about unusually high liquidity levels from several economists who work for investment firms and commercial banks. And as we all know, risk spreads are quite low by historical standards. So I worry that there’s a lot of money chasing investments out there, and that this may have driven the price of risk down too far. In the national outlook, even with the weak fourth-quarter numbers we continue to expect that economic activity will expand at a solid pace similar to that in the Greenbook. We see growth at or slightly above trend over the next two years and the unemployment rate remaining around 5 percent. Of course, if the fourth-quarter sluggishness spills forward, we would have a more complicated set of issues to deal with, but I agree with the staff and expect that growth will bounce back this quarter. With regard to prices, we think that core PCE inflation will average close to 2 percent over the forecast period. The outside economists at our meeting last week generally agreed with this outlook, although a couple predicted that GDP growth would fall somewhat below 3 percent in 2006. Most of these economists thought that we would raise the fed funds rate to 4¾ to 5 percent and then go on hold. As always, we’re going to have to take a hard look at the data and forecasts before we decide what to do. Inflation could moderate further. We’ve been pleasantly surprised at firms’ ability to absorb cost shocks. If they continue to do so, we could be looking at core PCE inflation rates heading down this spring. In that event, inflation risks would be diminished, and there would be fewer risks in ending the current rate cycle. But there’s a good chance that recent cost increases will pass through, and we’ll experience a repeat of last winter’s uptick in core inflation. Moreover, I can see some plausible outcomes for growth that would pressure resource utilization. And in that event, we’d be looking at a forecast for core inflation that was stuck above 2 percent. I think this would be a problem. With inflation remaining at such rates, we could begin to lose credibility if markets mistakenly inferred that our comfort zone had drifted higher. When we stop raising rates, we ought to be reasonably confident that policy is restrictive enough to bring inflation back toward the center of our comfort zone, which I believe is 1½ percent. And as I read the long-run simulation in the Bluebook, it seemed to say that the funds rate needed to rise a bit over 5 percent by late 2006 to bring core inflation down to 1½ percent within a reasonable period. So for today, we should move forward with an increase of 25 basis points, and we should allow ourselves enough flexibility so that policy can either stop or continue moving, as the situation warrants." FOMC20071211meeting--62 60,MR. STOCKTON.," I don’t think you’d need to look much farther than the horizon that we’re showing here to see that, in the context of the staff’s view about activity, that path for the fed funds rate would probably not be sustainable because in some sense our IS curve is considerably stronger than the market’s currently. If it makes you feel a little better, we are planning on incorporating the extended forecast into the Greenbook next time, and we want to take these alternative scenarios and push them out because we recognize that one of the weaknesses in the relatively short period that we have here is that much of the interesting action in these often takes place just beyond the time frame that we’re showing. So I think that will help." CHRG-111hhrg48875--66 Secretary Geithner," Well, as I said, what we're proposing to do is to expand the role they would play with respect to a broader range of institutions and within its set of checks and balances that are similar to what now exists for banks. " FOMC20060510meeting--117 115,CHAIRMAN BERNANKE.," I will comment as well on TIPS spreads, but those markets are fairly concentrated, and therefore, liquidity issues sometimes play a role in these high-frequency movements." CHRG-110hhrg45625--20 Mr. Barrett," Thank you, Madam Chairwoman. Thank you, Ranking Member Bachus. I firmly subscribe to the belief that Main Street and Wall Street are inextricably linked. Instability in the financial markets leads to instability in taxpayers' retirement accounts, pension funds, and people who are concerned about if and how their jobs, student loans, and car loans will be affected. The caliber that flows through our financial markets is vital to the continued success of our businesses large and small. We should all agree that a failure of our credit markets could and would be catastrophic. However, I am not convinced that the Treasury's plan to purchase $700 billion worth of illiquid assets is the solution. And I am not sure that this proposal gets to the root of the problem. I fear that it will only treat the immediate symptoms. While I understand that these are symptoms, and the symptoms that would shut down the credit markets are potentially disastrous, I worry if we go forward with this plan we will have to come back again and again with more and more money to treat symptoms that may pop up. We instead need to treat the cause of the problem which may be long and possibly painful. The whole crisis started around a type of credit, subprime mortgages, and it still resolves around this debt. Mortgage-backed securities and other debt instruments are the root of this problem. We need to do something to restore access to credit, which means more debt. But the proposal brought to us involves even more debt, the government borrowing another $700 billion. Consumers, like the government, have borrowed too much. We must cut government spending. We must also institute pro-growth policies to help our economy grow so that Americans and their government can get out of debt. It makes sense that when people have good jobs they do not need to borrow as much, whether to buy a mortgage, a home, credit card, pay for school supplies, or even gasoline. Too much of our recent economic growth has been built on debt. We see that businesses have been massively overleveraged as American consumers have. If debt was at a safe level, we would never have been in this fix in the first place. When consumer spending makes up 70 percent of GDP, I think that indicates an unsustainable form of economic growth, especially when it is financed by credit card debt and increasingly unaffordable mortgages. We need to start producing, whether that is energy, computers, or intellectual property. I think the road map to get us there is pretty clear. We must shore up our balance sheet, we need to reduce our capital gains taxes to spur investment, we need to reduce our corporate taxes which are among the highest in the world, and we must move toward energy independence as high energy prices are increasingly a dangerous drag on this economy. We should take this opportunity to do the right thing and help America grow in the long run. I appreciate that there is a panic in the market, but policies derived from panic are never sound. I strongly believe in the superiority of the free market and the ability of the markets to correct themselves. However, the government does not and has not always had a role in ensuring the market's function to correctly and efficiently make sure that we are free of fraud and malfeasance to minimize market failures. For example, we are all familiar with the important role that the FDIC plays in insuring bank accounts. I think that we should be more actively exploring other options where the government can take a role in helping the credit markets find order, but allow the free market to do most of the heavy lifting and provide more capital. One option that should be explored in greater detail is to allow the private entities, private equity, hedge funds, and other partnerships to participate in a competitive bidding process for the distressed assets that will be off-loaded by banks and other financial institutions rather than having the Treasury as the only potential buyer. This proposal should include a traditional auction which might include the government as well as other qualified buyers, with the assets going to the highest bidder. There is no doubt that we find ourselves in a precarious situation, but like many of my colleagues, I think it would be a mistake to rush into a huge new expenditure. Just as the markets are now panicking, the government does not need to do so, too. Thank you, Madam Chairwoman. I yield back. Ms. Waters. Thank you. The gentleman from Missouri, Mr. Cleaver.STATEMENT OF THE HONORABLE EMANUEL CLEAVER, A REPRESENTATIVE IN FOMC20061212meeting--82 80,MR. POOLE.," One possibility would be to say that the markets might believe that we will be perfectly okay with inflation continuing to run 2¼, 2½, or something like that. That is a possibility. But the way I would look at it is that the market would probably believe that we would be just holding the fed funds rate target constant in that situation. To have a market forecast of a declining fed funds rate, which is what’s in the bond market, it seems to me that you have to be anticipating that rates will come down. Now, I think that can’t be a recession outlook because otherwise the equity market wouldn’t be as strong as it is. So that’s why I came to that conclusion. One market or the other may be making a mistake, but I was saying that’s what I think is the best explanation of what the market sees." CHRG-111hhrg67816--240 Mr. Benson," Good morning, Chairman Rush, Ranking Member Radanovich, and members of the subcommittee. My name is Nathan Benson, and I am the CEO of Tidewater Finance Company, which was established in 1992 to purchase and service retail installment contracts. The company is based in Virginia Beach, Virginia, and has two lines of business, Tidewater Credit Services for consumer goods and Tidewater Motor Credit for auto services. I am here today in my capacity as a board director of American Financial Services Association, AFSA, whose 350 members include consumer and commercial finance companies, auto finance companies, card issuers, mortgage lenders, industrial banks and other firms that lend to consumers and small businesses. AFSA appreciates the opportunity to provide testimony to the members of the subcommittee. Today, I will focus my testimony on the role that the Federal Trade Commission has played, and continues to play, in helping to restore confidence in the financial services industry. I will also address the installment loan industry's importance in providing access to credit to millions of Americans. The FTC is the effective regulator. The FTC has been very successful in enhancing consumer protection under its current authority. It has addressed the economic crisis in two ways, first, by using its enforcement authority under Section 5 of the FTC Act to pursue bad actors in the sub-prime mortgage industry, and, second, by setting federal policy through guidance and public comment. I will start by providing some examples that fall into the first category. The FTC successfully negotiated a $40 million settlement with Select Portfolio Services in November 2003 for engaging in unfair and deceptive practices in servicing sub-prime mortgage loans. The settlement was modified in August 2007 to provide additional protections to borrowers, including mandatory monthly mortgage statements, a 5-year prohibition on marketing optional products such as home warranties and refunds for foreclosure attorney fees for services that were not actually performed. The FTC has entered into a $65 million settlement with First Alliance Mortgage Company for making deceptive sub-prime mortgage loans. The FTC distributed the $65 million to nearly 20,000 affected borrowers. The FTC has successfully pursued other sub-prime mortgage lenders engaged in what the Commission deemed to be inappropriate conduct, including Capital City Mortgage Corporation and Quicken Loans. I want to just move on to the installment lending and its role in providing credit to consumers. At the outset, let me say that AFSA shares Congress' concern about predatory lending. We support the goal of protecting consumers from unfair, abusive, or deceptive lending and servicing practices while preserving access to responsible lenders. The installment lending industry was born in 1916 out of a need to provide credit to working men and women. The Russell Sage Foundation worked with lenders to develop a set of principles by which they would abide in their lending activities. Lenders agreed to make the cost of their loans transparent so that borrowers understood the true cost of the loan. Loans would be structured over a period of time allowing a repayment schedule that was long enough to match the earning power of the borrower. Finally, the lender would price the loan based on the character of the borrower, which was defined as a combination of the borrower's employment stability and previous history of handling credit. Today's installment lenders are a key element in improving the socio-economic status of poorer citizens and supporting our company's economic health. They do this by adhering to basic principle of economics, that people should borrow so they can consume based on their permanent income, and that such consumption is the fuel of our economy. Typically, the middle and upper class borrow through traditional banking and financial services relationships. However, average wage earners with few financial assets often cannot borrow in this way. Traditional banks simply are not equipped to offer products and services to these consumers in a manner that is profitable for the enterprise. As a result, these consumers need access to safe forms of small-sum credit. These are the very products the installment loan industry, an industry fully and completely regulated and examined at the state level, have been providing successfully for decades. Certainly, people turn to installment lenders for multiple reasons. Key among these, however, is the need to access small sums to deal with unforeseen circumstances. I could go on but if there are any questions. [The prepared statement of Mr. Benson follows:] [GRAPHIC] [TIFF OMITTED] T7816A.071 FOMC20051101meeting--135 133,MR. POOLE.," Another example that I thought was quite interesting was that UPS is actually shifting its over-the-road shipments away from the piggyback rail system to long-distance trucks in order to gain shorter transit time. My contact said that the railroads are simply unwilling to put the investment into their track and equipment and operating systems to match the delivery times. Obviously, it’s much less fuel-efficient to ship by truck, but the pressure on delivery times was leading UPS to switch its operations in that direction. On the price front, my Wal-Mart contact said that general merchandise prices are still falling a little bit. Food prices have been up about 1½ percent over the last year. However, Wal-Mart noted that its suppliers—I think this would be primarily domestic suppliers—have indicated that they expect to take some price increases after January 1, although not enough to completely cover their cost increases. Wal-Mart is not seeing price increases on goods that are sourced abroad, particularly from China of course. Wal-Mart has continued to absorb increases in transportation costs and utility costs. That’s the story for retailers generally. It’s obvious that they’re not going to absorb those costs forever, but they have been doing so temporarily. My Wal-Mart contact also noted that their construction costs for new stores and other facilities are rising in a range of 10 to 15 percent. And in a recent luncheon in St. Louis with local real estate people, house builders, and others in the business, many said that they also see substantial upward pressure on construction costs. It’s not just the cost of land—or ground, as the homebuilders put it—but materials and labor costs are under substantial upward pressure. One other thing that I thought was interesting came from my contact at UPS, where they’ve just completed—I think the negotiations are completed—negotiations with their pilots. Apparently November 1, 2005 61 of 114 lump sum. And I suspect that these lump sum payments will escape inclusion in the ECI measurement, given the way the ECI is put together. I see Dave Stockton shaking his head. The other thing that was really quite surprising is that they are paying signing bonuses for new airplane captains of $45,000 to $60,000. You would think, with all the pilots being released from the passenger airlines, that they wouldn’t have any trouble hiring pilots. But apparently the strength of the union is such that it has been able to work that deal as part of the settlement. UPS is anticipating that their pilots, now making $190 per hour, will be up to $223 per hour in 2006. They will be the highest paid pilots in the industry. The one other thing I would say is that I share the Greenbook forecast, but I do believe that the inflation risks are asymmetric. It’s much easier for me to imagine a ½ point forecast error with inflation coming in on the high side, rather than the low side, of the point forecast. I think that’s where I’ll stop now. Thank you." FOMC20050503meeting--29 27,MR. STOCKTON.," Thank you, Mr. Chairman. In reviewing my remarks from the last meeting, I managed to find that at least one of my insights had survived the intermeeting period. If you will allow me, I quote: “While I can easily imagine looking back on these words with regret, the persistent and widespread improvements that we are now witnessing certainly leave the impression that the expansion is more firmly established and less fragile with respect to shocks than it was in early 2004.” Unfortunately, as I see it, the surviving insight is that I would come to regret my words. Just how much, I think remains an open question. But the past six weeks have clearly restored a greater sense of two-way risks to the outlook. Just as the great preponderance of data that became available in the early part of the year had led us to revise up our outlook for the real economy, it seems nearly every major economic release since the last meeting has been to the low side of our expectations. The litany of bad news has been long and varied. Private payrolls increased by just 100,000 in March. In the manufacturing sector, output slipped a bit that month, and our estimates for January and February were revised down. A very weak retail sales report for March held down the growth of overall consumer spending in the first quarter. With orders and shipments for capital equipment having dropped sharply in March, growth of equipment and software spending is looking a bit weaker in the first half of this year than was incorporated in the previous forecast. Moreover, the data on merchandise trade for February suggest that demand for our exports was softer than we had expected and that a greater portion of domestic demand is being met by foreign rather than domestic producers. And, reflecting the softer tone of the economic data, stock prices dropped about 4 percent below our March baseline assumptions. All in all, it has been a pretty downbeat collection of data. May 3, 2005 10 of 116 larger output gap occurs despite the fact that we trimmed our path for the funds rate by 25 basis points starting in the second half of this year. Obviously, the relevant questions at this point are: What are the explanations for the recent spate of disappointing economic reports and what are the accompanying implications for the outlook? One plausible hypothesis is that what we have experienced has largely been statistical noise that has produced a weak quarter of GDP growth but that should have little or no implication for our assessment of the strength of the economy going forward. There is evidence to support this view. Perhaps most notably, initial claims for unemployment insurance have averaged about 325,000 over the past month—a figure at the low end of the range that has prevailed as the labor market has gradually but steadily improved. And insured unemployment has also continued to drift lower. So there is not much sign of an inflection point in activity here. Moreover, despite last month=s weak retail sales report, home sales remained strong, and the reports we have received from the automakers suggest that motor vehicle sales were solid in April. These are developments that don=t seem consistent with a view that consumers are in the process of throwing in the towel. And in the business sector, anecdotal reports from our contacts have generally remained favorable both with respect to their order books and their capital spending plans. Those considerations made us comfortable discounting significantly the recent weakness in the data. But we didn’t think it was prudent to dismiss that weakness entirely, either. There simply was too much bad news. In addition, there was corroboration for some of the downbeat statistical readings from other sources. The poor performance of retail sales has coincided with a sag in measures of consumer sentiment over the past few months. Likewise, the reports from purchasing managers are consistent with the slower growth of manufacturing activity that appears to have occurred since the turn of the year. May 3, 2005 11 of 116 By our estimates, the depressing effects of the increase of oil prices since December 2003 on the growth of real GDP should be peaking in the first half of this year, so the timing is consistent with our view that energy prices may well have been an important factor in the slowdown in activity that we have experienced. But the weakness seems too extensive to stem from that cause alone. Accordingly, we have also put some weight on the possibility that the incoming data are signaling that underlying aggregate demand is not as strong as we had earlier anticipated. Of course, one interpretation of that observation is that the degree of monetary accommodation may not have been as large as we had previously gauged. Over much of the past year, despite gradual increases in the real funds rate, our estimates suggested that we could be very comfortable with the view that policy remained accommodative—a view that seemed consistent with the incoming data on the economy. We still see monetary policy as accommodative, at least from a medium-term perspective, but we recognize that we are now edging into grayer territory. The confidence intervals around estimates of the equilibrium real funds rate that we show in the Bluebook are intended to give you a sense of just how ignorant we are about its precise value, if that wasn=t already abundantly obvious to you. We certainly can=t rule out that we have overreacted to the recent news. A rebound in April spending, a few upward revisions to data from earlier months, and this recent period will barely register a ripple on the surface of a solid underlying expansion. But I would note that our reaction has not been idiosyncratic either. Market participants have also marked down their path for the federal funds rate by about as much as we have over the intermeeting period. Of course, weaker real activity has been only one of the difficulties with which we have had to contend. The news on inflation, for the most part, has also been somewhat disappointing, especially the readings on energy and import prices. In response, we have revised up prices in these two areas noticeably in the first half of the year. The incoming data on core consumer prices were only a tad above our expectation. To be sure, the 0.4 percent increase in the core CPI grabbed considerable attention. But we correctly anticipated that this increase would translate into a milder 0.2 percent increase for the market-based core PCE measure. This was higher than we had projected in the March Greenbook, but by an amount measured in basis points, not tenths. May 3, 2005 12 of 116 first half do have consequences for inflation going forward. Higher consumer price inflation, through a combination of formal and informal arrangements in labor markets and perhaps through some slippage in inflation expectations more generally, seems likely to find its way eventually into wage inflation and back into prices. That was the motivation for the upward adjustment to our projection of core consumer price inflation to 1.9 percent this year and 1.7 percent next year—0.1 percent higher than our March projection in both years. However, the contour of our inflation projection remains the same. As in past forecasts, we expect some slight easing of pressures on inflation as the pass-through of higher prices for oil, imports, and other commodities begins to wane. Of course, it remains an open question as to whether and when we will get the slowing in oil and materials costs that we are projecting. For the most part, we continue to take our cues from futures markets for these prices. Although I cannot see a clearly superior alternative, I will admit this approach has not been a surefire recipe for success over the past year. During that time, the cumulative upward revision in our forecast for core PCE prices in 2005 has been about ¾ percentage point. As we noted in yesterday=s Board briefing, we believe that this revision can largely be explained by the upward surprises that we have experienced in the prices of oil, imports, and commodities. Looking forward, an easing of those pressures remains an important element of our forecast. But it remains just that, a forecast. Moreover, we recognize that, at some point, the consequence of a series of cost shocks could look to many people an awful lot like an accelerating price level. And if that view were to cement itself, the implications for inflation expectations and the feedback into wages and prices could be a less favorable inflation outcome than shown in the Greenbook. In that regard, we continue to draw comfort from the fact that wage inflation has shown no signs of increase during the past couple of years. Hourly labor compensation from the national accounts increased 4 percent at an annual rate in the first quarter, below both our March projection and the average pace posted last year. More surprisingly, the employment cost index, released last Friday after completion of the Greenbook, showed an increase in hourly compensation of just 2½ percent at an annual rate in the first quarter—with wages rising at a subdued pace of just under 2½ percent and hourly benefits slowing to a 4¼ percent pace, the smallest rate of increase we=ve seen in quite some time. This is certainly good news and suggests that we are not yet witnessing anything that looks like a wage-price spiral. May 3, 2005 13 of 116 my professional or personal life. [Laughter] If I step back and take a more dispassionate look, while recent developments have highlighted reasons for concern, the outlook still remains quite favorable. The economy has been averaging growth at or above potential over the past year despite what has been a huge energy price shock, the removal of massive fiscal stimulus, and the withdrawal of monetary accommodation. And after a dip in the first quarter, growth is projected to return to its above-trend pace starting in the current quarter. Meanwhile, even with sharply higher oil prices, a declining dollar, rising commodity costs, and diminishing slack, core consumer prices are up only 1¾ percent over the past 12 months—a pace that remains low even by the standards of the past decade. And we are projecting core PCE inflation to remain at or below 2 percent over the projection period. By most objective metrics, it remains a bright picture. Having accumulated another 2,000 words of potential regret, I should probably turn the floor over to Karen at this point." CHRG-109shrg30354--38 Chairman Bernanke," Senator, that is absolutely right. Again, our goal is to achieve a sustainable expansion. There are risks in both directions, if I may say so. Clearly, we do not want to tighten too much to cause the economy to grow more slowly than its potential, and we are very aware of that concern, and we think about it and we look at it and try to evaluate it. The risk in the other direction is that, if we were to stop tightening too soon and inflation were to get higher and more persistent, then we would be faced with the situation of having to address that later on with perhaps even more interest rate increases. So our goal is to achieve a sustainable expansion. We have to balance those risks and those two directions. And we do that by looking forward to our forecasting process and thinking about how actions we have already taken are likely to affect the economy in the long-run. " FOMC20050202meeting--105 103,MS. JOHNSON.," We haven’t taken the step of, say, putting that into an alternative simulation in the Greenbook, which maybe we should do. But we have been thinking about the issue and what alternatives might be good—that is, effective and productive—and what alternatives might be counterproductive. There was a time about three weeks ago when the amount of chatter about the Chinese regime was very elevated. And there were some remarks that came out of the meetings in Davos, just five days ago, that made it seem as if something was imminent. And then the talk would subside and it would go quiet. Do I think that nothing is going to happen in this regard between now and the end of 2006? February 1-2, 2005 81 of 177 would have a very hard time specifying exactly what will be done or when and putting it in the baseline forecast." FOMC20050202meeting--139 137,MS. PIANALTO.," Thank you, Mr. Chairman. My District report will balance out President Guynn’s report, because economic conditions in the Fourth District have not changed very much since December. As suggested by our Beige Book report, it appears that our region’s economy is still not advancing at quite the pace as the rest of the country. That said, most of my business contacts are cautiously optimistic that the country’s economy will see solid growth in 2005. In what might be a good sign for job creation, for the first time since I’ve been in this job I’m hearing less emphasis on productivity gains as an explanation for limited hiring. I am finally hearing some mention of staff additions, although they are focused in particular industries and are not widespread. These comments are consistent with GDP expansion in the 3½ to 4 percent range, modest gains in employment, and relatively robust capital spending, as contemplated in the Greenbook baseline projection. My directors and my other business contacts continue to comment on high input prices, especially prices of raw materials, and they comment on the desirability, or even necessity, of February 1-2, 2005 96 of 177 increases to their customers, although it remains difficult to quantify how much of this talk is feeding into retail prices. Nonetheless, from my perspective, the flat markup scenario that is reported in the Greenbook is a very important risk, even though I do believe that the baseline projection is the more likely scenario. We’ve just ended a year in which the realized rate of headline inflation was higher than I think is acceptable going forward. Of course, as has been mentioned, there were special pressures from the energy sector that contributed to that, and I share the opinion that those problems are probably behind us. And I am heartened that we have managed to emerge from the year without deterioration in the private sector’s inflation expectations. Nonetheless, when asked what will turn out to be the biggest economic surprise in 2005, the Blue Chip forecasters put higher-than-expected inflation at the top of their list. I’d like to be sure that we don’t contribute to a continuation of last year’s price level performance by unintentionally setting the fed funds rate at a level that’s too low. I do like the fact that we’ve been able to remove our accommodation at a measured pace in moving the fed funds rate back toward a more comfortable zone. If we stop short in adjusting the fed funds rate now, we could find ourselves losing the ability to continue with the moderate steps that we’ve had the luxury of implementing so far. Over the past few months, many of us have noted that what we ultimately want is to move the fed funds rate somewhere back to a neutral neighborhood. Given the imprecision of this neutral concept, it’s a pretty big neighborhood, and I’d prefer not to be at the lower end of that range. Thank you, Mr. Chairman." CHRG-110shrg50414--139 Chairman Dodd," Senator Dole. Senator Dole. I would like to ask Secretary Paulson, Chairman Bernanke, and Chairman Cox the following question: According to the Wall Street Journal, the market for credit default swaps has reached $62 trillion, up from $144 billion as of 10 years ago. The issue of credit default swaps, as I mentioned earlier in my opening comments, is one that I have consistently raised throughout the year, beginning with Bear Stearns in March: the transparency of this market and what regulators have been doing to improve oversight of these securities. Chris Cox has spoken today to the regulatory issue. At the time, though, the Treasury Department, Federal Reserve and SEC all testified that these CDS securities did not play a major role in the situation at Bear Stearns. Now Americans come to learn that these same securities--credit default swaps--played a role in the collapse at Lehman Brothers and the Government intervention of AIG. Simply put, what has changed? And given that we now know they played a significant role in the demise of AIG and Lehman Brothers, will the Treasury Department plan on purchasing some of these illiquid CDSs? " FinancialCrisisReport--245 Looking back after the first shock of the crisis, one Moody’s managing director offered this critical self analysis: “[W] hy didn’t we envision that credit would tighten after being loose, and housing prices would fall after rising, after all most economic events are cyclical and bubbles inevitably burst. Combined, these errors make us look either incompetent at credit analysis, or like we sold our soul to the devil for revenue, or a little bit of both.” 955 A. Subcommittee Investigation and Findings of Fact For more than one year, the Subcommittee conducted an in-depth investigation of the role of credit rating agencies in the financial crisis, using as case histories Moody’s and S&P. The Subcommittee subpoenaed and reviewed hundreds of thousands of documents from both companies including reports, analyses, memoranda, correspondence, and email, as well as documents from a number of financial institutions that obtained ratings for RMBS and CDO securities. The Subcommittee also collected and reviewed documents from the SEC and reports produced by academics and government agencies on credit rating issues. In addition, the Subcommittee conducted nearly two dozen interviews with current and former Moody’s and S&P executives, managers, and analysts, and consulted with credit rating experts from the SEC, Federal Reserve, academia, and industry. On April 23, 2010, the Subcommittee held a hearing and released 100 hearing exhibits. 956 In connection with the hearing, the Subcommittee released a joint memorandum from Chairman Levin and Ranking Member Coburn summarizing the investigation into the credit rating agencies and the problems with the credit ratings assigned to RMBS and CDO securities. The memorandum contained joint findings regarding the role of the credit rating agencies in the Moody’s and S&P case histories, which this Report reaffirms. The findings of fact are as follows. 1. Inaccurate Rating Models. From 2004 to 2007, Moody’s and S&P used credit rating models with data that was inadequate to predict how high risk residential mortgages, such as subprime, interest only, and option adjustable rate mortgages, would perform. 2. Competitive Pressures. Competitive pressures, including the drive for market share and need to accommodate investment bankers bringing in business, affected the credit ratings issued by Moody’s and S&P. 3. Failure to Re-evaluate. By 2006, Moody’s and S&P knew their ratings of RMBS and CDOs were inaccurate, revised their rating models to produce more accurate ratings, but then failed to use the revised model to re-evaluate existing RMBS and 955 9/2007 anonymous Moody’s Managing Director after a Moody’s Town Hall meeting on the financial crisis, at 763, Hearing Exhibit 4/23-98. 956 “Wall Street and the Financial Crisis: The Role of Credit Rating Agencies,” before the U.S. Senate Permanent Subcommittee on Investigations, S.Hrg. 11-673 (4/23/2010) (hereinafter “April 23, 2010 Subcommittee Hearing”). FOMC20081029meeting--196 194,MS. KOLE.," I think that in many of the major foreign countries there is room for fiscal stimulus. That may be a bit of an upside risk to our forecast because, for example, China has already put some things in place. They have increased exporter rebates, and they are also putting more money into homebuilding and trying to prop up the construction industry. Japan just announced a bigger package. I'm not so sure if it will go through. Korea has announced--and even some of the oil producers are announcing--plans to put money into the system. I don't think we have fully incorporated that. Maybe we have thought about it in China's case because we think that they will do everything they need to do to keep that economy growing at a-- " FOMC20071031meeting--134 132,VICE CHAIRMAN GEITHNER.," I think this emphasizes the importance of the point that Brian made about the opportunity everybody has to revisit their submissions, particularly in terms of how they think about the risks to the forecast in the wake of a possible move in monetary policy. We haven’t talked about this in much detail before, but if the expected path of monetary policy in the near term changes between when you submit and when we clarify, then that might change a bit and, I would think, would affect what those histograms might look like in terms of the balance. It won’t affect them dramatically, but it will affect them a little. I’m not sure it will make them converge fully to the way alternative A, section 4, is written now." CHRG-109hhrg28024--223 Mr. Bernanke," It depends very much on the person's expectations in retirement, when they expect to retire, will they continue to work, and the like. I mean, one of the things which makes all this so difficult to forecast is that lifestyles are changing. We no longer have people retiring to Florida 100 percent of the time necessarily. Many people continue to work part-time, or work longer. My predecessor worked a bit beyond age 65, for example. So the amount of savings that people, individuals, have to do depends a lot on their plans and expectations. I think that it's arguable that a large share of the population is not saving enough to significantly augment Social Security and, therefore, to guarantee a comfortable retirement. " CHRG-111shrg55278--56 Mr. Tarullo," There is considerable force to that as well. The Board, as you know--long before my arrival there--had expressed concerns about the GSEs, and I do not think anything that has happened in the last 10 months would have reduced those concerns. I guess I would say that there are a number of ways one can go but, going forward, what would be critical is to distinguish private roles from a public role. There is a real public role that can be played by GSEs. That is why they were originally started. But when you have a public role, that is when guarantees, implicit or explicit, are going to be involved. And that is when you are trying to implement a set of policies, so those activities are going to have to be constrained, and you are going to have to make sure that the entity is really functioning as a public entity under a certain obvious set of constraints. My characterization of some of the GSEs over the last 10 years would be that nobody could tell where the public ended and the private began. Ms. Bair. I would just add that the Federal Reserve Board was an early sounder of risk. And at Treasury, especially when I was at Treasury, similarly, we tried to sound the alarms. I think, though, one of the advantages of---- Senator Martinez. I will speak up for HUD as well. [Laughter.] Ms. Bair. Absolutely. A lot of people. I think this council would be able to give voice to those concerns and have real authority to address them. I think that is one of the advantages of the council. I think the Administration proposal would put the FHFA on the council. And if you continue with these GSEs--I do not know what their future is, but if they continue--they clearly still represent tremendous systemic exposure. So I think this would be a prime area where in the past you would have had a mechanism where we could have forced some real action through this council. Going forward, if the GSEs continue to function this way, the regulators should be represented as well. Ms. Schapiro. I do not have much to add, although let me stand up for the SEC, long before I arrived, in their push for public reporting by the GSEs. I do think Dan makes an excellent point about distinguishing the public and private roles and attendant consequences of having that public policy mission. It needs to be, I think, very transparent and well-understood by the marketplace. Senator Martinez. Well, I think the market, you know, when you put paper in the market and people invest, I do not know how that is ever a public role, really. I am not sure you can have private investors and a board of directors that is then beholden to the investors or to their public role. And that is my trouble with the whole idea of the GSEs the way they are chartered. So I think I for one would wonder how their future should really be and whether, in fact, they still have a role that ought to be as it has been in the past. Or should we very dramatically alter that going forward? Thank you for your input, and thank you for being here this morning. Senator Warner. Senator Menendez. Senator Menendez. Well, thank you, Mr. Chairman. Thank you all for your testimony. Let me ask, you know, for those of us who are struggling to define what the boundaries of systemic risk are, which is, I think, one of the key questions--and I know you have been asked some of these, and you have given some answers. But to me, it is more complicated than just the size of a firm or what business it is in, but how significant its activities are as well as how extensive its relationships are with other firms and consumers. So we have used very often ``too-big-to-fail.'' Sometimes I wonder whether we should be looking at too interconnected to fail. And in that respect, you know, should, for example, extensive relationships with small business and consumers count in defining systemic risk? By way of example, CIT. CIT is the largest lender to small businesses in America and has been in financial difficulties. It seems to me that unless an entity like that can find its way out of its financial difficulties, we are talking about hundreds of thousands of small businesses across the Nation who will not have the type of financing they need to conduct their activities, which is the greatest creator of jobs in the country at a time in which the country is desperately in need of jobs. So how do we look, for example, at that? Is that an element of systemic risk? If it is, then define it for me a little better. If it is not, tell me why it is not. " CHRG-111hhrg51698--329 Mr. Morelle," I think it is, Mr. Chairman, and we would certainly love to work with you and the Committee and Congress on that. We do think there is an appropriate and important role to play for the states. And I would again suggest that one of the hallmarks of insurance regulation is that when people make commitments on future events that there is the ability to meet those commitments. That clearly has not happened in many cases that we have talked about, AIG being the most prominent. But, as well, in many of the other investment banks and some of the banks that are under distress right now. I certainly think there is a role to play and a combination of the responsibilities and the strengths of the various levels of government to provide that security. But, I am not persuaded in the conversations that I have had and the testimony we have taken that prudent risk management should be sacrificed in the effort to have more and more liquidity. That is part of the problem that we have gotten ourselves into. " CHRG-111hhrg52406--24 The Chairman," I thank the gentleman. I would just note that after 22 years as a district attorney, being able to say to somebody else, give me a break, probably is a role reversal for you. " CHRG-111hhrg55814--284 Mr. Dugan," I think it could be adjusted, and I take the comments of Governor Tarullo to heart. I think there are some places where there needs to be more of a recognition of the respective roles that we have on different things. For example-- " FOMC20081216meeting--195 193,MR. ROSENGREN.," Thank you, Mr. Chairman. As requested, I will be brief. Like the Greenbook, we see an economy in which the unemployment rate remains very elevated, and inflation is below my target for several years. Our own equations would indicate that these elevated unemployment rates are likely to put even more downward pressure on the inflation rate than forecast in the Greenbook. The labor market is extremely weak, and there is a significant risk of deflation. I believe that greater use of nontraditional policies will be needed to mitigate more-severe outcomes than encompassed in the baseline forecast. On the financial side I would just highlight two points. First, many banks are placing interest rate floors on home equity loans and on commercial loans. Pervasive use of floors may make the choice of which low federal funds target to pick of little relevance to actual borrowing costs. We may want to consider surveying banks to get a better understanding of where these floors are currently being set. Second, many firms are reporting that their lines are not being renewed and are asserting that it reflects problems with the bank not the borrower. Discussions with community banks indicate that, for smaller borrowers, community banks are benefiting from this trend. However, it may be useful to understand better how the reductions in lines, particularly at troubled banks, are affecting the overall economy. Just a general point. I think bank micro behavior is going to be very important for macroeconomic outcomes, and we might want to increase the amount of effort that we are putting into understanding both their financial condition and how their behaviors may be changing over the next six to nine months. Whether that's done through the bank supervision process or the loan officer survey or which mechanism we use, I think we need to probably get a little more intelligence on exactly what those trends are. Thank you, Mr. Chairman. " CHRG-111shrg50564--3 STATEMENT OF SENATOR SHELBY Senator Shelby. Thank you, Mr. Chairman. Today, the Committee will hear from one of this Nation's most respected economists and veteran policymakers. Dr. Volcker is no stranger to this Committee. Senator Dodd and I remember many years ago when he would come here as Chairman of the Federal Reserve Board. During the financial crisis in the late 1970s, it was Paul Volcker who helped put our economic house back in order, and, Dr. Volcker, I welcome you back to the Committee again. While I am very interested in the views of our witnesses on regulatory modernization, I think the hearing could be a little bit premature. Let me explain. As I have said many times and will continue to say, I believe that before we discuss how to modernize our regulatory structure, or even before we consider how to address the current financial crisis, we need to first understand its underlying causes. If we do not have a comprehensive understanding of what went wrong, we will not be able to determine with any degree of certainty whether our regulatory structure was sufficient and failed or was insufficient and must change. I understand that next week Chairman Dodd plans to hold a hearing on the origins of the financial crisis, for which I commend him. I welcome that hearing, but I believe that one hearing, or even a handful of hearings, falls well short of what these exceptional times will demand. Instead, this Committee should, I believe, and must conduct a full and thorough investigation of the market practices, regulatory actions, and economic conditions that led to this crisis. The Committee should hear testimony from all relevant parties and produce a written report of its findings. This work is crucial, I believe, if we are to develop policies that will help end this crisis and prevent it from occurring again. While I understand many people have their own views of what happened, this Committee has yet to make that determination in a comprehensive and organized manner. As a result, nearly a year and a half later, we still have not documented what started the crisis and why it became so severe. The uncertainty about its origins has not only exacerbated our economic downturn by undermining confidence in our entire financial system, but it has left us without a clear understanding of what needs to be done. We need to remedy that. Thus far, the efforts of the Treasury Department and the Congress have been ad hoc at best. When this all began, I strongly opposed the TARP bailout legislation because I believed Congress jumped right to a legislative solution without first identifying the problem it was trying to solve. Since we never developed a consensus about what caused this crisis, neither Congress nor the Treasury Department can devise a targeted solution. And as a result, TARP has drifted rudderless since it was passed 4 months ago, wasting taxpayer dollars while the crisis rages on without an end in sight. It is well past time that we investigate the origins of the financial crisis so that we can begin to lay the groundwork for a bipartisan, effective, and durable solution. In the absence of such effort, there is now talk of creating a commission to examine the origin of the financial crisis and to make recommendations for further action. At this time, I would oppose the creation of such a commission because a thorough investigation is something that this Committee can do and must do. The American people rightly expect their elects representatives, the Senators here, not unaccountable commissions to do the work necessary to solve the problems facing the country. This Committee is uniquely positioned to conduct a transparent investigation that could build the necessary political consensus around the appropriate legislative remedy that we must seek. This particular Committee has a long history of conducting such investigations. The best precedent, I believe, for this type of investigation that our current economic situation demands is the year-long investigation of stock market abuses the Committee conducted during the Great Depression. The so-called Pecora hearings produced a detailed report exposing a wide range of abuses on Wall Street. The Committee heard testimony from hundreds of witnesses, producing nearly 12,000 pages of transcripts from over 100 hearings. The investigative staff was made up of dozens of individuals and included attorneys, accountants, and statisticians. They conducted scores of interviews and sworn depositions. The Committee subpoenaed corporate records and heard testimony from the heads of Wall Street and industry, including 3 days of testimony, I have been told, from Mr. Morgan himself. The Committee's investigative record comprises 171 boxes in the National Archives. The record that the Pecora hearings established ultimately laid the groundwork for the passage of the Securities Act and the creation of the Securities and Exchange Commission. Recently, renowned economic historian Ron Chernow wrote an editorial in the New York Times calling for Congress to initiate an investigation in the tradition of the Pecora hearings. He stated the importance of such an investigation to resolving the current crisis by pointing out, and I will quote him: If history is any guide, legislators can perform a signal service by moving beyond the myriad details of the rescue plans to provide a coherent account of the origins of the current crisis. The moment calls for nothing less than a sweeping inquest into the twin housing and stock market crashes to create both the intellectual context and the political constituency for change.I believe that he is correct. The hearings this Committee has held to date on the credit crisis have been helpful, but I think they have lacked the focus and purpose displayed during the Pecora hearings, partly due to the Committee's lack of resources up to this time. To remedy this problem, Senator Dodd and I have already submitted an initial request for additional funding and office space for the Committee. We were recently informed that the Committee is going to receive additional funding, although not what is necessary, I believe, to conduct a thorough and fair investigation. I am hoping that our colleagues on the Rules Committee would agree that this type of effort here in the Banking Committee right now is not only necessary but deserving of their support. I believe the investigation should start by calling before the Committee all of the regulators from the past decade or more who were appointed to make sure this crisis did not happen, but it did. The Committee has heard from regulators on their views on how to solve the crisis, but it has yet to hear from present and former regulators on what caused the crisis and whether steps could have been taken to prevent it. The Committee, I believe, should supplement this testimony with an exhaustive review of the records of the regulators from that period. Once again, there will be a time to discuss what needs to be done, but before we entrust any new or existing regulator with additional responsibilities or authorities, I believe we need to know if and how our present regulatory structure failed us. After we complete a thorough review of the role of the regulators, we should then call the CEOs of the largest banks, insurance companies, brokerage firms, home builders, realtors, and other financial services companies of the past 10 years to testify. This, of course, would be preceded by an extensive staff effort to examine the activities of each institution or industry. Since the crisis began, the Committee has not yet heard from Wall Street CEOs on their role in creating the toxic assets that have spread through our financial system like a cancer. Nor have they publicly explained why their risk management systems failed or why they operated with such dangerous levels of leverage. Because many of these firms have either failed, received public money, or sought some type of Federal assistance, I believe they owe it to the American people to explain how this crisis started and what role they played in it. Last year, I called for a hearing to examine the role of underwriters in spawning the crisis. The Committee announced that it would hold a hearing to examine underwriting practices, but it was postponed and is yet to be scheduled. That hearing could now be part of this effort. Mr. Chairman, I am willing to work with you, as I have, and I believe this Committee is uniquely positioned, as you do, to perform this important service at this time for the American people. I pledge my full support should you choose to undertake your own version of the Pecora hearings, as long as they are comprehensive. " CHRG-111shrg51395--77 Mr. Silvers," But an agency that is governed by the independent regulators but has its own staff and mission in this area. And I think the Fed would play a very large role there because they are---- Senator Shelby. And they can't be overridden by the Fed? " CHRG-111shrg55117--128 PREPARED STATEMENT OF SENATOR JACK REED Today's hearing provides an important opportunity to hear from Chairman Bernanke on the overall health of the economy, labor market conditions, and the housing sector. These semiannual hearings are a critical part of ensuring appropriate oversight of the Federal Reserve's integral role to restore stability in our economy and protect families in Rhode Island and across the country. I continue to work with my colleagues on this Committee to address three key aspects of recovering from the financial crisis. First, we must stabilize and revive the housing markets. With estimates of more than a million foreclosures this year alone, we must recognize this as a national emergency no different than when banks are on the verge of failing. One in eight mortgages is in default or foreclosure. These are more than statistics. They represent individuals and families uprooted, finances destroyed, and communities in turmoil. We need to keep pushing servicers to expand their capacity and hold them accountable for their performance. And we need to make the process more transparent for homeowners. Second, we need to create jobs, which the American Recovery and Reinvestment Act is already doing throughout the U.S. Although there have been some positive signs in the economic outlook, the unemployment rate in Rhode Island and nationally has continued to climb steeply. In the 5 months since you addressed the Committee in February, the national unemployment rate has risen from 8.1 percent to 9.5 percent, and in Rhode Island it has surged from 10.5 percent to 12.4 percent--the second highest in the country. I will soon introduce legislation to encourage more States to use work share programs, similar to our program in Rhode Island, which provide businesses with the flexibility to reduce hours instead of cutting jobs. Third, we need to stabilize and revitalize the financial markets. We've made significant progress in this area, but we need to continue to monitor these institutions to ensure they remain well-capitalized and are able to withstand market conditions much better than they did in the recent past. And we need to be smart about the Federal Reserve lending programs to get our credit and capital markets once again operating efficiently and effectively. This is especially true for small businesses, our job creators, which are the key to our Nation's economic recovery. Finally, complimenting all of these is a need for comprehensive reform of the financial regulatory system. We face several major challenges in this area, including addressing systemic risk, consolidating a complex and fragmented system of regulators, and increasing transparency and accountability in traditionally unregulated markets. It is important to recognize that our economic problems have been years in the making. It will not be easy to get our economy back on the right track. But in working with President Obama we can begin to turn the tide by enacting policies that create jobs and restore confidence in our economy. ______ CHRG-111shrg382--37 Mr. Sobel," Well, I think the IMF has a very important role to play in promoting global financial stability. The FSB brings together national regulators, supervisors, Treasury officials with standard setters. The IMF attends the meetings. Sometimes the way I think about it is a bit simplistic, but there is kind of a micro focus on what are you doing in any given institution. But I think one of the things we have learned from the crisis is we need a macro focus to understand what are the macroeconomic phenomena and dimensions that interact with the performance of the institutions. If you just look at one individual firm, but you don't see what is happening across firms, you can miss some---- Senator Bayh. Well, that is a role the IMF could---- " FOMC20060510meeting--59 57,MR. STOCKTON.," If I could respond to that for just a second—I’d be happy to write a number down on the back of an envelope. [Laughter] If we were to write a number down, I’d caution you not to take it too seriously. I think you ought to be looking at survey measures of inflation expectations. You ought to be looking at market-based measures of inflation expectations. And in some sense, I think you still need to take seriously models that have adaptive expectations as well, because they could be reflecting how people are learning or how they might be influenced by past inflation. We show some of those things. We could show a lagged inflation term, or as I say, we could certainly create a variable that we would call inflation expectations for purposes of the staff forecast. But I’d be nervous about giving it prominence over and above these other measures that I think you should be taking on board as well." FOMC20050202meeting--93 91,MS. JOHNSON.," Your first international chart reviews financial developments for the major foreign industrial countries. After appreciating early last year, the nominal exchange value of the dollar in terms of the other major foreign currencies (the black line in the top left box) changed little through September. It subsequently declined broadly, as can be seen by the red yen–dollar and blue euro– dollar lines. So far this year, the nominal dollar index has rebounded about 1½ percent from its December low. It is now approximately 27 percent below its peak in early 2002. As can be seen in the panel to the right, euro and yen three-month market interest rates have remained about flat for over a year as dollar rates have moved up with your moves to raise the federal funds rate. The ECB has left its official repo rate at 2 percent since mid-2003, and the Bank of Japan is continuing its policy of quantitative easing. The middle panels show market expectations of policy moves by those two central banks on three dates: currently and at the time of the two most recent chart shows. Three-month euro futures rates, on the left, have shifted down since June, as expected tightening has been pushed off into the future. Markets now appear to expect some upward move by the ECB around midyear. Similarly, as seen to the right, markets have pushed off expected increases in rates on the part of the Bank of Japan into 2006. February 1-2, 2005 75 of 177 The table in the top half of your next chart provides an overview of our forecast for real GDP growth abroad. After expanding at an average annual rate of more than 4 percent during the first half of 2004, total foreign real output (line 1 in the table) decelerated to just under 3 percent during the second half. Although both the timing of and the factors behind the “soft patches” experienced abroad differ across countries, we expect that going forward the pace of activity will generally firm across the industrial countries (lines 2 through 6) and will converge to steady growth across the emerging economies (lines 7 through 11) as the restraining forces dissipate. By the second half of this year, we project that average foreign growth will return to an annual rate of about 3¼ percent and remain near that rate over the remainder of the forecast period. Among the industrial countries, the “soft patch” was far more evident in Japan (line 3) and the euro area (line 4) than it was in the United Kingdom (line 5) or Canada (line 6). The latter two countries have sustained moderate to strong growth in real GDP with vigorous domestic demand over the past several years. In contrast, Japan is struggling to sustain an expansion that had been promising to end over 10 years of subpar economic activity. The euro area has been expanding at subdued rates, with high unemployment. As shown in the bottom panels, business and consumer confidence in both Japan and the euro area improved sharply from previous lows in 2003 through the first half of 2004. Little or no further improvement was recorded during the second half of last year, however, raising concerns about the robustness of internal demand in these economies during this year and next. As can be seen in the right panel, through mid-2004 Japanese exports expanded strongly, supporting output growth, and, to a lesser extent, euro-area exports did the same. A pickup in the pace of global expansion should halt the downturn in Japanese exports and contribute to renewed export growth in these economies, but at rates below those experienced in late 2003 and early 2004. February 1-2, 2005 76 of 177 exports has led to China becoming a more important trading partner for a range of countries. For example, over the past several years, China has moved up to replace the United States as the number one trading partner of Japan, Korea, and Singapore. The bottom panels indicate that production expanded strongly in 2004 in both Brazil and Mexico, although a slowing in the second half of the year is clearly evident for Brazil. Despite sharp fluctuations, on balance, exports provided positive stimulus to Brazilian output over the year, as they also did in Mexico, although to a lesser extent. The nominal U.S. trade deficit, reported in the upper left panel of your next chart, has moved further into deficit since the last chart show. Compared with the third quarter, the most recent data for October and November report a substantial increase in imports (line 2) and essentially no change in exports (line 8). About half of the increase in nominal imports reflects the higher oil import bill (line 6), which in turn was boosted by the elevated level of oil prices. The remaining half of the increase is accounted for largely by consumer goods (line 3), with several other categories showing small positive changes. The weakness in exports, which surprised us and the markets, is not explained by a large drop in any particular category and would still be apparent even after accounting for errors made by Canadian statistical officials in measuring their imports for November—a correction to the data that we cannot yet make. The breakdown of U.S. exports by destination is illustrated by the panels to the right. During 2004, exports to Canada and western Europe expanded strongly; the most recent observation for Canada likely will be revised up about $4 billion when corrected data are released. Export weakness is evident in the downturn in exports to the group of countries labeled “Other Asia,” i.e., our Asian trading partners other than Japan, China, and Hong Kong. U.S. exports to those three economies were flat for most of last year. Oil prices, shown in the lower left, reached remarkable highs in 2004 and have been very volatile since midyear. After the December meeting, I must admit, those prices moved back up, not down. We still see the strength in overall global economic activity, and thus demand for crude oil, as a significant factor in supporting oil prices at current levels. Moreover, some supply developments, including OPEC decisions and violence in Iraq, continue to influence prices. In line with the futures markets, we project that prices for global crude oil will decline through next year, although we expect that the spread between the spot price for WTI [West Texas intermediate oil] and the U.S. import price will narrow somewhat. February 1-2, 2005 77 of 177 foreign prices expressed in dollars. That contribution fluctuates with the exchange value of the dollar, which declined at times, particularly in the fourth quarter of last year, but which also rose at times, such as in the second quarter of last year. Starting next quarter, we see the upward pressure from both of these factors as diminishing greatly, with the result that core import inflation is projected to be low over most of this year and during next year. Our outlook for the contribution of global commodity prices reflects the predictions in current market futures curves. The low and steady contribution of foreign prices when expressed in dollars results from our projections of stable and low inflation abroad on average and of little change going forward in the exchange value of the dollar. In addition, expiration of the multifiber agreement [World Trade Organization Agreement on Textiles and Clothing] should lower import prices. The consequences of our outlooks for foreign growth and prices for U.S. real exports and imports are presented on your final international chart. Real export growth (line 1 in the top left panel) is boosted this year by some bounceback from the weak fourth quarter last year. The acceleration in core exports (line 4) reflects our assumption that some of the recent export weakness will be “paid back” in early 2005 as well as the continuing stimulative effects of recent dollar depreciation. The somewhat stronger export growth forecast for both this year and next also depends upon the projected return to steady, moderate growth abroad. In contrast, real imports of goods and services (top right panel) are projected to decelerate this year; growth of imported core goods (line 4) should slow nearly 2 percentage points, in part the result of the expiration of the partial-expensing tax provision, which had created an incentive to import capital goods in 2004. Past dollar depreciation lessens growth of core import volume as well. Real import growth should rebound somewhat in 2006, as growth of core imports responds to the subdued pace of projected inflation in import prices. The bars in the middle left panel translate export and import growth into contributions to U.S. GDP growth. The positive contribution from exports is expected to outweigh temporarily the negative one from imports during the first half of this year. Thereafter, on balance, imports will subtract about one-third percentage point more from GDP growth than is contributed by export growth. February 1-2, 2005 78 of 177 adjustment will not even have started by the end of the forecast period if the Greenbook forecast is realized. In 2005 and 2006 the projected current account deficit widens significantly more than does the trade balance as net investment income deteriorates. We asked our global econometric model what average rate of dollar depreciation would be required during the Greenbook projection period for the trade deficit in the fourth quarter of 2006 to be about unchanged from that estimated for the fourth quarter of last year. The dollar path needed to produce that outcome, shown in red in the bottom left panel, is one that declines at an average annual rate of 10 percent. The panel to the right reports consequences of the weaker dollar path for the trade balance and the current account balance. By construction, in the alternative of a weaker dollar, the change in the trade balance over the forecast period is about zero. However, the current account balance nonetheless continues to deteriorate. In fact, the weaker dollar improves the current account deficit by less than the improvement in the trade balance, primarily because higher interest rates, which the model generates as it uses a Taylor rule to guide monetary policy, result in even greater declines in net investment income. This simulation suggests that even were the dollar to depreciate quite sharply, it is likely that over the forecast period the trade deficit would remain near its current size and the current account deficit would widen further. Sandy will now conclude our presentation." FOMC20051213meeting--92 90,MS. BIES.," Thank you, Mr. Chairman. I want to echo Dave Stockton’s analogy of tidings of great joy in this forecast. I think the upward revision in growth and the downward revision in inflation are developments that we all welcome at this point in the economic expansion. As I tried to assess some of the information to see where I would want to come out on policy, I tended to take an approach similar to the one President Yellen took, in saying: Where do we stand at this point in our effort to remove accommodation, and where are we going as we move forward? In the alternative scenarios laid out in this Greenbook, there is really only one where long-term inflation expectations lose their anchor and which therefore gives me much concern. As I looked at where we are on inflation, I was struck that there is some good news and some bad news and that there are currently risks on both sides. Last year we saw inflation coming up from extraordinarily low levels— moving up from 1 percent to over 2 percent. It rebounded quickly, and I was one who was quite concerned by how quickly inflation had moved up. In the last six months, though, it has been 1.6 percent, which sounds like a fairly good area for it to be in. But the fact that it rebounded so fast clearly indicates that we always have to be very alert to developments on that front, because prices can move rapidly. The energy pass-through, I think, is a risk for higher inflation. I’d love to see the analysis that December 13, 2005 60 of 100 think we could see real concerns about disruptions and risks to the economy going forward—as a consequence, for example, of believing that energy prices are going to stay in a high range for several years or seeing the possibility of outright shortages in areas like natural gas. We’ve also seen that other central banks in the world are now expecting stronger growth and higher inflation in their economies. The ECB [European Central Bank], as was mentioned earlier, finally raised its policy rate, and even the Bank of Japan is coming out of a zero rate world. So some of the cushion we’ve had worldwide may be moderating, and that could produce more risks on the upside on inflation. On the other hand, when I look at what has been happening with jobs growth and labor compensation, I continue to be struck by how moderate the growth in compensation has been. The productivity story is clearly one reason for this. The numbers continue to amaze me at this point in the cycle. It’s easy to achieve productivity gains in a company early on when you have excess capacity. But this many years into an expansion, it really takes a ton of attention and effort. Another thing that often comes up in my conversations with business executives is this: They are sitting at very high levels of profit and cash flow generation; and when you ask them about their main challenges, they still say their primary challenge is to maintain profit growth. If you start to dig into that, you find that it’s beyond just managing wage costs and looking at capital. The lessons they learned in the ’90s in terms of really changing the way business processes are run are continuing to play a role in all of the decisions they’re making on issues like inventory management—not tying up capital either in inventory stored or in warehouse capacity. As I looked at last month’s numbers, inventory-sales ratios hit record lows. So clearly, businesses are continuing to learn more and more about how to keep inventory levels very, very December 13, 2005 61 of 100 through better information systems and better order management systems. They also are focusing a great deal on quality control, particularly in services and retail businesses, and in business services where that is a key differentiator with the competition. But better quality also has major cost benefits because it reduces errors and the need to redo work and it focuses on the timeliness of delivery. And these are the kinds of values beyond prices that customers are rating as increasingly important. So firms get both greater efficiency and value added for their customer base more than in the past. And finally, outsourcing—and I’m talking not internationally but simply outside of the core enterprise—is a business practice that evolved in the ’90s and has proven to be very important. In the old days when you ran a big corporation that was vertically integrated, there were cost centers throughout the organization and it was very hard for CFOs to get a handle on controlling costs. Now that the culture has become “if it isn’t a core function, you ought to try to outsource it,” the process of renegotiating with the contractors annually or semi-annually or every three years and of going out for other bids puts continual pressure on attaining productivity improvements and a favorable cost payback. But when the function was embedded in the bigger organization, the social politics sometimes got in the way and made it difficult to wring out the costs. The fact is that firms now try not to do everything, and to outsource functions unrelated to their core business. That this has become an ingrained practice in many companies is another theme I’m hearing. So, in short, I’m finding that changes in business practices are the focus of a lot of companies. And they believe that despite higher costs, they are going to be able to improve the value with modest price increases going forward. Pulling all of that together, I tend to think that we are very close to the end of the increases in interest rates that we need to implement. There are risks on both sides, but it strikes me, based on the December 13, 2005 62 of 100 a minute ago, according to the Bluebook, the real fed funds rate that we would have with a 25 basis point increase today is at the midpoint of the range of the staff’s estimates of equilibrium. Also, it’s above the funds rate derived from the policy rules for all of the alternatives. So we are close to where I think we need to be, given the forecast. As a result, I think we really do need to talk about how to make this transition and change our communication." FOMC20070131meeting--234 232,MR. MOSKOW.," Thank you, Mr. Chairman. I agree with the sense of the Committee that we should not be raising rates today. However, I do think that, as we’ve all said, the inflation risks still dominate and that we’re approaching some very important decision points in the next couple of meetings. If we look back, of course, the primary risk to our growth forecast has been housing. We have seen an incredibly sharp decline, and many of us have the sense that housing is stabilizing now. There’s still some uncertainty about that, but it seems to be stabilizing. Once it stabilizes, our attention will shift to the other part of our dual mandate—to price stability. As I think we have all said, we’re uncomfortable with the current rate of inflation. There has been some improvement; we’ll take that to the bank. We’re happy with that. But there is still a lot of uncertainty about the future course of inflation, and the projections in the Greenbook and the Bluebook are not encouraging to me. My comfort zone is 1 to 2 percent, so I’m in the 1½ percent category. In view of that range, as Vince said, we have work to do. I agree with Tim and Sandy that we shouldn’t interpret alternative B as saying that each individual has a target of 2 percent. Our projection for inflation is 2¼ percent in both years, and that is clearly above that target. We have said we’re concerned about inflation—we said that last time, and I think it was well put. But we should make even stronger statements in the minutes about the costs of inflation running above forecast and about the damage it can do to the economy on a long-term basis. As I said, I don’t think we have the luxury of waiting until inflation rises before we act. We have to be forward-looking. The next couple of meetings are going to be important because we’ll know a lot more about whether housing really has stabilized further and what the inflation numbers will look like. In terms of the language, I’m comfortable with alternative B as it’s stated. I like the reference to the high level of resource utilization in section 3, so I would not change the language at this time." FOMC20061025meeting--185 183,MS. MINEHAN.," As I noted yesterday, I’ve become somewhat less worried about the downside risk to the baseline outlook. So to some degree, that factor has changed a little since the last time. In fact, I think the baseline isn’t bad at all. Indeed, it’s a testament, again, to the resilience of the U.S. economy if we can actually pull off, as we seem to be doing, a gradual slowing of the powerful U.S. housing markets against the background of considerable geopolitical and energy market uncertainty and price pressures, not to mention the potential for both strong consumer retrenchment and financial market volatility. So we seem to be threading the line through a lot of risks on both sides of this baseline, and we seem to be doing it successfully in negotiating that soft landing. I think we should take some pride in that so far so good and that monetary policy has played a key role in this unwinding process. In that regard, I continue to believe that the cost to the central bank of being wrong on inflation risks is greater than being wrong on the side of growth at this time. If growth wanes more than is now expected, we can ease policy fairly quickly. Getting behind the curve on inflation could be a good deal more costly. Thus, I am pretty comfortable with the current stance of policy, which I see as slightly restrictive. At least for the time being, I think it balances the risk of being wrong on inflation with the risk of slower growth and is appropriate given the brighter tone of much of the incoming data, with the possible exception of residential investment. A risk-management argument could be made for raising rates, and certainly those less comfortable with the current and prospective levels of core inflation might find such an action attractive. I don’t, as I continue to worry some about downside risks to growth, and I am more or less comfortable with our forecast that, with no change in policy in the near term, inflation will gradually fall to just over 2 percent as measured by the core PCE in the next eighteen months or so. That projection, at least at this time, seems right. So I come down on the side of keeping the fed funds rate at 5¼. So that’s the policy choice. The next issue is what to say about it. I think it’s important to continue to emphasize some concern regarding inflation rather than to move to more of a balance of risks. Financial markets remain quite accommodative, and I really see no reason to encourage them to be more so, thinking that policy easing might occur sooner than they do now. I think that would be the outcome of alternative A. So I’d prefer alternative B. The next question is, which alternative B? We now seem to have B-, B+, and B. Let me just comment a bit on the variety of alternatives that have been raised. You know, I have a lot of regard for Governor Kohn, and I take his point—and Governor Kroszner’s point—about section 2. However, when reading through it myself, I did think that the reference to the third quarter might help the markets react better if, in fact, the Greenbook forecast is accurate about the number that we’re going to see on Friday, which is considerably less than what a lot of people in the market think we’re going to see. I thought that the reference to the third quarter was helpful there. But, again, I have a great deal of regard for the cumulative wisdom on the other side of that. With regard to section 3, I, too, believe that there is some benefit to making the change that’s suggested in the Bluebook of using the alternative A wording for section 3. The shorter wording does reflect the moderation that has occurred in energy and commodity prices, and it puts the level of resource utilization more front and center as an inflation risk. I also find that it’s somewhat shorter, which, in general, I think is desirable. In section 4, I found the B+ wording attractive because it suggests a concern regarding inflation that I heard around the table yesterday and somewhat of a diminution of deep concern about the downside risks. In a way, I think there is a benefit at the margin to getting away from stock phrases. But I take Governor Kohn’s point very seriously that one does that recognizing that there’s a potential for unknowable consequences. So while I am marginally in favor of B+, I am more than happy to go with alternative B, either as it’s presented, with the switch of section 3, or the new language for section 2. I’m easy, you might say. [Laughter]" FOMC20071031meeting--248 246,MR. KOHN.," I think the balance of risk statement in the announcement has had the utility weight on it; there have been times when the Committee was more concerned about falling to one side or another. But I at least interpreted the forecast as simply whether there were skews to one side or another. If I may have the floor to talk a bit to President Poole’s point. I think we do say in the statement that there are upside risks to inflation and downside risks to growth. So I would be concerned if the whole Committee shifted to the middle because then I think we would be contradicting the announcement that we made, so I think your point is good. I mean, you ought to be sure that you really do think there is downside risk to growth and upside risk to inflation, or whatever, and adjust it for the policy choice that we made today." CHRG-111hhrg56776--273 Mr. Gerhart," Chairman Watt and members of the committee, I am Jeff Gerhart, president of the Bank of Newman Grove in Newman Grove, Nebraska. I'm also a former director of the Federal Reserve Bank of Kansas City. The Bank of Newman Grove is a State member bank supervised by the Federal Reserve with $32 million--that's ``M'' in million, not ``B'' in billion--in assets. Our bank was founded in 1891, and I'm the fourth generation of my family to serve as the bank's president. Newman Grove is an agricultural community of 800 in the rolling hills of northeast Nebraska. Our bank works hard to ensure Newman Grove is a vibrant community through loans to our local farmers, small businesses, and consumers. I am pleased to testify on behalf of the Independent Community Bankers of America and its 5,000 community bank members nationwide at this important hearing to link the Fed's examination--or supervision of monetary policy. Some in Congress have proposed that the Federal Reserve's supervision of State member banks be eliminated and that a supervision over holding companies be eliminated or limited to the very largest companies. Although the primary responsibility of the Federal Reserve is to conduct monetary policy, the ICBA opposes separating the Federal Reserve's monetary policy role from its role as financial supervisor. For decades, the Federal Reserve has played a critical role in the banking regulatory system as a supervisor of State member banks and holding companies. ICBA believes the local nature of the regional Federal Reserve banks, working in harmony with State bank regulators, gives them a unique ability to serve as a primary regulator for State member banks, the vast majority of which are community banks serving consumers and small businesses. This, in turn, gives the Federal Reserve an efficient means for gauging the soundness of the banking sector, information that is critical to developing and implementing sound monetary policy. Federal Reserve Chairman Bernanke recently testified that the Federal Reserve's supervision of community banks gives the Fed insight into what has happened at the grass roots level to lending and to the economy. This is particularly true with respect to the vital small business sector. While community banks represent about 12 percent of all bank assets, they make 40 percent of the dollar amount of all bank small business loans under a million dollars. The Federal Reserve monetary policy is to promote this important sector of the economy. The Federal Reserve's supervision of community banks must be maintained. In addition, regulation of community banks gives the Federal Reserve a window on the vast array of local economies served by community banks, many of which are not served by any larger institutions at all. The inside gain from the supervision of State member banks and holding companies, both large and small, allows the Federal Reserve to identify disruptions in all sectors of the financial system in order to meet its statutory goal of ensuring stability of the financial system. The record shows the Federal Reserve has been a very effective regulator of community banks, and this role should be preserved. ICBA is very concerned that limiting the Federal Reserve's oversight to only the largest or systemically dangerous holding companies could lead to a bias and favor the largest financial institutions. This is a risky approach to financial reorganization and a path that the United States should not go down. The Federal Reserve Bank of Kansas City, the Federal supervisor of my bank, brings to its bank supervisory role a highly regarded expertise in the agricultural economy. The Federal Reserve's expertise in agriculture enhances its ability to supervise Midwestern community banks like mine with a significant ag loan portfolio. It would be a mistake to remove the Federal Reserve's economic expertise from the country's financial supervisory structure. Having multiple Federal agencies supervising depository institutions provides valuable regulatory checks and balances and promotes best practices among those agencies. The contributions and views of the Federal Reserve have been an important part of this regulatory diversity, which would significantly be diminished if the Federal Reserve were stripped of all or most of its supervisory authority. I want to thank you for inviting me here today, and I would be glad to answer any questions. [The prepared statement of Mr. Gerhart can be found on page 73 of the appendix.] " FOMC20070321meeting--303 301,VICE CHAIRMAN GEITHNER.," Thank you, Mr. Chairman. I think three things about our current regime are worth reflecting on as to whether we can improve them. They are, first, the lack of clarity that exists about how we define our objective; second, the relative lack of texture that we provide about the outlook and the risks that underpin our decisions relative to some other central banks; and third, the way we run our internal conversation. In all these areas, because institutions are subject to inertia, we’re probably short of the frontier of the achievable, but I think it’s worth thinking about whether we can get closer to the frontier. I just want to raise some questions that I think are the hardest for us to work through in figuring out how we should evolve—and I think we should evolve. The first issue is about the balance between the benefits of the regime and the costs. The problem we face is that, based on what we know about the theory and the experience, the gains on expectations relative to what we have already achieved as a central bank look pretty small. I think there’s a broad consensus that they’re small. There’s a greater dispersion of views about what the costs are. Some of them are transition costs—how you get where you’re going and the political issues that surround that. Some of the costs are more uncertainty about the effect on how you operate going forward. The difficulty in judging the balance between what we think we know about the potential gains and those costs is that it’s hard to narrow uncertainty around the costs even after looking at the experience of other central banks. As many people have said, the experience of other central banks is pretty reassuring as to the costs. It’s hard to argue that they are worse off because they have achieved this in terms of outcomes. But some of that uncertainty is difficult to narrow ex ante, and a lot of it will depend on judgments that we make about the design of the regime. But even those judgments won’t fully answer the questions because, even if we tied them down now, they would still leave some uncertainty about the effect on our incentives, our behavior, and our management of a regime that will have much more exacting demands on communication. This problem is magnified by the fact that it is hard for us to adopt a regime with an explicit, fixed, relatively short horizon and to justify it as consistent not only with the dual mandate and the politics that surround that, but also—based on what we know about the experience of other central banks—with making sensible decisions about monetary policy that has multiple objectives over time. I don’t think that outcome is realistic for us as a Committee. Therefore, you’re talking about a range of options that are much toward the softer end—no fixed horizon, a horizon that varies according to the circumstances. The gains are going to look more tenuous. That’s one issue that I think is interesting for us to think through. The second issue concerns the initial conditions and the transition costs. If you’re going to adopt an objective that’s different from what people think your objective is and different from what best estimates of trend core inflation or trend inflation are today, those conditions and costs are very complicated. The dialogue between Rick and Jeff was very interesting. Both choices that exist today, if we were going to launch today, look very unattractive. You can basically decide that you will pick a target that’s pretty close to what your judgment is about trend because that is slightly above what the market infers our objective is. To validate a higher objective than what they have been inferring is awkward and hard to see. It would be easy to say that you’re going to adopt an objective substantially lower than that and believe that it would be easy for us to make it a simple, compelling political endeavor to achieve. So I think that issues about timing, initial conditions, and transition costs are very important and complicated to work through. But I thought you did a nice job of laying out the obvious issues on both sides. The third issue that I think is interesting is the question about the strength of the consensus necessary to go forward and how you deal with it. I think you’d need a very strong consensus to go forward. Some would view this change in regime by the Fed as the most significant since Humphrey-Hawkins, maybe since well before Humphrey-Hawkins, and so you’d want to have a very strong consensus. When you decide, on the strength of that consensus, you had better move forward. You have to have agreement. People have to agree that they’re going to operate under that regime, and I think we will, in effect, need to bind our successors to operate within that regime. Even if you have a regime in which, because of the legal or practical circumstances surrounding the institution, you have to have a periodic reaffirmation of that objective, in effect you’re binding our successors because we all agree that once you do this you can’t go back. We can’t contemplate the possibility that we’re going to adjust it in response to the changing preferences of different Committees over time. The fourth issue that I think is interesting for us is that we have to design a process of internal deliberation before launch that allows us to get more comfortable with the way we would operate. The aspects of our internal decisionmaking process that are least well suited to operating comfortably in any of the variants of the regime that we’ve been discussing are the lack of clarity that we live with about what our individual preferences are, about how that informs our different views about the structure, about how we inform our choices about appropriate, desirable paths for inflation, and about what monetary policy we think is consistent with that. As we’ve been discussing, we need to bring a little more internal clarity to that conversation. We need to know why we’re disagreeing when we disagree if we’re going to be better at thinking through difficult choices. There is also the related gap in how we talk about this stuff today, as Don Kohn said. Even if you only talk about a regime toward which you may be leaning or publicly disclose things about your forecast or move in the direction of a quantitative definition of inflation, we’re going to have to have a more explicit conversation about what we think is the appropriate path or slope of the path. Even if we don’t want to adopt a fixed horizon that varies over time and have that embedded in what we disclose about our forecast, we’re going to have to have more explicit conversations about what we think is an adequate, acceptable path toward trend. That is a complicated conversation to have, and in my brief experience on the Committee, we haven’t spent much time thinking about those kinds of choices. We’d prefer to live with squishiness, lack of definition, and ambiguity around those kinds of things because it is easier. I don’t think we’d have that option in a regime in which we’re moving toward more-frequent disclosure, three-year forecasts, and a central tendency of a path for these kinds of things. So my fourth issue is that we need to be careful in thinking through how we’re going to get comfortable with the evolution in our internal regime that’s going to be necessary to live within these kinds of regimes before we launch. My last point is—I’m not sure how to describe this—about the stability in any proposal we adopt. We’re all going to be tempted to soften the edges of what we’re agreeing on to make the consensus as broad as possible. We need to be careful that, if we adopt the intermediate things, we look at them and think they will stand up pretty well to external criticism and that we’re not going to find ourselves uncomfortable with having moved to that intermediate position. I think we’re going to get pulled naturally further toward more clarity. The discussion about the past—for example, whether we reveal the conditioning assumptions of our forecast—is the best example of that. That’s one instance in which you might decide that it’s expedient to agree today that we’re going to have an unstated, undisclosed, appropriate policy conditioning assumption for a forecast that has more clarity. But over time, as we’ve seen in other cases, there’s going to be a lot of pressure to say, “But what does this tell us really? We don’t really understand this.” So we want to think through this question about how to do something that is going to look stable over time. It doesn’t mean we have to fix it and say we would never evolve beyond that. But if we know we’re going to adopt something that’s going to be unstable and subject to pressure to move, let’s try to think through a bit in advance how we’d anticipate that pressure and respond to it. We can make the same point about the importance of thinking through the sequence of any evolution. I take Rick’s point about the importance of being evolutionary in that respect. Just as an example, if we decide that we want to go first with the transparency around our forecast before consensus or clarity on a quantitative objective as publicly announced, we should be sure that we think that’s an optimal chain of decisions, too. So the questions about sequence are going to be important to work through. I have a bunch of comments on the initial proposal for a narrative description of our forecast and the way uncertainty is captured. But if the Chairman permits, I will submit those directly to the staff for the record." CHRG-111hhrg74855--115 Mr. Wellinghoff," Well, it is essential and the only way to have reasonable prices with these RTO markets is to ensure that they are well-designed as a structural package and that is why it is so important to have one entity who oversees that structural package to make certain that the design is adequate to ultimately get to the end result of the reasonable prices. " Mr. Scalise," OK and then you had also talked about or I think in your testimony, the intensive capital expenditures, just the energy industry as a whole is a capital-intensive industry. Could you comment on the role that the FERC regulated financial products play in securing capital for the development of new technologies and if that capital is limited by new regulations, what that role would be on the ability to have newer technologies developed? " FOMC20050202meeting--149 147,MR. BERNANKE.," Thank you, Mr. Chairman. The economic recovery seems well entrenched, and domestic final demand continued strong, foreshadowing healthy growth in 2005. I don’t see inflation risks as having changed materially in recent months. In particular, labor costs have been remarkably subdued. However, with the recovery no longer fragile, continued withdrawal of monetary accommodation at a measured pace remains the appropriate policy, in my view. Some have cited a possible slowdown in labor productivity growth as an upside risk for inflation on the grounds that slower productivity growth implies a more rapid rise in unit labor costs. While lower productivity does, of course, lead to higher unit labor costs, all else equal, the links between productivity growth and inflation, as well as the implications for policy, are actually quite February 1-2, 2005 102 of 177 First, it’s important to note that an assumption of slower productivity growth is already incorporated into the Greenbook forecast. The staff projects output per hour in the nonfarm business sector to rise at about a 1.7 percent annual rate in 2005, less than recent experience and about a percentage point below the profession’s consensus estimate of the long-run trend. The projected slowdown reflects both cyclical factors and the assumption that there will be some giveback of the extraordinary recent gains. As productivity growth has surprised repeatedly on the upside for almost a decade now, I think the risks for the Greenbook productivity projections should be viewed as well balanced, at worst. The staff projects that the deceleration in the cyclical component of output per hour should have little effect on inflation but will instead lower profit margins. And even though the expected slowdown in structural productivity growth will put upward pressure on prices, the staff expects the impact on inflation of that productivity slowdown to be offset by other factors like declining energy prices and a stabilization of the dollar. To summarize, the Greenbook’s baseline forecast shows that some slowing of productivity growth, at least, is not inconsistent with continued stable inflation. The interesting question is: What will happen if productivity growth in 2005 comes in even lower than the 1.7 percent projected by the staff? If firms view the resulting increase in the rate of growth of unit labor costs as more or less permanent, then historical experience suggests that these costs will be passed on to consumers fairly quickly, thereby boosting inflation in the short run. However, it does not follow that policy should therefore be tightened more aggressively. The appropriate response depends also on the reaction of aggregate demand to this change in productivity growth. If a slowing in productivity growth occurs that is both perceived as permanent and is also largely unexpected by households and firms, then stock prices should fall and households should mark down their estimates of permanent income. The resulting decline in aggregate demand will tend to offset the inflationary impacts of the productivity slowdown. Also, because firms will expect February 1-2, 2005 103 of 177 illustrated in chart 6 of the Bluebook, the optimal policy response to a permanent slowdown in productivity growth may well involve a slower pace of tightening rather than a faster one, despite a possible short-run bump in inflation. This scenario is just a mirror image of the post-1995 experience in which a perceived increase in secular productivity growth sparked a stock market boom and rapid growth in spending, and hence was not disinflationary, despite the fact that unit labor costs declined. What if productivity growth slows substantially but aggregate demand does not respond? In that instance, unfortunately, we might be called upon to make a judgment about whether the slowdown is likely to prove temporary or permanent. If it is temporary, then neither inflation nor policy should respond very much. If the slowdown is judged to be permanent, however, the failure of aggregate demand to adjust would suggest that households and firms anticipated the slowdown, while the staff was too optimistic. In this case, the slowdown in productivity should indeed be met with a tightening of policy in the short run. However, the funds rate should be lower in the long run, reflecting the fact that the neutral fed funds rate will also be lower. This scenario is the mirror image of the 2002-2003 period in which productivity gains created disinflationary pressures that did require aggressive easing in the short run. To summarize, slower productivity growth does not necessarily require a tighter policy. First, some slowing is already anticipated and incorporated into the Greenbook forecast. Second, if a significant slowing occurs, the key issue is the extent to which aggregate demand responds to the slowdown. A sufficiently large decline in aggregate demand might well reverse the presumption that tighter policy is needed when unit labor costs rise. Thank you." FOMC20070321meeting--85 83,MS. PIANALTO.," Thank you, Mr. Chairman. Comments from my business contacts confirm the softening in economic activity that is depicted in the Greenbook. Most of the people I talked with during this intermeeting period confirmed the slowing that we are seeing in the national data. But at the same time, they expect that business will improve over this year. My business contacts are still planning to add modestly to staff and to expand output, although their capital spending plans are not particularly ambitious this year. A number of my business contacts told me that the dollar depreciation is finally having an effect. They are getting more orders and are being asked to quote more jobs from foreign customers. I have recently had conversations with CEOs of the large banks from my District, who have an interesting perspective on the ongoing turmoil in the subprime mortgage market. They don’t seem to be particularly concerned that the situation in the mortgage markets is going to be substantially worse than is already factored into the admittedly weak housing forecast. But they are concerned, as President Yellen mentioned in her comments earlier, that the subprime mortgage problems are symptomatic of broader issues that could spill over into hedge funds and private-equity funds—both of which have become an increasingly important source of funding for business investment activity. They worry that retrenching among managers of these funds could adversely affect business confidence more generally. Their comments resemble the alternative Greenbook scenario labeled “Business Pessimism with Spillovers.” The difference, however, is that my business contacts are suggesting that the problems could originate in the financial sector and spill over to producers’ expectations. Turning to inflation, the volatility in the monthly retail price numbers, even in the so- called core measures, will make it difficult to clearly perceive the very modest progress in the inflation trend that appears in the Greenbook baseline. Given the usual noise in the price data, work by my research department indicates that identifying a break in the inflation trend on the order of about ½ percentage point with a fair amount of certainty can take somewhere between a year and a half and two years after the break has in fact occurred. While I believe we are still on a course that leads to a lower inflation trend, the path we take to get there will not likely be a smooth one, and there will be times that will test our nerve. Indeed, as I look at the data today, I would judge that the downside risk to the real economy has increased somewhat. Still, in my view the primary risk we face is that inflation could remain stuck higher than either I or the Greenbook foresee. Under these conditions, I think two qualities are essential—patience and clarity. We need to be patient so that we don’t become unnecessarily aggressive in trying to foster lower inflation in a softening economic environment, and we need clarity so that the public does not come to see our patience as indifference to the current inflation trend. Thank you, Mr. Chairman." CHRG-111hhrg56766--126 The Chairman," Time has expired. We were going to have a hearing on March 2nd on that very subject. I had to postpone it because there was a major hearing on the fishing industry in my district and I had to fish or cut bait, so I'm going fishing, but also it turned out we had originally thought that would be a day in which there had been votes the day before. It is a day in which there are not votes until that evening and members expressed a lot of interest in it. We will, on the next available hearing day, have a full hearing on exactly that topic and so, Mr. Chairman, we will be looking for an elaboration of those views, but we had the hearing set for March 2nd on precisely the topic the gentleman asked, not just Fannie and Freddie Mac but its interaction with the FHA and Ginnie Mae and the Federal Home Loan Bank and all of the various strains of housing financing. So we'll get the rest of that answer within 10 days at the latest. The gentlewoman from New York, the Chair of the Small Business Committee, who will be co-presiding on Friday on a hearing on this recurring important topic of how do we get loans flowing to small businesses which she's been focused on, the gentlewoman from New York. Ms. Velazquez. Thank you, Mr. Chairman. Chairman Bernanke, you know, you quite well said that economic recovery is tied to jobs creation and we all know that job creators in our country are small businesses, and if you talk to any member in this panel sitting here, they will tell you that each one of us know some creditworthy borrowers who can't access lending and and we know that we have put together all these tools to incentivize lending and we see today's Wall Street Journal with that title about lending, the sharpest decline since 1942. And I know that your answer to me is going to be, well, that is not under my purview, but if we have tried all these tools and are not producing the success in terms of easing or getting credit flowing again for small businesses, even the loan guaranty by SBA, we have seen 50,000 less loans this year compared to last year and we increased the loan guaranty from 75 to 90, we reduced the fees paid by borrowers and lenders. So my question to you is, do you think that there is a time, given this economic crisis, for the Federal Government to play a more aggressive role in direct lending in a temporary basis? " CHRG-110hhrg38392--66 Mr. Gutierrez," Thank you very much. Welcome back, Chairman Bernanke. Just a side note, as Chairman, when you get together with the Governors, you might want to take a look at what I feel is going to be a real looming crisis, and that is for our generation of college kids today, because there is not a week that goes by that my daughter does not get another credit card. Worse yet, now she is getting loans to take a vacation, and to get a laptop. I mean, you should see the stuff that is coming in the mail. Fortunately, she has a very fiscally responsible dad who has taught her about money and monetary policy, at least I hope so, until I get the credit card bill in the mail. Very seriously, I really fear this can get out of hand, especially with the rising costs of how young people are going to manage their college. I would hate to see the next generation in such debt, but no matter what monetary policy you come up with, we are not going to be very helpful to them. Chairman Bernanke, at the February hearing, in response to a question from my good friend Congressman Cleaver regarding the positive role that immigrants have played and continue to play in our economy, you comment briefly on immigration reform. You state, ``So I certainly agree that immigrants have played a big role, they continue to play a big role, and we need to have a national policy on that. This is a very tough issue, and I think Congress really has to take the lead about how many people and under what conditions we admit, but it certainly is the case today that immigrants are playing a major role in our economy. There is no question about that.'' I appreciate your response, and agree with you in many respects, and I am not trying to play ``gotcha'' here by asking you to endorse any particular panacea--you just answered the last question in that regard--but I would like for you to expand a little bit on part of your answer from February. Specifically, do you think that the uncertainty with respect to the availability of a vibrant workforce created by Congress' failure to act on immigration reform has a negative impact or could have a negative impact on our economy? " CHRG-111shrg61513--100 Mr. Bernanke," Well, I think it is very important, and I guess on the subject of regulation, I guess I would like to remind the Committee that the Federal Reserve, although we have been very focused on large institutions over the last couple years because of the crisis, we also supervise a large number of community banks, State member banks, and they provide us very important information about the economy. We can learn from them what is happening at the grass-roots level, what is happening to lending. And, you know, to get to your question, that kind of information is very valuable for us as we try to understand what is going on in the economy. As you point out, the community banks have in many cases, when they are able, when they are strong enough, have been able to step up and provide lending. They are very important lenders to small businesses, for example. And as you say--and this was the issue that Senator Bennett was raising--one of the proposals that the Treasury has made is to create a fund that would capitalize small banks that demonstrate that they can increase their lending to small businesses. So in the spirit of my previous conversation with Senator Bennett, I am not going to endorse or not endorse that approach. There are other approaches also for addressing small businesses. But I would say that if you go do that, one suggestion the Treasury makes, which is to separate it from the TARP, maybe to pass it--this would address Senator Bennett's question--to pass it separately so that it is not stigmatized or otherwise associated with the restrictions with the TARP, which increase the chance that that would be a successful program. But we certainly do value the small banks for what they are able to do, and if we are going to get this economy going again and get employment growing again, then small banks, small businesses are going to be critical for that. Senator Merkley. Thank you very much, and I want to turn to another issue, which is that I was meeting with a group of Members of Parliament from Canada two nights ago, and when I asked them about the economic meltdown and the impact on Canada, they smiled and said: Well, you know, we kept the risk out of our banking system, and now there is a huge economic movement in which we are going down, Canadians are going down and buying up the foreclosed real estate in the United States.And certainly in your role, there is the chance to look at and learn how different models interacted around the world. And would you just take a second to comment on the Canada structure, how they managed risk, whether there are any insights for us here in our efforts to provide regulatory reform? " FOMC20071211meeting--111 109,MR. KOHN.," Thank you, Mr. Chairman. The outlook for economic activity has weakened over the intermeeting period. The housing bust looks steeper with importantly greater declines in prices, and that will affect future consumption. Weakness in housing and the uncovering of greater losses at key financial intermediaries have contributed to a notable deterioration in financial markets and a tightening of some financial conditions. We are also beginning to see signs that economic weakness has not been confined to the housing-related sectors. With regard to activity outside of housing, like many others who have spoken today, I see the most notable development as the flattening-out of consumption spending in September and October. That could reflect the rise in energy prices, but it seems to me that the very deep dip in consumer sentiment suggests that more is at work—that the actual and expected effects of financial market turmoil, for example, on the cost and availability of credit to households along with lower house and stock prices might also be contributing to less-ebullient consumption spending in the recent past and going forward. Capital spending also seems to be slowing. Although business investment spending hasn’t been revised down in the fourth quarter in the Greenbook, logically slower consumption growth will show through before long, as it does beginning in the first quarter in the Greenbook. In addition, we have some more evidence of greater business caution, which could damp business investment relative to expected activity. The NFIB survey for November, for example, shows that the outlook by small businesses deteriorated decidedly in November. There’s a sharp downturn in almost all the outlook indexes for small businesses in this November survey; and as I listen to the reports from around the table, I think for all except a swath of states from Nebraska through Texas, maybe the lower Midwest, I’m hearing a little more pessimism from other places around the country consistent with this. To be sure, employment continues to expand. Various purchasing manager surveys also suggest that activity continues to increase, albeit slowly. But I agree with the staff that, on balance, the incoming data suggest more near-term weakness than anticipated at our last meeting, including some tentative evidence of spillovers from housing. Financial market conditions have deteriorated substantially, and that will place further restraint on growth next year. I think what we learned in the first few weeks of November was that losses are much larger than had been previously anticipated. Those losses stretched into what had been seen as higher quality mortgage-related assets, as Bill Dudley showed us, and the losses are large enough to call into question the ability of some very essential intermediaries to provide support for markets or to extend much additional credit. Those intermediaries include Fannie and Freddie and the financial guarantors, as well as some investment and commercial banks. As concerns about downgrades and potential fire sales rose, investors and institutions moved to protect themselves, with the rise in term funding spreads symptomatic of the greater level of concern. It is logical and reasonable that the response of intermediaries to this concern would be to tighten terms and conditions for their loans to exert greater control over their balance sheets. Expectations that intermediaries will be tightening credit, along with the incoming spending data, led to a more pessimistic view of the economic outlook, and although Treasury rates fell substantially, concern about the performance of borrowers meant that those declines did not show through very much into the cost of funds to private lenders and borrowers. Indeed, a number of indicators point to a net tightening of credit conditions across a range of borrowing sources over the intermeeting period, and that tightening will persist past the New Year. That tightening will have adverse implications for demand by households and businesses in 2008—that is, I do think there’s going to be some spillover from Wall Street to Main Street. Forward measures of the LIBOR-OIS spread for after the year-end moved substantially higher. In effect, the cost to banks of funding will not reflect the full extent of the easing we’ve done in the federal funds market. The spreads on corporate bonds have widened sufficiently to actually increase borrowing costs for both investment- grade and junk-bond issuers over the intermeeting period. The leveraged-loan market deteriorated in late November, forcing banks to take more loans onto their balance sheets, using up scarce balance sheet room. Secondary markets for nonconforming mortgages remain moribund, with no signs of life, and any loans that will be made in these nonconforming sectors will be placed onto the balance sheets of thrifts and banks, many of which are already facing strains. Perhaps as a consequence, rates on prime jumbo mortgages have actually risen over the intermeeting period; Fannie and Freddie have increased fees and are tightening standards, and they face slightly higher spreads. So the damping effect of lower Treasury rates on the cost of conforming housing credit will be held down. All that said, I do see some encouraging signs that the preconditions for future improvements are coming into place. As others have noted specifically, institutions are recognizing and dealing more directly with the implications of these losses. They are recognizing the losses more aggressively. They’re raising capital, and they’re being more explicit about taking contingent liabilities like SIVs onto their balance sheets. Even so, I think that what we have learned over the intermeeting period is that the process of returning financial markets to more normal functioning is going to take longer and the disruption to the cost and availability of credit will be greater than I had thought just six weeks ago. Prospects for a period of weaker economic growth and reduced resource utilization do work to lower inflation risks. In addition, we’ve seen a downward revision to compensation and unit labor costs, and commodity prices outside food and energy have fallen substantially in recent weeks. At the same time, energy prices have risen, and past inflation data have been revised higher, and the staff has actually revised up its inflation forecast by a tenth or two over the next few years. So on balance, I judge the inflation risk still to be to the upside if the economy follows the modal forecast but by considerably less than I thought at the last meeting. I look forward to a discussion in the next part of the meeting about how we deal with the policy implications of this changing situation." CHRG-111shrg62643--230 RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER FROM BEN S. BERNANKEQ.1. Chairman Bernanke, I am deeply disturbed by the most recent quarterly report to Congress from the Special Inspector General for the Troubled Asset Relief Program. In this report, SIGTARP Neil Barofsky tells Congress that reductions in current outstanding balances of TARP and TARP-related programs ``have been more than offset in the past 12 months by significant increases in expenditures and guarantees in other programs, with the total current outstanding balance increasing 23 percent, from approximately $3.0 trillion to $3.7 trillion. This increase can largely be attributed to great support for the Government-sponsored enterprises (GSEs), the housing market, and the financial institutions that participate in it'' despite the fact that the banking crisis, by an reasonable measures, subsided. How long do you perceive a need for extraordinary taxpayer support for the housing market?A.1. As your question suggests, declining balances in, and closing of, some financial-sector support programs are positive developments that are indicative of a gradual healing in the financial system. The stock of other assets acquired by the Federal Government related to extraordinary support of the financial system has increased significantly over the past year, including purchases of Treasury, agency, and agency-guaranteed mortgage-backed securities under the Federal Reserve's large scale asset purchase program, and purchases by Treasury of preferred shares in Fannie Mae and Freddie Mac as those GSEs continue to operate in conservatorship. Other housing-related guarantees, commitments, and outlays by the Government have also grown significantly over that period, although some are probably better understood as reflecting extraordinary conditions in the housing finance market more than extraordinary actions to support the financial system. In particular, mortgage loans and mortgage-backed securities guaranteed by FRA and the GSEs have continued to rise substantially, as the private-label mortgage securitization market remained essentially closed. The programs described above, along with continuing low mortgage interest rates and the effects of the first-time homebuyer tax credit, have helped support housing market conditions and thus to blunt some of the damage of the financial crisis. Nonetheless underlying weaknesses remain in the housing and home finance markets. As noted in my testimony, for example, housing construction has continued to be weighed down by weak demand, a large inventory of distressed or vacant houses, and tight credit conditions for builders and some potential buyers. For their part, RAMP and non-RAMP foreclosure mitigation loan modification programs have made a positive contribution, reducing debt service obligations for many struggling borrowers. Over the longer horizon, it remains too early to assess the overall effect of these programs, including the extent to which borrowers with RAMP permanent modifications, or other loan modifications and refinancings, may subsequently default on these obligations. As economic and financial conditions gradually improve, the extraordinary conditions and need for extraordinary Government actions will of course diminish. When that time comes, as with the Federal Reserve's purchases of agency-guaranteed mortgage-backed securities, the withdrawal of extraordinary support should be managed carefully so that it can be achieved with a minimum of associated dislocation. Congress has a direct/public policy role to play in some aspects of this eventual withdrawal, including as it considers the future role of Government-sponsored enterprises in the market for housing finance. The non-TARP program estimates published in SIGTARP reports are assembled directly by SIGTARP staff across non-TARP programs they deem relevant, drawn from public sources. Without speaking directly to the figures you reference, the SIGTARP estimates cited in your question can reasonably be interpreted as consistent with this assessment.Q.2. Chairman Bernanke, you have indicated that the Federal Reserve may undertake additional asset purchases. What kind of assets will the Fed purchase if it decides to undertake a second quantitative easing? How will you ensure that the Federal Reserve adequately protects itself in pricing those asset purchases and how long would the Fed hold those assets on its balance sheet? What metric will you use to determine that additional easing is necessary?A.2. Consistent with its statutory mandate to foster maximum employment and stable prices, the Federal Reserve would consider additional steps to provide monetary accommodation if economic developments suggested that it was appropriate to do so. As noted in the minutes of recent FOMC meetings and in speeches by Federal Reserve officials, purchasing additional assets would be one of the options that the Federal Reserve could implement in such a situation. The Federal Reserve's legal authority largely limits Federal Reserve purchases of securities to Treasury, agency, and agency-guaranteed securities. As a result, additional Federal Reserve purchases of securities, if deemed necessary, would likely be of these general types. Decisions about the specific securities that would be purchased within this general class of securities would depend on a number of factors, including the implications of purchases for the general level of longer-term interest rates, the effect of purchases on market liquidity and functioning, and policymakers' preferences for the long-run composition of the Federal Reserve's balance sheet. As in the past, the Federal Reserve would employ a competitive bidding process in purchasing securities to ensure that such purchases are conducted at market prices. The evidence suggests that the Fed's earlier program of purchases of securities was effective in improving market functioning and lowering long-term interest rates in a number of private credit markets. The program (which was significantly expanded in March 2009) made an important contribution to the economic stabilization and recovery that began in the spring of 2009. Indeed, the FOMC's recent decision to keep constant the Federal Reserve's securities holdings reflects the conviction that these holdings can promote financial conditions that help support the recovery. Decisions regarding how long these assets or any newly acquired assets will be held on the Federal Reserve's balance sheet will be based on an assessment of the outlook for economic activity and inflation. There are no simple metrics that the Federal Reserve can employ in determining whether additional policy easing is necessary and, if so, whether additional purchases of securities would be appropriate. As always, a wide range of economic indicators informs the Federal Reserve's view about the outlook for economic activity and inflation. Any decision to acquire additional securities would need to weigh the potential benefits of such purchases against the potential costs. Regarding potential benefits, additional purchases could further lower the costs of borrowing for households and businesses and thereby provide needed support for spending and economic growth. On the other hand, further purchases of securities could reduce public confidence in the ability of the Federal Reserve to exit smoothly from a very accommodative policy stance at the appropriate time. Even if unjustified, a reduction in confidence might lead to an undesired increase in inflation expectations and so to upward pressure on actual inflation. The Federal Reserve will weigh these and other considerations and carefully monitor economic and financial developments in judging whether additional asset purchases are warranted.Q.3. A number of economists, market watchers and Members of Congress have speculated that U.S. firms are reluctant to invest and hire, though they may have the cash on their balance sheets to do so, because of uncertainty over a dramatic reshaping of the health care and financial regulatory regimes. How large of a role do you believe this uncertainty is playing in companies' decisions on how and when to deploy their capital? And, do you think the uncertainty over future tax rates also factors in?A.3. Several factors are likely to influence hiring and capital spending decisions. Typically, a firm's sales prospects and the expected rate of return to an investment--either in new equipment or new workers--are key elements in the decision. In some cases, access to credit also might affect decisions to invest and hire. In addition, uncertainty about the economic environment or expected returns can also influence the willingness of a firm to make spending commitments. Recent surveys of businesses provide some insights into these issues and suggest that many firms are concerned about the overall economic environment and their company's own sales prospects. Two examples are presented in the table. As shown on line 1, 36 percent of respondents to the latest Duke CFO survey cited consumer demand as the most important problem facing their business. Fortunately, concerns about consumer demand have diminished from a year ago, but they remain the most frequently cited problem. Similarly, as shown on line 3 of the table, respondents to the latest survey of small businesses, conducted by the National Federation of Independent Business (NFIB), pointed to poor sales as their most important problem, but that concern also has diminished from a year ago. In addition, the S&P 500 volatility index (VIX), an indicator of uncertainty in financial markets, also is down from its previous peaks, although it remains relatively elevated by historical standards. It is difficult to know the extent to which uncertainty specifically related to future taxes, the recently enacted health care legislation, or financial regulatory reform is affecting business capital spending and hiring decisions. However, both the Duke CFO survey and the NFIB allow respondents to cite government policies more generally as the most important problem facing their business. These responses are shown on lines 2 and 4 of the table. In addition, line 5 presents the data on the extent to which taxes are a pressing business concern. Of course, these responses are not direct indicators of uncertainty. Moreover, the figures presented in the table are from only two surveys and may not present a complete picture of whether greater uncertainty about Government policies is restraining capital spending and hiring.Q.4. Are you concerned that keeping interest rates this low, for such an extended period of time, will have negative or dangerous consequences? Why, or why not?A.4. The FOMC has established a very low level of short-term interest rates to foster its statutory objectives of maximum employment and stable prices. The FOMC has been very explicit in stating that the current very accommodative stance of monetary policy is conditional on the economic outlook, which includes low anticipated rates of resource utilization, subdued inflation trends, and stable inflation expectations. The explicit conditionality of the Federal Reserve's policy stance should help to guard against adverse outcomes such as a buildup in inflationary pressures or imbalances in financial markets. As the economy recovers, investors, seeing that the conditions supporting the current stance of policy have changed, will likely begin to anticipate the removal of policy accommodation; such anticipations of policy firming will, in turn, boost longer-term interest rates immediately, helping to damp any buildup in inflationary pressures. Of course, the Federal Reserve must be able to validate expectations of policy firming at the appropriate time. To do so, the Federal Reserve has a number of tools at its disposal. First, the Federal Reserve will put upward pressure on short-term interest rates by raising the rate it pays on the reserve balances held by depository institutions. Second, the Federal Reserve has developed reserve draining tools that can be employed to reduce the quantities of reserves outstanding and thereby tighten the relationship between the rate paid on reserve balances and short-term market rates. Finally, the Federal Reserve can sell assets at an appropriate time and pace to further tighten the stance of monetary policy. In short, the Federal Reserve has the tools necessary to effectively remove policy accommodation when such actions are warranted by the economic outlook. As always, the Federal Reserve is sensitive to the risks surrounding the outlook, and we are mindful of the possibility that very low interest rates could, if maintained for too long, lead to adverse economic outcomes. At the same time, there are risks that the premature removal of policy accommodation could undermine the economic recovery and contribute to unwelcome disinflationary pressures. The Federal Reserve will be monitoring economic and financial developments carefully to ensure that its policy actions appropriately balance these risks. ------ FOMC20060808meeting--60 58,MR. LACKER.," Thank you, Mr. Chairman. The Fifth District’s economy remains generally strong, though overall growth appears to have moderated in recent weeks. Retail sales have been lackluster, especially for big-ticket items. Manufacturing shipments and new orders picked up in July, however, and our early readings for August are even stronger in suggesting additional momentum going forward. District labor markets remain tight, with workers in some skill categories hard to find in urban areas and temporary workers in demand. The housing market continues to slow generally, although markets differ significantly across our District. Current and expected price trend measures remain very elevated, according to our surveys, as they have been for most of the year. Turning to the national economy, I focused at our last two meetings on my concerns about the deteriorating outlook for inflation, and the news over the intermeeting period has heightened those concerns. But today I think it is important that we also assess carefully the outlook for output and employment. I’m pretty sure that I can safely do so without danger of being viewed as an output nutter. [Laughter] GDP growth has been choppy in recent quarters; but over the past year and a half, output has been growing at about 3½ percent. You get the same 3½ percent growth rate if you average over the past three and a half years. We have substantially reduced the overhang of underutilized resources over that period. Employment has grown about 1½ percent a year, and the labor force has grown at just a little over 1 percent. I think the evidence is now fairly persuasive that resources are approximately fully utilized in the sense that significant amounts of idle labor or capital do not seem to be awaiting the return of better times. What sorts of growth rates for output or employment are sustainable over the next two years? The labor force appears likely to grow at about 1 percent—that is, about 110,000 jobs per month. Labor productivity has been trending around 2½ percent over the past couple of years, but I would be a bit more conservative going forward and expect about 2¼ percent per year, closer to the long-run average. As a result, it seems reasonable to put the center point of an estimate of a sustainable real growth rate at about 3¼ percent, with perhaps some extra above that if you’re more optimistic about productivity growth. Is this trend our best near-term forecast? Several factors could contribute to weaker real growth. Residential investment will contract in the coming quarters as the housing market cools, and lower average housing-price appreciation will reduce household wealth gains and damp consumption growth. The upward sweep in energy prices has taken a bite out of real disposable income as well, but I would expect real household spending to track real household income going forward because both the housing-price adjustment and the energy-price run-up, so far at least, look more like one-time reductions in household wealth and income and not like sources of ongoing erosion extending out more than a year. So I think it is reasonable to expect consumption to grow at close to 3 percent, down a bit from the average of 3½ percent over the past several years. Other factors seem likely to bolster growth. Business fixed investment spending has been expanding quite strongly in this recovery. It is up at an annual rate of close to 7 percent since the beginning of 2003, despite the sluggishness of structures until this year. In the second quarter, BFI was up 6.8 percent year-over-year, and the most recent high-frequency indicators remain on track. BFI spending as a share of GDP is still quite low by historical standards; and as the Greenbook points out, the fundamentals—business balance sheets and output growth—look quite solid. So it seems reasonable to expect business investment to continue to expand at a rate close to 7 percent. Putting everything together, I expect growth over the next year and a half to be just under 3 percent, or just more than ¼ percentage point below potential. The Greenbook forecast is weaker—GDP growth at about 2¼ percent for the next six quarters—mainly because the Board staff sees lower business investment spending and a pronounced reversal in the household saving rate. I think that a healthy respect for the uncertainty involved suggests that reasonable confidence intervals around each of these forecasts—the Greenbook’s and my own and the others I’ve heard today, for that matter—would include all the other point estimates and, more important, would include the possibility that growth proceeds at potential over the forecast period and beyond. So though it is reasonable to expect growth at or less than potential in the near term, my sense is that it’s hard to be too certain that it will be much below for long. As I said at the outset, the inflation picture has only worsened. The surge in core inflation that began in March has continued into June. The monthly pattern—3.7 percent in March at an annual rate, 2.7 in April, 2.8 in May, and 2.9 in June—makes this episode look less and less like a temporary bulge and more and more like a sustained increase. It is worth noting that the current acceleration in core inflation is broadly based, as the Greenbook emphasizes and President Poole ably articulated, and not attributable to any narrow set of special factors. The annual revisions to the national income and product accounts once again raised inflation for past years, although not that much this time, as President Yellen noted. It now appears that year-over-year core PCE inflation has exceeded 2 percent every month since April 2004. Perhaps the most striking change in the annual revisions, however, was in wages and salaries. The puzzle of compensation growth bulging in 2005 and slowing in 2006 is now gone, and it is now clear that compensation is on a broad upswing. The Board staff estimates that nonfarm business compensation per hour accelerated from a trend around 4 percent to something over 5½ percent. In fact, 5.4 percent was today’s release. Unit labor costs have deteriorated accordingly and now show an annual rate of increase of 4.2 percent in the second quarter, according to today’s release, and they are up 3.2 percent year over year. Before the NIPA revisions, the behavior of unit labor costs suggested that the current increase in inflation was not being incorporated into nominal wage compensation, but the labor cost data now show exactly the opposite—that the acceleration of inflation in recent months has induced a broad acceleration in nominal wages. I find it hard to be confident that a surge in unit labor costs is likely to be absorbed by falling markups. Measured markups have been trending up for some time, and I think they still do after the revision. Our economic understanding of the determination of markups, especially at the macroeconomic level, is still quite limited. In many models, the markup is entirely a real phenomenon and thus would be invariant with respect to purely nominal accelerations in costs. The main exceptions are the sticky-price models, but these don’t provide much comfort because in them a high markup is a forecast of accelerating nominal marginal cost—that is to say, an upswing in inflation. So I don’t take much comfort from the high level of markups. Combining the growth and inflation outlooks, it is worth thinking carefully about the extent to which we can expect slowing growth to bring inflation down. There have been a number of skeptical comments about that hypothesis around the table today. The relationship between output gaps and inflation is quite tenuous, as the staff rightly emphasizes whenever the subject comes up. Empirically, the ability to discover this relationship relies heavily on recessions and, thus, is much less reliable as an indicator of the effects on inflation of a small widening of the gap. Indeed, at our last meeting and again today, David Wilcox characterized the effect of the expected path of the output gap on inflation over the forecast period as tiny. The combination of uncertainty about the relationship between output gaps and inflation and the uncertainty about the degree to which growth is likely to fall short of potential should, I think, leave us deeply skeptical about whether we can rely on expected moderation in growth to bring inflation down. It is unfortunate that so many commentators placed so much weight on that in response to our last statement. Let me add a comment or two about President Yellen’s most excellent statement. I think the insights she articulated about backward-looking inflation models breaking down and the different inflation dynamics in forward-looking models is very important for our policy deliberations. Her staff apparently has documented that inflation now looks more as though it’s fluctuating around a sample average—I’ll say, a trend—and less as though it’s driven by output gap measures. She concludes that we may see inflation fall faster than the Greenbook forecasts do. I want to register a couple of observations. The first is that, with forward-looking expectations, inflation behavior is far more sensitive to changes in the public’s beliefs about our behavior than in models in which inflation expectations formation is backward looking. I’d register just the possibility that the long-run expected inflation that the public believes applies has been drifting around and may, in fact, account for some of the swings of measured inflation around sample averages. Finally, certainly taking the point of view that inflation expectations are formed in a forward-looking manner makes more likely the possibility that inflation will come down faster than the Greenbook states. But with inflation looking forward, it becomes our responsibility to bring that about. So that happy outcome could require our action and our strong communication, but I would welcome inspecting, if I could, the work of President Yellen’s staff, and I welcome her contribution." FOMC20070321meeting--87 85,MS. MINEHAN.," Thank you very much, Mr. Chairman. Perhaps unlike in the rest of the country, most of the recent cyclical data point to some reasons for optimism about near-term growth in New England, with the possible exception of the rate of foreclosure initiations related to subprime mortgages. The annual benchmark revisions by the BLS paint a happier picture of the current state of regional job growth, especially in Massachusetts and Connecticut. The overall message is that the region has been growing at a pace that is about at its long-term trend and has been adding jobs consistently in recent months. This picture is a bit different from the one we’ve been seeing for some time. The region’s unemployment rate remains about at the nation’s, and demand for skilled labor, as measured by both online and newspaper help-wanted ads and by anecdotal reports, is quite strong. Indeed, many continue to note that hiring the skilled workers they need has been difficult. Both temporary-help service firms and software and IT firms report strong demand for labor, particularly to meet finance and technical positions and to meet a growing backlog in activity in high-tech businesses. This aspect of the region’s labor market may be pulling some discouraged workers back into the labor force, as reflected in the perhaps temporary uptick in unemployment. Reflecting this better news on regional job growth, the Philadelphia Fed’s coincident economic indexes point to economic activity in the region’s two largest states that is on a par with national growth. When we surveyed a wide swath of retail contacts, we saw a bit of gloom on the retail side. But the fact that in New England you have an array of very small companies, sometimes in unique circumstances, may have given a little downbeat sense to the retail climate. The reports from larger retailers in the survey—and we have a couple of them— show solid year-over-year growth. Manufacturing employment continued to decline, but manufactured exports last quarter rose at a pace just a bit slower than the nation’s and were buoyed by airline-related products, fabricated metals, and general machinery. As I’ve noted before, downtown vacancy rates in most of the cities in New England are declining, as are suburban office vacancies; rents are rising; and one or two corridors fanning out from Boston are reportedly hot sites for new biotech firm locations. Business confidence, as measured by local surveys, is up, as is consumer confidence. So, overall, things are not too bad. A concern among this mostly brighter news is the rising rate of initiations of real estate foreclosures, especially those related to properties financed with subprime adjustable-rate mortgages. According to data from the Mortgage Bankers Association, whether one looks at the rate of total foreclosures or at the pace of foreclosures among just subprime mortgages, initiations have risen rapidly in New England from a very low base and now outstrip the nation’s. This is not a contest you want to win. Anecdotes abound about individual borrowers lured into what appear to be quite inappropriate mortgages, and the Federal Reserve Bank of Boston has been working with local bankers’ associations and the Massachusetts Banking Department and others on outreach and education. Why New England generally, and Massachusetts specifically, should be outstripping the nation in this area isn’t really clear. The local banking industry does not appear to have played much of a role in subprime lending, nor were we an area of bubble-like real estate growth, though clearly prices rose rapidly in the region over a fairly long time. The detrimental effects to local communities from the rise in foreclosures and the potential for negative political fallout—not unlike what President Lacker mentioned—seem obvious. On the national scene, the incoming data on the real economy, with the possible exception of job growth, have been slower than I expected. Inflation data, if anything, have been higher. The picture is not comforting, and it is complicated by questions related both to the housing market and the surprisingly slow pace of business spending. Many people around the table have mentioned both those things. The degree of national fallout from problems in subprime mortgage lending is a question right now, as it bears both on the pace of recovery in residential real estate investment and on the potential for wider spillovers from housing to consumption. At present, we in Boston, like the Greenbook authors, don’t expect that subprime mortgage problems will by themselves have much of an effect on overall growth. But we do have a concern if these problems lead to tighter lending standards, making mortgages and other borrowing more difficult to obtain and thereby exacerbate housing inventory overhangs, extend the current period of sluggish new home starts, and create further downward pressure on home prices. So far, we don’t see much of that happening. Trends in overall market and banking liquidity, mortgage interest rates, and new mortgage issuance are all positive. We think that those trends, combined with positive consumer home-buying attitudes, paint a reassuring picture that some of the downward trends will not be as severe as they otherwise might be. Indeed, I spoke to members of the advisory board of Harvard’s Joint Center for Housing Studies in late February. The group was composed of about fifty major homebuilders and major suppliers to the building industry. They were in a bit of collective shock regarding the rapid deterioration that they saw in their industry from late last year into the current quarter and seemed to be focused on inventory and cost control rather than on profits this year, which they didn’t expect. However, they saw continuing spending on home improvement, growth from commercial construction, and strength in non-U.S. markets as partial offsets. No one in the group mentioned the subprime issue or potential problems in mortgage financing, but that may have just been the fact of the moment. It was actually the day before the market break in late February, so it’s possible that they are not thinking along the same lines today. We have also been asking ourselves why business fixed investment has been so slow relative to fundamentals. We had been assuming that this inexplicable trend would right itself and that growth of producers’ durable equipment would show greater signs of health, but that hasn’t happened. We, like the Greenbook, have written down expectations regarding PDE. I’d really like to be wrong on the downside regarding this area, as it worries me a bit more than subprime mortgages or any of the recent financial market ups and downs. If businesses lack the confidence to invest in new equipment as much as they might be expected to given the fundamentals, how much longer will they continue to hire staff? If job growth slows, what will happen to consumption? To date, both hiring and consumption remain pretty solid. But while I saw some upside risks here at our last meeting, now I’m a little worried on the downside. In view of the incoming data, we have written down our forecast, much as the Greenbook has, and we have joined the Greenbook in a lower estimate of potential. We see growth a bit above 2 percent this year, rising to the mid 2s in ’08, with slightly rising unemployment and only slightly slowing core PCE inflation. However, as I probably implied before, I think the risks around this forecast on both sides seem to have risen. Will housing trends and the possible effects of diminished business spending affect the resilient consumer more than we now expect? Will the underlying pattern of core inflation continue to surprise on the upside, with the moderation we expect remaining mostly in the forecast? I don’t mean to overreact here. There are positives. External growth is strong. Fiscal spending at both the state and the national levels should be supportive. Financial markets, though certainly a bit more volatile and nervous, remain accommodative. Perhaps the downside risks to growth that I see are simply the ebb and flow of the U.S. economy continuing its transition from an above-trend rate of expansion just a year ago, not unlike the slow patch we saw in the late summer and early fall of last year. All in all, I remain somewhat more concerned about risks on the inflation side than about risks to growth. But it does seem to me as though the balancing act in meeting our two objectives has gotten a bit more difficult." FOMC20060808meeting--155 153,MR. KOHN.," If no one wants to start, [laughter] I can start. I actually have just a couple of things to say. We need to keep in mind that communication is not an end in and of itself. It’s a means to an end. Where we rank on some professor’s table of transparency isn’t really what it’s about. It’s about meeting our legislative objectives for stable prices and maximum employment. As we think about our communication, we ought to concentrate on that—what our goals and objectives are and where inflation and activity are going relative to those objectives, given the shocks and dynamics of the economy, and the broad policy outlines for strategy to foster those objectives. If we do that well, we’ll help achieve those objectives, both by building public understanding of, confidence in, and support for a politically independent central bank and by giving private agents, in financial markets and in labor and product markets, information that should help them act in ways that will promote achieving our goals. I think we’ve done a good job of this. Certainly, this institution for the past twenty-five years has been pretty darn successful at achieving our congressional mandates, and our communication has contributed to that. At least around the edges it certainly has helped, in both the political and the economic dimensions. So I don’t think we have a communication strategy that’s seriously broken, that needs radical surgery. But I do think it has grown in an ad hoc way, separately in each area of communication—the announcement and the minutes, for example. This is a good time to step back and see how things are fitting together—whether we can tailor some things to some audiences and other things to other audiences that we want to attract and whether anything is missing from the strategy. The discussion this morning reinforced my view that we do need to talk about goals and about whether we should be numerically defining price stability. There’s a presumption around the table that we have already done this to a certain extent, but we haven’t as a committee. We’re in a kind of untenable position right now in which the outside world doesn’t know how we look at our objectives and how we would act. So we need to have that discussion, and I’m glad that we’ve scheduled it for the first part of the discussion in October. How the economy is doing relative to our goals, objectives, and strategy does require forward-looking language. We tried to indicate in this memo that the forward-looking language has pitfalls that we need to keep in mind as we go forward. What we know is limited. That certainly was a theme this morning about our uncertainty, and conveying that uncertainty is really, really hard. How we indicate the risks, which are almost as important as the central tendency forecast, is something we’re going to need to work on. There are issues about the market’s putting too much weight on what we say. I was surprised, Mr. Chairman, by the reaction to your testimony and how much emphasis they seemed to put on our projections, indicating where they thought things would be going forward. In retrospect, I wonder whether there are ways of indicating our degrees of uncertainty around those projections, and I think we need to honor and encourage the diversity and exchange of views in the Committee. All those issues are hard with respect to the outlook for inflation and economic activity, and they are even harder with respect to the outlook for interest rates and our policy path in particular. The issues of conditionality, overweighting, and flexibility become even more acute when we start talking about our own policy path. There are times, and the summer of 2003 was one of those, in which the market’s interpretation of where our policy path might be has the potential for impeding our ability to meet our objectives. In 2003 and the subsequent year or two years, I think we were right to put some emphasis on that because, if we hadn’t, it would have been harder to meet our goals. But for the most part, I think the markets should be able to infer what we’re going to do from how we talk about our goals and our assessment of the economic developments, and we don’t need to discuss the immediate outlook for policy. It would be nice to think about ways of getting away from this business of signaling what we’re going to do exactly at the next meeting, partly because we don’t know but also because it does sometimes build in expectations that affect our decisions and dynamics. Those are some broad thoughts I had." CHRG-111hhrg52397--255 Chairman Kanjorski," You are a real optimist. I think that someone could, by convoluted methodologies of using trusts, etc., you could do it in a successful way and never be detected unless you were to open up all the trust operations in the country, which obviously we do not do. I am not sure why we do not do it, maybe we need a clearinghouse for trusts to find out who really owns things. Anyway, that is another issue for another day. Obviously, you all agree that there is a role for Congress to play in the derivative market. I am curious, I asked a question of the prior panel, is there any of you who feel absolutely that operations are occurring in such a way in the derivative area that there is no role or need for Congress to take action or for the government to provide for regulation? Is there anyone who feels we are moving on the course and should stay there as the present law constitutes us to do? " CHRG-111hhrg54872--141 Mr. Clay," Sure. Mr. Calhoun, how do you envision a new agency like the CFPA, what would be their mission with the whole financial literacy piece? Do you envision any role? " FinancialCrisisInquiry--12 Excessive leverage by many U.S. investment banks, foreign banks, commercial banks, and even consumers pervaded the system. This included hedge funds, private equity firms banks and non-banks using off-balance sheet vehicles. There were also several structural risks and imbalances that grew in the lead-up to the crisis. There was an over reliance on short- term financing to support illiquid long-term assets, and over time, certain financing terms became too lax. Another factor in the crisis was clearly a regulatory system. I want to be clear I do not believe the regulators. While they obviously have a critical role to play, the responsibility for companies’ actions rest solely on the companies’ management. But we should also look to see what could have been done better in the regulatory system. We have known that our system is poorly organized with overlapping responsibilities. Many regulators did not have the statutory authority they needed to address the failure of large global financial companies. Much of the mortgage business was not regulated or lacked uniform treatment. Basel II capital standards allowed too much leverage in investment banks and other firms and not incorporate liquidity at all. The extraordinary growth and high leverage of the GSEs also added to the risk. We also learned that our system has many embedded pro-cyclical biases, a number of which proved harmful in times of economic stress. Loan loss reserving methodologies caused reserves to be at their lowest levels at a time when high provisioning might be needed the most. Certain regulatory capital standards are also pro-cyclical, and continuous downgrades by credit agencies also required many financial institutions to raise more capital. When all is said and done, I believe it will be found that macro economic factors will have been some of the fundamental underlying cause of the crisis. Huge trade and financing imbalances caused large distortions in interest rates and consumption. As for J.P. Morgan Chase, the last year and a half was the most challenging period in our company’s history. I’m immensely proud of the way our employees continued to serve our customers through this difficult time. Throughout the financial crisis, we never posted a quarterly loss. We served as a safe haven for depositors. We worked closely with the federal government. And we remained an active lender. CHRG-111hhrg53021Oth--98 Secretary Geithner," The proposal the President laid out reflects--and, of course, I played a substantial role in shaping those proposals--my judgment, our collective judgment about what is appropriate, given the risk we have seen illustrated by this crisis. " CHRG-111hhrg53021--98 Secretary Geithner," The proposal the President laid out reflects--and, of course, I played a substantial role in shaping those proposals--my judgment, our collective judgment about what is appropriate, given the risk we have seen illustrated by this crisis. " FOMC20060510meeting--174 172,CHAIRMAN BERNANKE.," Thank you. Let me just talk a bit about the policy option and the statement. I think we are facing two goals that are difficult to achieve at the same time. The first one is to respond to some increase in inflation risk and what might be a bit of an inflation scare in the bond markets. In order to respond to that, we would have to signal that we are willing and able to continue to respond to inflation as it rears its ugly head. If you like, inflation is the nail, and monetary policy is the hammer. We do not have to strike the nail, but we have to show that we are not putting down the hammer. We have to keep it in our hand. [Laughter] In that respect, I think it is important that we not signal that there is a definite pause. I am also disturbed by the response of inflation compensation to those signals. We need to keep the option open to respond once or even more than once if the inflation data and the economic outlook dictate that response. I do think that the use of the further policy firming language in part 4, which repeats the March statement, will be viewed as hawkish and will probably have some upward effect on yields. Our second objective is to maximize our flexibility, given the degree of uncertainty that we now face in the economy. I agree with Vice Chairman Geithner that an optimal policy can well include pauses for two reasons—perhaps more than two, but here are two. The first is that we gather information over time; to the extent that we gather useful information and uncertainty is resolved, we can make a better decision. Between now and June we are going to see two CPI reports, two rounds of housing sales and starts and permits, two retail sales figures, and two industrial production figures, just to note some of the data that we will be seeing between now and the next meeting. So I think it is useful for us to indicate that we will be responding to changes in the outlook and to leave ourselves the flexibility to respond in June according to how the outlook evolves. I am very sensitive to the issue of overshooting. At least in principle, the correct response is that we look at the outlook, not at the current data. To the extent that our forecasts incorporate the lagged effects of interest rates, we should, in principle at least, be trying to accommodate that issue. So I recommend a 25 basis point increase today. I recommend alternative B. I have a couple of questions for the group. I gather that most people have acceded to that statement, but let me just ask a couple of questions about the language. The first is, Could we drop number five? It does reemphasize the broad principle that we respond to changes in economic prospects, but it is a bit redundant given the previous statement. So that is the first question I am going to ask you. The second question has to do with inflation expectations. I think it would be a big mistake to somehow indicate that we thought they were not contained. First of all, it is not factually correct, as Vincent’s demonstration showed. Second, it would convey a concern about the state of expectations that is greater than the one we actually have. What we could do—and I am a little reluctant, but I am open to the suggestion—would be to say in that sentence, “Inflation expectations have risen slightly but remain contained” or something like that." FOMC20050809meeting--133 131,MR. MOSKOW.," Thank you, Mr. Chairman. There haven’t been many changes in our region since the last meeting, so I’ll keep my comments about our region brief. Business conditions around the Seventh District are generally good, although we still lag the nation. Labor markets continue to improve gradually, and inflationary pressures remain moderate. Many of our contacts remarked that growth has come down from last year’s pace, but they’ve also acknowledged that last year was unsustainably strong and that the current moderate pace is more in line with long-run trends. Finally, Michigan is still struggling, due to its heavy reliance on the Big Three automakers. The Big Three indicated that the reaction to their latest incentives, which succeeded in pulling down inventory significantly, as David mentioned, was larger than they had expected. Nonetheless, they told us they were only raising their sales outlook for the year as a whole by 100,000 or 200,000 units. They also said that they would be fairly conservative about increasing production; this gets to the payback we talked about before. Turning to the national outlook, the recent data confirmed that the economy is on solid footing. We expect growth to be somewhat above potential over the rest of this year. This represents a modest strengthening of our forecast since June. And with the unemployment rate at 5 percent, it is likely that the current degree of resource slack is small. The moderation in the recent monthly core inflation data is a positive development. However, the upward revisions to core PCE inflation are a serious concern. Apparently, inflationary pressures were higher than we August 9, 2005 33 of 110 At our last meeting, I was concerned about the possibility of core inflation running above 2 percent sometime over the next couple of years. Now it turns out that we’ve already been having inflation at that pace. This, of course, includes both market and nonmarket inflation but I don’t think you can discount the nonmarket inflation. As Janet said, we now have additional data. And I think the point is, in reference to Tom’s question, that the forecast for core inflation has changed now. It used to be that inflation in 2006 was coming down from the rate in 2005, and now, of course, it’s going up. Looking ahead, given the policy assumption in the Greenbook, we think the inflation forecast is reasonable and that the risks to the outlook are balanced. But I am uncomfortable with the outlook. I’d like to see inflation stabilizing below 2 percent much sooner. I agreed strongly with the Chairman’s arguments at the last meeting about the asymmetric policy costs surrounding the inflation forecast. And at the higher rates now built into the Greenbook, we could face an even greater risk of a disappointing increase in inflationary expectations. In that case, reestablishing price stability would require much tighter policy than markets currently expect. I’m also concerned about the large amount of liquidity chasing financial deals. In the early stages of our accommodative policy, businesses were extremely cautious and many capital investments were deferred. Liquidity flowed into mortgages and into housing. Now corporations are flush with cash, competition among lenders is intense, money is flowing rapidly into private equity funds, and banks continue to relax lending terms. I think we may be approaching the point in the lending cycle where investors tend to overreach and make bad August 9, 2005 34 of 110 And given firms’ buffers of cash, I don’t see much risk of choking off productive investment projects if we raise rates to levels somewhat higher than markets currently expect. So how does this all add up? Given the good prospects for growth, but with some asymmetric policy risks, I continue to think that we should raise rates until we are comfortably in the middle of the neutral range. To me, this means reaching a fed funds rate of about 4½ percent before we pause. Of course, we will continue to watch the incoming data. If either inflation or growth comes in much lower than expected, we can stop earlier—or we can do more if necessary. Finally, it’s pretty safe to say that this is not the meeting for us to change our policy strategy. So I favor a 25 basis point increase today, and I’ll hold off my comments on the language until later." FOMC20050503meeting--109 107,MR. REINHART.,"2 Thank you, Mr. Chairman. I’ll be referring to the materials that were distributed during the coffee break. Market participants see today as another step in your journey of removing policy accommodation. As shown in the upper left panel, futures prices and survey responses indicate that a ¼ point firming today is a lock, as is the retention in the May 3, 2005 73 of 116 statement of the judgment that the risks to both of your objectives are balanced. Some doubts, however, have surfaced about whether the “measured pace” language will survive the day: One in four of the respondents to surveys by the Desk and by Blue Chip think not. Market views about your action today were essentially settled by your March statement. As the solid line in the top right panel shows, the May federal funds futures contract has traded at about 3 percent over the entire intermeeting period. But investors also apparently understood that your actions in coming quarters depend on economic prospects, as they revised down the funds rate expected at year­ end (the dotted line) about ¼ point—or about as much as the staff has assumed in its baseline. Some of the twists and turns of that path owed to Committee statements. As can be seen in the middle left panel, the announcement released after your March meeting was viewed as hawkish about inflation and prompted the largest swing in the two-year Treasury note yield in the window surrounding 2:15 p.m. in the past year (the red bar). Some of that was taken back by the more nuanced description of your deliberations provided in the minutes of that meeting released three weeks later. (Note that only the last three pairs of bars cover the new regime of expedited publication of the minutes.) As can be seen by the bars in the upper of the two panels at the middle right, the two-year yield rose in the windows bracketing major economic data releases, as increases following data on faster-than-expected consumer price inflation more than offset the changes sparked by spending, production, and employment releases with a surprisingly soft cast. That latter information, along with well-publicized problems at a few prominent corporations and declines in equity prices, soured market sentiment about the vigor of the economic expansion. And as can be seen in the panel just below, intraday movements in the two-year note yield were highly correlated with those of the S&P 500. As shown in the lower left panel, equity prices shed 2½ percent on net over the intermeeting period, and risk spreads on debt instruments widened. Triple-B yields (the solid line in the middle panel) edged lower, but speculative-grade yields (the dotted line) actually rose. With the value of the dollar appreciating slightly on foreign exchange markets (the lower right panel), financial conditions likely tightened on net. May 3, 2005 74 of 116 more gradually than in the previous forecast, and core PCE inflation, at the right, running along a slightly higher path. This fits the bill of an adverse supply shock, likely at least in part the product of sustained higher oil prices. In effect, higher inflation—and probably upside risks to inflation—act as a constraint limiting how fast slack can be worked down. As a result and as many of you have noted, the policy menu available to you looks dourer than it did six weeks ago. In that brave new world of diminished possibilities, a ¼ point increase in the nominal funds rate would help prevent an erosion in the real funds rate (as the result of the upcreep in inflation and perhaps short-term inflation expectations) and might even close a little of the distance of the actual real rate (the solid line in the middle panel) with estimates of its equilibrium (the swath of red). Taking as given the wisdom of the crowd about policy expectations, the issue isn’t whether you will tighten by ¼ point, but whether you will signal a slower, unchanged, or quicker pace of firming going forward in the words that accompany that action. The staircase plotted in blue in the bottom left panel considers a future in which you tighten 25 basis points at upcoming meetings for as far as the eye can see. That path is not built into markets. The expected federal funds rate (the dark solid line) veers to the south of the staircase and flattens out, implying the expectation of an end to this cycle of firming. Looking at the readings along the vertical line denoting year-end, an expected federal funds rate of 3½ percent adds up to two more ¼ point increases in the final five meetings of 2005. The same structure of expected funds rate can be described as averaging over different branches of the probability tree in which the Committee tightens ¼ point at each meeting until it stops for good. The distribution of stopping times, given at the lower right, shows that current futures quotes are consistent with ¼ weight given to the funds rate being on hold starting in June and a six-in-ten chance prevailing that you will be done at some point before the end of this year. The arguments for pausing sometime soon are laid out in exhibit 3. In particular, as seen by the position of a nominal federal funds rate of 3 percent plotted as the solid line in the upper left panel, standard policy rules mostly call for something south of that target. As shown in the two panels at the upper right, policy rules agree that the nominal funds rate this quarter should be higher than the average of the first quarter. You’d be more comfortable with a funds rate at the level of 3 percent if your inflation goal is a 1½ percent annual increase in the core PCE (the upper right panel) than if your inflation goal is 2 percent, as noted directly below. May 3, 2005 75 of 116 forecast period 1 percentage point higher than the baseline, and core PCE inflation moves back into the territory where “unwelcome disinflation” was once a serious concern. Moreover, a signal that policy would be on hold might not provoke particular concern on the part of market participants given that employment compensation (the lower left panel) remains subdued and inflation expectations (the lower right panel) generally seem well anchored. For some of you, such reasoning may sound uncomfortably like an echo of arguments made 30 years ago, just at the point where people around this table made serious mistakes. Core PCE inflation, the solid line in the upper panel of exhibit 4, is running well above the central tendency of your forecast for this year made just three months ago. And at 5¼ percent, as in the middle left panel, the unemployment rate is within spitting distance of most estimates of its natural rate. In addition, as at the middle right, productivity growth has slowed, perhaps suggesting that less restraint on unit labor costs will be provided in coming quarters. With such an outlook, you might be justified in wanting to pick up the pace of firming sometime soon. Indeed, as shown in the bottom panel, both the spot price of West Texas intermediate crude (the solid line) and far-ahead futures prices for that resource (the dotted line) have moved up decidedly, implying that more of the “excise tax” an import-dependent country such as ours must pay is permanent, presumably to the detriment of spending and the economy’s potential to produce and posing the risk that inflation expectations will pick up. Putting greater weight on the reduction in supply associated with this run-up in energy prices—which includes both a possible deterioration in inflation sentiment as well as longer-run effects on potential output—presumably would incline members to want to project a firmer stance of policy. A useful starting point for your discussion of the policy statement might be the one you issued in March, which I have included as exhibit 5. In previous meetings and in comments on the early drafts of potential statements I distributed last week, some of you expressed a clear preference for eliminating forward-looking language from the announcement. It is important to recognize, however, that the forward- looking content comes in two flavors, one explicit and one implicit. The Committee characterizes its future policy action in the next to last sentence, which is typed in red. This is a relatively explicit message, in that the Committee forecasts both the direction and the likely pace of its future action. The implicit forecast is typed in blue. As long as you assert that policy is accommodative against the backdrop of a generally positive depiction of the economy, readers will infer that you intend to raise rates over time. May 3, 2005 76 of 116 language about “a pace that is likely to be measured”—but leave the part where you describe policy as accommodative. Readers will likely view that change as giving the Committee the scope to tighten more quickly than previously expected. Alternatively, you could excise all guidance, both the red and the blue, on the notion that the changes would indicate symmetry about the possible paths for policy. Whatever may be the merits of a statement that does not restrict your range of future action, the current situation may make you willing to tolerate the status quo for a bit longer. The expansion probably seems less vigorous and more uncertain to you now than it did six weeks ago, and you might be concerned that an adverse market reaction to an asymmetric statement without the “measured pace” language could further dent the economy’s momentum. But despite the recent hesitancy in spending and production, you’re likely to view a 3 percent nominal funds rate as still accommodative. Thus, it risks misleading the public to remove that sense under a symmetric approach to eliminating forward-looking language. If you share that appraisal, you probably would favor, even if reluctantly, alternative B of Table 1, which is repeated for convenience as the last exhibit." FinancialCrisisReport--565 The IKB email was forwarded to Mr. Tourre, who sent it to Mr. Egol with the following message: “Paulson will likely not agree to this unless we tell them that nobody will buy these bonds if we don’t make that change.” 2531 Mr. Tourre expressed concern, not about what ACA, the portfolio selection agent, might or might not agree to, but only about what the Paulson hedge fund might agree to. Failing to Disclose Key Information. Evidence obtained by the Subcommittee indicates that Paulson’s role in the Abacus asset selection process and its investment objectives for the CDO were not fully or accurately disclosed to key parties or investors at the time the CDO was being structured and sold. Moody’s, one of the credit rating agencies asked to rate the Abacus securities, was not informed of Paulson’s role or investment objectives. At a Subcommittee hearing on the role of the credit rating agencies in the financial crisis, Eric Kolchinsky, a former Moody’s managing director who oversaw its CDO ratings and was familiar with Abacus 2007-AC1, provided sworn testimony that he had not known of Paulson’s involvement with the CDO at the time it was rated, did not know of Paulson’s role in selecting the referenced assets, and believed his staff did not know either. He testified that allowing an entity that wants a CDO to “blow up” to pick its assets “changes the whole dynamic,” and was information that he would have wanted to know when rating the securities: Senator Levin: And were you or your staff aware at the time that Moody’s was working on the ABACUS rating that Paulson was shorting the assets in ABACUS and playing a role in selecting referenced assets expected to perform poorly? Mr. Kolchinsky: I did not know, and I suspect, I am fairly sure, that my staff did not know either. Senator Levin: And are these facts that you or your staff would have wanted to know before rating ABACUS? Mr. Kolchinsky: From my personal perspective, it is something that I would have wanted to know because it is more of a qualitative not a quantitative assessment if someone who intends the deal to blow up is picking the portfolio. But, yes, that is something that I would have personally wanted to know. It changes the incentives in the structure. 2530 2531 3/12/2007 email from Jorg Zimmerman (IKB) to Michael Nartey, GS MBS-E-002683134. 3/12/2007 email from Fabrice Tourre to Jonathan Egol, GS MBS-E-002648826. FOMC20080916meeting--126 124,MR. STERN.," Thank you, Mr. Chairman. Well, even before the events of the last several days, I thought that this was the most severe financial crisis, certainly, that I have seen in my career. And the last several days--as well as some of Bill's comments about possible contagion spreading from breaking the buck and so on and so forth--have only heightened that conviction and my concern about where we are. So I think it is fair to say that the headwinds confronting the economy have intensified even further. It is difficult to comment on the degree or the duration, but I think we know the direction. As far as the near-term economic outlook is concerned, I wasn't terribly optimistic about the next two or three quarters to begin with. If I were going to prepare a new forecast at this point--or even had I prepared one last week--I probably would mark it down a bit. But, of course, there is not much we can do about that at this stage. As far as the inflation outlook is concerned, I have thought that, late in this year and into next year, inflation would start to abate, and recent developments perhaps heighten my conviction about that. But I will agree that it is still an open issue. So it seems to me that all of this suggests that the outlook, at least in terms of financial conditions and the economy in the near term, has clearly deteriorated. The inflation outlook, if anything, has perhaps improved a notch, or at least the outlook that I had earlier is a little more solid. Given the lags in policy, it doesn't seem that there is a heck of a lot we can do about current circumstances, and we have already tried to address the financial turmoil. So I would favor alternative B as a policy matter. As far as language is concerned with regard to B, I would be inclined to give more prominence to financial issues. I think you could do that maybe by reversing the first two sentences in paragraph 2. You would have to change the transitions, of course. I would say that if we wanted to change policy at this meeting--and that is not my preference--I would do it by � percentage point, and I would think that the rationale would be psychological reasons. Again, I don't think we are going to have a big effect on the near-term performance of the economy. But if we think psychology in the marketplace is sufficiently bad or that there is sufficient concern that the Federal Reserve somehow doesn't quite get it--I would think that all our actions cumulatively, including the actions over the weekend, should not make that a grave concern--then I think we would want to do more than � percentage point. Thank you. " CHRG-110hhrg38392--76 Mr. Pearce," I would note that the National Petroleum Council met just yesterday--these are inside industry experts--and they forecast that supply will be very tight and that prices will be high, trending higher, and then I think that we are doing things--I have seen the bill that we have marked-up in the Committee on Resources that would begin to limit access internally to Federal lands and to also slow the process down so that our supplies internally are beginning--will collapse. I will tell you that, as a life-long member of the oil industry and growing up in an oil town that already--because of the things that we are doing here, that as to the remedial work on the wells that keeps the production curve steady instead of declining, it is beginning to shut down. That utilization of equipment is beginning to lag nationwide, but also, specifically, in the remedial area, and so you have to anticipate that there might be some clouds on the horizon in that forecast and then the effect. Now, there are about three pages of your report from about the bottom of page 6 on where we are dealing with the subprime market, and some portion of that is a difficult market. My question is as to the worst-case scenario: I am wondering why we have so much attention on the subprime market. If the entire market collapsed--let us take the worst, worst, worst-case scenario--how much effect would that have on our economy? I would like that answer in kind of the context of, recently, Dow Chemical announced, because of high energy prices, that they are building a $22 billion facility in Saudi Arabia, another $8 billion facility in China, and together, 10,000 jobs are going to those places. Those would be high-six-figure jobs here, and yet they are building. So my question is that 30 percent of your report is about subprime, and the addressing of things that we should be addressing, but I am not sure that 30 percent of our time should be addressed versus the effect of high energy prices. Could you give me some understanding of those two factors? " FOMC20060920meeting--123 121,MS. MINEHAN.," Thank you very much, Mr. Chairman. New England continues to grow modestly, though recent data suggest that some caution is warranted. District employment growth remains slower than that of the nation. Most states in the region are back to their January ’01 levels of employment; but the largest states, Massachusetts and Connecticut, are not. The Philadelphia Fed indexes of overall state activity, which are based largely on employment- and wage-related data, suggest sluggish growth as well, with Maine and Massachusetts at or near the bottom of the index for the country as a whole. Even with slow labor growth, certain categories of positions are very hard to fill—in particular, finance, accounting, certain IT specialties, engineers, biotech, and skilled labor for manufacturing. In fact, one large aircraft manufacturer was quoted as saying that the labor situation as far as he was concerned was insane. Costs for acquiring certain kinds of labor are rising, but in general, we are not seeing increases across the board in overall expected labor costs. But given the kinds of labor that are very much an important part of the businesses in the First District, such increases may not be far off. Housing markets are clearly contracting. We are part of the coastal situation. Through the second quarter, New England house prices escalated at only half the pace of the United States as a whole, and home foreclosures, while still fairly low, ticked up more significantly in the region than elsewhere. Permits have fallen sharply, down 25 percent from last year and 22 percent from the year before, though yesterday’s starts data were a bit better for the Northeast than elsewhere. Slower building is leading suppliers of housing products to project declining business later this year as their sales tend to lag a decline in residential real estate markets. Consumer confidence for the region as a whole dropped off at a faster pace than elsewhere in the nation in August compared with the year before. So there are all those reasons for caution about the growth rate of the New England economy, but not all the data are bad. Consumer prices, in general, are escalating more slowly, even though energy costs are higher. Downtown and suburban office vacancy rates are down, and rents are rising. Hardware and software businesses that were contacted or that are represented on our small-business advisory group report fairly strong revenues and definite concerns about costs. Business confidence measures and surveys were positive both for Massachusetts and Connecticut, reflecting profitable trends and stronger sales and even some strength in manufacturing. As I mentioned at our last meeting, the growth in personal income in the region, despite slow job growth, is on a par with that of the nation. Reflecting this and strong corporate profits, state income, sales, and corporate tax revenues are up, in some cases by relatively large percentages. So even though we have some reasons to be concerned about New England, not everything is negative—though that is sort of hard to find in the local media and you certainly will not hear the politicians talking about it either. Turning to the nation, I would agree that most incoming data since our last meeting have been on the subdued side. Auto sales, trade data, and certainly anything to do with residential real estate markets have been more subdued than was expected. Of course, price measures have been subdued as well, at both the headline and the core levels. But like New England, not everything is slow. I would look at employment growth as fairly solid, even though it has slowed from the beginning of the year. The surprise in wage and salary income may reflect largely the exercise of stock options, but it could also reflect some pressure on overall wage costs because hiring certain kinds of workers is getting difficult. Oil prices are down, and gasoline price declines act as a kind of bonus to the consumer. Consumer spending isn’t too bad. The latest retail sales data aren’t bad at all; and although confidence bounces around a bit, it seems to have recovered—at least as much as gasoline prices have recovered. Industrial production seems pretty good, with strong growth in some equipment categories. Business profits are good. Orders and shipment data suggest that business spending is solid. I am sort of repeating everything you said, David, and I probably should not do that. But I seem to be at the same point as people you mentioned in your presentation might be—a little shocked by the slowness of expected GDP over the next couple of quarters. In fact, when we in Boston look at our baseline forecast, it is a good deal more optimistic largely because we are not seeing as much of a decline in residential investment. I found the briefing yesterday to the Board interesting, when you tracked your own forecast of residential investment. At one time we were lower than you were, but you far surpassed us. In fact, with your decline 50 percent greater than ours in ’06 and quite a bit larger again in ’07, we get a GDP that is 0.3 percentage point higher in ’06 and almost 1 percentage point higher in ’07. We also see a lower NAIRU, and we have a bit higher estimate of potential—so it does not affect the gap as much, but it does affect the headline number of GDP. I understand all the mechanics, but the staff forecast is lower than most private forecasts. I wonder, if growth is that low for that long, whether it might set off a chain reaction of actually higher saving rates than you project and lower confidence that could feed back more strongly than you have anticipated. In that regard, I found the recent estimates of a rising probability of recession interesting. I do not think we’re going to have a recession, but I do wonder about it if, in fact, we do realize the slow growth of the Greenbook forecast. However, how much do we really know about how long residential investment will stay negative without a recession? Mortgage rates are not up that much—only 50 basis points or so from the beginning of the year. Incomes are rising, and nonhousing wealth is rising. At some point, buyers should recognize that housing has gotten more affordable and resume desired purchases, perhaps without further major price declines. Certainly speculative building is off, and investors have backed out of contracts, but how much more of that really will occur? The Greenbook would suggest another year and a half, but shouldn’t builders be acting quickly now to reduce the amount of overbuilding and to preserve price levels? Underlying demographics and other fundamentals have not changed either. So it is hard actually for me to see that residential investment will be that hard hit that long. I take Janet’s comments about the builders in her District. I imagine that, if I had talked directly to builders in the First District, they might have been pretty gloomy, too—again, given some reflection of the coastal situation. I did talk to Nick Retsinas at the Joint Center for Housing Studies, which Harvard runs, and he was not particularly negative. He felt that a correction is occurring but thought that it would be short-lived. Now, he did say that they were going to come out with some revisions and that he was still working on them, so his outlook may get more negative. But I am going to try to keep tabs on where they see things because they do stay in touch with all the large builders across the country. Again, the knock-on effects of lower residential construction may not be all that great. You mentioned that nonresidential construction is up, but the Greenbook says that it will slow soon. A good deal of that is oil related; and as long as people are working, incomes are solid, and financial conditions remain pretty accommodative, consumption ought to remain solid. So I wonder whether the Greenbook baseline is really more of a worst-case scenario for residential construction and GDP, though I realize regional effects of the housing slowdown on employment and spending could be considerable. If growth is faster and if your estimates of the NAIRU and the participation rate are more or less on target, I also wonder about the risks of higher inflation over the forecast period than is the case in the baseline as resource pressures grow. Moderating energy costs are helping here, but they have been volatile in both directions, and I at least would like to see a somewhat longer period below recent highs before declaring victory. In sum, the rather benign baseline forecast may be the best; but as you noted, there are great ranges of uncertainty. There are downside risks to be sure, and it is impossible to rule out a recession given the slow growth forecast of the Greenbook. But I really think the risks to be concerned about lie in the area of stronger growth, more pressure on resources, and higher and more persistent inflation. As many other people have commented, I, too, found the material on inflation persistence of some interest and very well done, though I take the point that it is hard to be confident either about the definition of persistence or about whether it is, in fact, lower or higher. I would argue here that it might be better to assume, as we consider the stance of policy, more rather than less persistence, in part because we are uncertain and in part because the costs of being wrong are somewhat asymmetric. If inflation is less persistent and we assume it is not and take a conservative policy stance, inflation should retreat quickly and help shore up our credibility. Choosing a weaker stance and being wrong about it could be quite costly. Given the uncertainties facing us, the nature of the incoming data, and the fact that we have already paused, it might not be time right now to take out more inflation insurance, but I certainly think it is time to be very vigilant. Thank you." FOMC20080625meeting--162 160,MR. MISHKIN.," Thank you, Mr. Chairman. I do support alternative B and the current language in the statement. I have no problem with that. I think it conveys what we need to convey. Although I think that the next move is very likely to be up and it maybe should be done quite soon, I would argue that we still need to have a lot of flexibility and to think in terms of having a lot of flexibility in where we may have to head in the future. I want to argue along those lines and outline why I think that is the case. The first issue is something that the Chairman mentioned yesterday, about which I felt very strongly--in fact, I meant to say it, but as always the Chairman says things better than I could in this context--that there really is still a very serious possibility that the shoe could drop in the financial markets. The Chairman mentioned a set of institutions that we have to be concerned about, and although there has been some improvement in terms of the stress that the financial markets are under, I don't think we are out of the woods yet. We are likely to be, but we have to be ready to recognize that things could go south. So that's one issue. The second issue is that the recent positive data we have seen are, again, very tenuous to me. I'm hoping that they indicate that things are going in the right direction. But a bunch of things make me very nervous, which I mentioned yesterday--how consumers react in housing crises, consumer sentiment, and the big problem that is going to occur when people have to face very high prices of food and energy, which hit their pocketbook very directly. So, again, that could be quite contractionary. The good news that we have seen recently might reverse very quickly. The third issue is that I think the headwinds could be very substantial in the future, that this cleanup will take a long time, and in that case we could have very slow and subpar growth that could widen output gaps more than the Greenbook and most participants here are expecting. So I do not consider the current stance of monetary policy to be overly stimulative. For me it is just about right and very much along the lines of what I think would be optimal policy. Of course, my view relates not only to the real economy. I also think that inflation expectations, as far as I can tell so far, are reasonably well contained. There is very little movement in the measures of inflation expectations that I pay most attention to. That argues that our stance is about right. I would also very strongly argue that I do not think that we have taken out a lot of insurance. I have argued that before. We have moved less gradually, which I think is very beneficial, and I would commend the Committee in that regard. But we moved in line with what the forecasts have been telling us optimal policy would be, and I think that is quite important. However, here is why I think we need to have flexibility in the other direction. If you think about a risk-management approach, it should not be focused just on tail risk to economic growth, which has been our most major concern because of the financial disruption. It equally implies that, symmetrically, we should be just as worried about tail risk to inflation, particularly to long-run inflation expectations, which I think are the key driver of underlying inflation, which is what monetary policy can particularly deal with. Here we have a situation in which we have hit the perfect storm of shocks because of the huge supply shock and there are much more serious upside risks and tail risks in terms of long-run inflation expectations. So I really do worry that with long-run inflation expectations and, therefore, underlying inflation we are in a more fragile situation and that we have to be very cognizant of that in terms of what we do in the future. The bottom line is that we may have to move very quickly to raise rates if any of several things happens. One is that headwinds are not as serious as I think they are likely to be. There is certainly a very serious possibility that things could be better than I expect. I would not be unhappy, so I would not get depressed, about that. Really more depressing would be if inflation expectations started to look as though they were getting more unanchored. Particularly, I would worry much more about what happens in terms of inflation compensation and the Survey of Professional Forecasters, paying some attention to consumer surveys but putting a lot less weight on them. If the canary starts to look as though it is keeling over, we have to move very quickly, and so I am going to watch that canary very, very carefully. " FOMC20070131meeting--53 51,MR. SLIFMAN.,"2 Thank you, Mr. Chairman. I’ll wait for my colleagues to come to the table. We’ll be using the chart package that you all should have on the economic outlook. Separating the signal from the noise in the recent economic data has not been easy—what with the motor vehicle anomaly, the defense spending pull- forward, and the transitory swings in oil imports. We tried to cut through the clutter by highlighting in the Greenbook real private domestic final purchases, or PDFP— that is, the sum of consumption, residential investment, and business fixed 2 Material used by Mr. Slifman, Mr. Wascher, and Mr. Gagnon is appended to this transcript (appendix 2). investment. We think this aggregation, which is shown on line 3 of the table in exhibit 1, currently is giving a fair representation of the thrust of aggregate demand. The data that we have received since the December meeting have been stronger than expected. As a result, we have revised up our estimates of the growth of PDFP in both the fourth and the first quarters to annual rates of about 2 percent—roughly the same rates as those in the middle two quarters of 2006. The remaining panels of exhibit 1 highlight some of the indicators that have informed our judgment about the current pace of activity. Starting with the labor market, the middle left panel, increases in private payroll employment averaged 119,000 in the fourth quarter, close to the average pace in the preceding two quarters. As you may remember, at the last FOMC meeting we commented on the stronger signal for activity coming from the labor market compared with the spending data. That tension seems to have been largely resolved, not because of weaker employment but because of stronger spending—especially consumption. Retail sales increased briskly in November and December; accordingly, in this Greenbook, we boosted our estimate of fourth-quarter real PCE growth, the middle right panel, to an annual rate of about 4½ percent. The fundamentals for consumption remain quite solid: steady employment gains, recent declines in energy prices that have raised real income, well- maintained consumer sentiment, and further increases in stock market wealth. That said, at least according to some of our models, the fourth-quarter pace of consumer spending was stronger than would have been consistent with those fundamentals. Our forecast for the growth of real PCE in the first quarter, at 3.6 percent, reflects a bet that some of the surprising fourth-quarter strength will carry forward for a while. Turning to housing, sales of new and existing homes—which are not shown in the exhibit—appear to have stabilized in recent months, and the ratio of new home inventories to sales has moved down a bit. As shown in the bottom left panel, the apparent stabilization of housing demand may now be starting to show through to permits and starts for single-family homes. Of course, the unusually warm weather in December makes a definitive assessment at this time particularly difficult. In the business sector, investment spending slowed appreciably in the fourth quarter. In particular, shipments of nondefense capital goods, the red line in the panel to the right, have been unexpectedly soft recently, including the December figure that we received after publishing the Greenbook. Part of the recent weakness in this category appears to be for purchases of equipment related to construction and motor vehicle manufacturing. With orders remaining above shipments, we expect real equipment spending to rise modestly in the first quarter. Exhibit 2 takes a closer look at some recent developments, starting with an examination of the effects on the industrial sector coming from the recent sharp declines in the production of light motor vehicles and residential investment. By our reckoning, production of light motor vehicles, the top left panel, tumbled nearly 20 percent at an annual rate in the third quarter of 2006 and dropped further in the fourth quarter. Meanwhile, we estimate that residential investment, shown to the right, plunged at an annual rate of about 20 percent in both the third and the fourth quarters. In thinking about the effects of these developments on industrial production, we need to keep in mind the upstream effects. As noted in the bulleted items in the middle left panel, the drop in production of light motor vehicles affects IP not only through its direct effect on light motor vehicle manufacturing but also indirectly through its influence on production in upstream industries such as primary metals, tires, and, nowadays, semiconductors. In the case of construction, of course, all the IP effect comes through the influence on upstream industries—lumber, concrete, plumbing fixtures, and so forth. The table to the right shows the estimated effects on IP growth, including upstream effects, associated with the declines in the production of light motor vehicles and residential construction illustrated in the top panels. We have used input-output relationships to estimate the direct and upstream effects and then translated these effects into their IP contributions. Lines 2 and 3 show that, after we account for upstream influences, motor vehicles and residential construction were sizable drags on IP in the third and fourth quarters. Yet, as shown in line 4, the drag from those two sectors was not the whole story. Even so, we think the more likely track from here forward involves modest growth rather than a cumulative weakening of industrial activity, in part because we think that most producers have been moving reasonably promptly to address any emerging inventory problems. The bottom panels widen the scope from the industrial sector to the economy as a whole and address the question of whether developments in less-cyclical industries have been helping support economic activity. My colleague Stephanie Aaronson divided the establishment survey employment data into three categories—highly cyclical industries, moderately cyclical industries, and acyclical industries—based on the correlation of individual industry employment changes with the GDP gap. The bottom left panel presents some history, with the highly cyclical grouping plotted by the black line and the moderately cyclical plotted in red. To keep the chart easier to read, the acyclical group is not plotted. The chart shows what you might have expected ex ante: Fluctuations in both series are highly correlated, but the amplitude of swings in the moderately cyclical is more damped. The panel to the right puts a microscope on the past few years—note the change in scale. As you can see, despite the step-down of employment gains in the highly cyclical industries, employment in the moderately cyclical industries has continued to grow apace. This suggests that the softness we’ve seen lately in residential construction and some parts of manufacturing has not spilled over to other parts of the economy. That conclusion is an important factor that has shaped our view about the longer- run outlook for the economy—the subject of exhibit 3. As shown in line 1 of the table in the top panel, later this year the growth rate of real GDP is expected to move back up toward our estimate of the growth rate of potential, and it stays there in 2008. This basic pattern is unchanged from the last Greenbook. The bullets in the middle panel highlight some of the major forces shaping this projection. The most important is our forecast that the restraint from housing will diminish this year and that its contribution to GDP growth will turn slightly positive next year. Second, the recent declines in oil prices, plotted in the bottom left panel, have raised real income; we believe that the drag from the earlier increases in oil prices should dissipate in the near term, and over time the stimulus from the recent price declines should begin to predominate. Third, federal fiscal policy, the bottom right panel, also is a bit stimulative, although the impetus is projected to ebb over the next two years. Finally, given our conditioning factors, the assumed path of the nominal federal funds rate is consistent with a real funds rate that closes the output gap over time. Exhibit 4 focuses on the components of PDFP. As I noted earlier, the leveling-off of home sales, the uptrend in mortgage applications, and the improvement in homebuying attitudes suggest that housing demand may be leveling off. The top panel shows the historical relationship between housing demand, as measured here by sales of new homes (the red line), and housing construction, shown here by single- family housing starts (the black line). The shaded areas highlight previous housing downturns as well as the current situation. As you can see, cyclical recoveries in sales and starts have generally been fairly coincident historically. You’ll have to take my word for it, but this has been the case even when the inventory of unsold homes has been high. Accordingly, we think that the recent stabilization of sales should be accompanied soon by a stabilization of starts. Then, as sales move up, so should starts. The middle panels focus on the consumption forecast. We expect real PCE, the red bars in the left panel, to increase 2¾ percent this year and next. The forecast reflects two main crosscurrents. On the one hand, real income growth, the blue bars, is projected to be robust, reflecting, in part, continued increases in real wages as well as further employment gains. On the other hand, the wealth-income ratio, plotted by the black line in the panel to the right, falls in our forecast as house prices appreciate only about 1 percent per year. With slower gains in wealth, and spending gradually coming back into line with fundamentals after the current period of unexplained strength, the saving rate should rise. The bottom panels present some details on the outlook for business fixed investment. As illustrated in the bottom left panel, total real outlays for equipment and software, excluding the volatile transportation equipment component, are projected to increase about 6 percent both this year and next. You can see from the red portion of the bars that the bulk of the support comes from spending for high-tech equipment as telecommunications service providers further expand their fiber optic networks and as businesses continue to invest in information technology equipment and software. We expect the contribution from the other equipment category (the blue portion) to narrow this year and then to edge up in 2008, largely reflecting the pattern of changes in the growth of business output. The bottom right panel shows our forecast for nonresidential structures excluding drilling and mining. The incoming information on construction outlays for nonresidential buildings and the forward-looking indicators that we monitor suggest that spending growth has downshifted. Accordingly, after rising 12¾ percent in 2006, real outlays for this component of nonresidential structures are expected to decelerate to a pace of 5½ percent this year. Our projection for 2008 brings growth in this component of nonresidential structures down to its long-run average. Bill will now continue our presentation." FOMC20081029meeting--248 246,MR. KOHN.," Thank you, Mr. Chairman. A number of the presentations yesterday talked about falling off a cliff in the middle of September. I think we need to remind ourselves that we were sliding downhill pretty fast before we hit that cliff. The third-quarter data, which aren't really affected by what happened in the last two weeks of September, indicate that the economy was weaker than we thought at the time of the last FOMC meeting. I think Dave Stockton or Norm Morin noted that about a third of their downward revision reflected incoming data rather than the credit tightening. That was especially true for consumption, with real consumption spending falling through the summer, responding to lower employment and tighter credit. Private domestic final purchases were revised down to a decline of 3� percent in the third quarter after being flat in the first half. Housing price declines picked up in August, and I think the deteriorating economy and concerns about the economy were reflected in increased nervousness in financial markets over the summer into the first half of September. It was really those worries about what the losses were going to be and how they would spread from mortgages to loan books generally--that deepening pessimism--that doomed the marginal institutions like AIG and Lehman and the GSEs. They just didn't have a chance to recapitalize or stabilize themselves when so many of the other market participants were worried about what their own positions would be. The resulting flight to liquidity and safety, the loss of confidence that followed, the deepening gloom, and the failures and near failures and associated losses triggered a tremendous tightening of financial conditions over the intermeeting period--President Yellen and others discussed this--despite the 50 basis points of easing. Even after the 900 point increase yesterday, equity prices are down about 20 or 22 percent over the intermeeting period. The dollar is up 10 percent. Corporate borrowing rates are up for investment-grade corporations 200 to 250 basis points. Banks tell us that they're tightening across every dimension of their lending; and other lenders, like finance companies, are also cutting back very, very sharply. You can see this in autos clearly, but the stress is much broader than just the auto finance companies. We have good programs in place to deal with many of these problems--the capital, the FDIC guarantees, and the Federal Reserve balance sheet facilities--and they are having some effects relative to the freezing up of markets that we had in mid-September. We can see that interbank spreads and LIBOR have come down some. Commercial paper rose, I guess, on Monday with the introduction of our facility. Declines in money market mutual funds have abated, though they're still there, and there are some signs that maturities are beginning to lengthen in funding markets. As these programs are more fully implemented, we'll see some greater effects--including, I hope, some greater willingness to extend credit. I also assume that the fiscal package is necessary, as in the Greenbook ""fiscal stimulus"" alternative. But we need to remember that the improvement we've seen over the last couple of days is relative to a situation in which funding markets were in effect frozen beyond a very short term, and although a sharp snapback is possible, as President Plosser was noting yesterday, I think further gains are more likely to be gradual. In the past few days, the declines in LIBOR have seemed very grudging and gradual, and LIBOR remains quite high--I think close to 75 basis points higher-- relative to what it was in mid-August, before we even cut rates. This was three-month LIBOR that I looked at this morning. In an environment of economic weakness, spreading credit problems, falling house prices, a number of false dawns in this episode so far, and death and near-death experiences, lenders and investors are going to continue to be very cautious and conserve their liquidity and capital. So despite further improvements, financial conditions will remain quite tight. The effects of lower wealth, higher borrowing costs, the stronger dollar, and tighter nonprice terms of credit will play out over the next few quarters, putting downward pressure on an economy that was already in recession. At the same time, heightened uncertainty and fear of future problems caused a sharp deterioration in attitudes and spending even apart from the effects of credit. Judging from the Conference Board index, regional purchasing manager surveys, and anecdotes--including what we heard around the table yesterday--it feels like a recessionary psychology, as I think Charlie Evans called it. Others talked about pulling back and curtailment of discretionary spending in train, and this is not just caused by credit effects. This is just fear. So we've had a downward shift in aggregate demand as well as a movement along the aggregate demand curve, and this downward shift in aggregate demand will propagate through multiplier�accelerator effects even if attitudes begin to improve some. The global dimensions of the shock are important. As we talked about yesterday, heightened risk aversion has had a pronounced effect on emerging market economies as well as on industrial economies. Net exports cushioned domestic weakness in the first half of the year, but with the dollar strong, if anything we'll be absorbing weakness from abroad, not exporting it, as the rest of the year goes on and we get into next year. Growing credit problems abroad will only add to pressures on many large global lenders who might have thought they were diversified geographically. But a little like our U.S. housing market, they will find that diversification doesn't really work when there's a global recession. The net effect of all of this is a much weaker growth path for the economy. In my forecast, I had a somewhat steeper near-term decline in economic activity and a slightly sharper bounceback than the staff, including my fiscal assumption, but I also have the unemployment rate peaking at over 7 percent, as the Greenbook did. With commodity prices plunging, the added slack maintained through several years, and declines in inflation expectations, inflation will be on a clear downward track. In the Greenbook, this downward track for inflation obtained even with the assumption of some rebound in commodity prices and the resumption of dollar weakness. In my forecast for inflation from next year on, inflation was at or below the 1� to 2 percent rate I would like to see as a steady state consistent with avoiding the zero bound when adverse shocks hit. Critically, the downside risks around activity forecasts are huge and tilted to the downside. I think they're huge because we've never seen a situation like this before, certainly not in my experience dating all the way back to 1970, and have only the vaguest notion of how it will play out in financial markets and spending. I think they're tilted to the downside because I, like the staff, assumed a gradual improvement in financial markets. That could be delayed or even go in the wrong direction for a time, further tightening financial conditions. In addition, the effect on spending of the heightened concerns and tighter credit conditions could be larger and longer lasting than I assumed. For some time an important downside risk to the forecast has been a sharp upward revision to household saving as wealth, job availability, and borrowing capacity eroded. I assumed a moderate increase in the saving rate, but I can definitely see the possibility that adverse developments will galvanize a more thorough rethinking by the household sector of what saving is needed, and that will affect investment as well as consumption. We'll get to the policy implications of all of this in the next round. Thank you, Mr. Chairman. " FOMC20060629meeting--126 124,MS. YELLEN.," Thank you, Mr. Chairman. Based purely on the economic data, I consider it a close call between raising the funds rate 25 basis points today and pausing. I definitely think that policy should have a firming bias because inflation is too high. However, I do consider policy to be mildly restrictive, and I see a lot of uncertainty right now about the prospects for both real GDP and inflation. My preference would be to move up a bit more slowly, if in fact it turns out that we do need to tighten more, in order to allow additional time to assess the economic situation as we go. In other words, the option value of pausing, especially in view of how close the next meeting is, would have ideally, in my view, made it preferable to pause on purely economic grounds today. There is a wide range of possibilities for the future. I am deeply concerned about the pace of core inflation in recent months, but as I said yesterday, I take comfort from the continued strength in productivity growth, modest increases in wages, and the high level of markups. But it certainly is a possibility that inflation will remain where it is or pick up even more than we have seen so far, and in that case, further action will surely be required to bring it under control. I’m also quite aware of the possibility that output will slow much more than the Greenbook expects and that the rise in inflation we’ve seen recently will turn out to be a temporary bulge. Financial conditions have tightened considerably, and we may regret not getting off the escalator of raising the funds rate at each and every meeting because, if in fact output does slow down even more than the Greenbook projects, we will probably overshoot the appropriate level of the funds rate, perhaps by a considerable amount. In response to President Lacker’s comment about how we affect inflation, it seems to me that we do affect inflation by manipulating aggregate demand. That is the channel through which monetary policy works. To my mind we have two goals, not one, and we are now in a regime with mildly restrictive policy so that we face a tradeoff between the pace at which we’re going to bring inflation back to our target and the path of unemployment along the route. So although on purely economic grounds I’d prefer to pause at this meeting, I certainly recognize that it would be difficult to leave the stance of policy unchanged at this time. In general, I believe that we should do the right thing, even if it surprises markets, but in this case our public statements seem to have convinced the public that we will raise the funds rate today. If we didn’t follow through, there would likely be some loss of credibility for policy. Moreover, as I’ve indicated, I see today’s call as an exceptionally close one between firming and pausing. Therefore, I can certainly support another increase in the funds rate of 25 basis points today. With respect to the statement, in response to Vince’s point about what our policy choice is today, I believe our objective should be to craft wording that lowers the market’s assessment of the chance that we’re going to move again in August below what it is, which is about 85 percent at this point. The revised statement does an excellent job in accomplishing that, and I endorse the analysis of the statement that Governor Kohn gave as he went through the various parts. I do find, however, that I’m also attracted to the wording suggested by President Poole as an alternative. It’s another way to accomplish the same thing, and it has the added attraction of including the statement that we judge our stance after today’s move as mildly restrictive. It does open up the distinct possibility of our pausing in August, depending on the information we receive. To my mind, there is a real policy challenge as we go forward. Policy—I agree with President Poole—is mildly restrictive: The Greenbook forecast has unemployment moving above the NAIRU and inflation gradually coming down. However, assuming that the inflation bulge is not a purely transitory one that will disappear rapidly, the process for inflation to move down is going to take a while. The communication challenge I think we face and will face for quite a while is how we will live through a period in which inflation exceeds our objective. We need to express the idea that that is an unacceptable long-run situation. But I endorse the comments that President Poole made: We have to make sure that every time we receive an adverse inflation reading—and that could occur for quite some time while the medicine of our policy is working—we don’t respond by raising the funds rate again." FOMC20070628meeting--46 44,MR. WILCOX.," I would say that the answer differs by series, so that if you tend to favor the short-term Michigan series shown in the top right, you might get a more alarming picture. But, for example, the Survey of Professional Forecasters’ ten-year- ahead series is all the way at the other end of the spectrum, having been essentially rock solid at 2.5 percent, and these other series fall somewhere in between. Obviously, this analysis is extraordinarily simple and doesn’t take into account other factors that may have been at work over that eight-year reference period that are not operating now. But the hope was that, on a very rough and ready basis, this might be broadly indicative and that an eight-year period might capture some variation in other factors that were influencing inflation." CHRG-110hhrg38392--77 Mr. Bernanke," Well, the Federal Reserve has multiple roles, and the primary purpose of this hearing is to talk about monetary policy in the economy, and that is normally the only topic I would cover. In this case, though, the Federal Reserve also has some regulatory roles in reference to subprime mortgage markets in particular, and I thought this would be a useful opportunity to update this committee on some of the actions we are taking specifically in this particular market. The concerns are in terms of what the effects of tightened lending standards might be on the housing demand, for example, which is one of the factors affecting the growth of the overall economy. But the main concerns I was addressing in the latter part of my testimony were really the maintenance of legitimate subprime lending and the protection of consumers from abusive practices. " FOMC20080430meeting--97 95,MR. LOCKHART.," Thank you, Mr. Chairman. Our high-level view of current circumstances is that the real economy is quite weak, with weakness widespread. The financial markets are turning optimistic, and elevated prices and inflation remain a serious concern. Reports from our directors and District business contacts were broadly similar to the incoming national data and information from other Districts reported in the Beige Book. Observations from such District input support themes in the national data--for example, employment growth is quite weak. In this round of director reports and conversations, I heard an increasing number of reports of holds on hiring and expansion plans. One representative of a major retailer of home improvement goods reported that hiring for seasonal employees will be down 40 percent this spring. This translates to approximately 45,000 jobs. Nonresidential real estate development continues to slow in the District, especially in Florida and Georgia. Of the 18 commercial contractors contacted in April, 15 expect that commercial construction will be weaker for the rest of 2008 than for the same period in 2007, with several predicting even more pronounced weakness in 2009. On the brighter side, Florida Realtors are anticipating that sales over the next few months will exceed year-ago levels, and builders are signaling less weakness than in recent reports. This is a level of optimism we have not heard from Florida for some time. However, housing markets in the rest of the District continue to weaken. We heard several complaints that obtaining financing is a serious problem for commercial and residential developers and consumer homebuyers. In sum, the information from the Sixth District seems to confirm what I believe is the continuing story of the national real economy captured in the Greenbook--that is, shrinking net job creation, developing weakness in nonresidential construction, and a bottom in the housing market still not in sight. In contrast, conditions in the financial markets appear to have improved substantially. As has been my practice, I had several conversations with contacts in a variety of financial firms. There was a consistent tone suggesting that financial markets are likely to have seen the worst. This does not mean that no concerns were expressed. Some contacts had concerns about European banks and credit markets, and concern about the value of the dollar, notwithstanding the recent rally, is coming up in more contexts. Concern was expressed about the dollar's disruptive effect on commodity markets, in turn affecting the general price level--in particular, the effect of high energy prices on a wide spectrum of businesses' consumer products and even on crime rates in rural and far suburban areas related to the theft of copper wiring and piping from vacant homes and air conditioning units. I worry that a narrative is developing along the lines that the ECB is concerned about inflation and the Fed not so much. This narrative encourages a dollar carry trade mentioned, again, by some financial contacts that puts downside pressure on the dollar that potentially undermines both growth and inflation objectives. I remain concerned about the vulnerability of financial markets to a shock or surprise, but overall, my contacts express the belief that conditions are improving. The Atlanta forecast submission sees flat real GDP growth in the first half of 2008, with gradual improvement in the second half. We continue to believe that the drag on economic activity from the problems in the housing and credit markets will persist into 2009. On the inflation front, I am still projecting a decline in the rate of inflation over this year. I've submitted forecasts of declining headline inflation in 2009 and 2010, but I should note that my staff's current projections suggest that improvement to the degree I would like to see may require some rises in the federal funds rate. It is my current judgment that, with an additional 25 basis point reduction in the fed funds rate target, policy will be appropriately calibrated to the gradual recovery of growth and the lowering of the inflation level envisioned in our forecast. This judgment is based on the view that, with a negative real funds rate by some measures, policy is in stimulative territory; that a lower cost of borrowing in support of growth depends more on market-driven tightening of credit spreads than a lower policy rate; that further cuts may contribute to unhelpful movements in the dollar exchange rate; and that extension of the four liquidity facilities may allow us to decouple liquidity actions from the fed funds rate target. In my view, we are in a zone of diminishing returns from further funds rate cuts beyond a possible quarter in this meeting. That said, as stated in the Greenbook, uncertainty surrounding the outlook for the real economy is very high, and the Committee needs, in my view, to preserve flexibility to deal with unanticipated developments. Thank you, Mr. Chairman. " CHRG-111hhrg56847--18 Chairman Spratt," Until recently, the Fed was buying mortgages in the secondary market, creating a market itself. You have stopped doing that now. What is the role of Freddie Mac and Fannie Mae as we go forward with the recovery? " CHRG-110hhrg41184--76 The Chairman," The gentlewoman from California. Ms. Waters. Thank you very much, Mr. Chairman, for holding this hearing, and I thank Chairman Bernanke for once again being here and helping us to understand his vision for how we deal with our economy, and, of course, we are all pretty much focused on the subprime crisis, because I think we all understand the role that it is playing in our economy--the negative role that it is playing in our economy at this time. Yesterday, Mr. Bernanke, we had some economists here testifying before this committee, and there was some discussion about the role of regulatory agencies, and some discussion about public policymakers and whether or not we were going to overdo it and come up with new laws that may prove to be harmful to the overall industry and thus the economy. And let me just say that I think that you have been very forthcoming in talking about some missed opportunities maybe early on, you know, with maybe what could have been done based on information that regulatory agencies should have known about, should have had access to, should have acted on. So that is behind us, but I am concerned about voluntary efforts by the financial institutions who have some role in responsibility in the subprime crisis. For example, I held a hearing where Countrywide said that it had made 18 million contacts, had done 60,000 workouts, and out of that, there were 40,000 loan modifications. This other coalition called HOPE NOW said they had done 545,000 workouts, 150 loan modifications, and 72 percent of these were what we found, that 72 percent of these were kind of repayment plans and they were not real modifications. Now we are trying to act on the best information. And here we have these voluntary efforts that are representing to us that they are making these contacts. They are doing these workouts, and we look at this. We don't see it in our communities. We don't have people who are saying that they got a workout that made good sense and that they had been contacted. How can you help us if we are to have any faith in voluntary efforts at all and not get so focused on trying to produce laws that will do some corrections? How can you help us with determining whether or not this information we are getting is true; whether or not they are doing these workouts; whether or not they are doing this outreach. What do you do to track this voluntary effort? " FOMC20060808meeting--175 173,MR. FISHER.," Well, Mr. Chairman, we do have responsibility for a fiat currency, and my straightforward and undiplomatic way of describing what we do for a living is that we are performing a great confidence game. I think that’s important to bear in mind. As President Yellen said, this is apple pie and motherhood. The answer is “yes” to the first questions, but there are questions about which agents we are talking about and, when we talk about generating well- informed expectations, how we do so. I mentioned earlier, to Governor Kohn’s embarrassment, “full frontal exposure,” and I think that’s not an unimportant point. To maintain the confidence game that we have to maintain and—if you’ll permit me to say this having experienced the other side—to maintain the last bastion of integrity in Washington—and I feel very strongly about that—we have to be very careful that we preserve a bit of modesty and mystery to accomplish our goals. The really tough part is how far we go, and that’s what we’re going to have to talk about going down the path. For example, I’m somewhat uncomfortable, even though I have great respect for President Moskow, about making long-term forecasts. The further out you forecast, the more probable error is. I am wary of exposing our vulnerabilities, and I think we should be mindful of that as we go through time. That’s just one thought. Another thought is about the statement. I may have forgotten my logic here, but I think we should be as straight as Occam’s razor—that is, we should take as few variables as possible to explain what we decide to do. I do think the minutes are very important for illumination. I don’t want to manipulate the minutes, but I think we can use them quite effectively. In my statement earlier in the meeting, when we were discussing our view of the economy, I said that I think we did that very effectively the last time around. Then a third point—I’m a strong believer in partnerships. I mentioned this at a dinner with the Presidents last night. I’m also a very strong believer in a strong managing-partner model, having worked all my life in the private sector in partnerships. But I do think it’s very, very important to have a diversity of views, and so I second what has been said at the table on that front as well. Those are my three comments, Mr. Chairman." FOMC20080625meeting--31 29,MR. WASCHER.," Exhibit 10 reviews our assumptions about aggregate supply. As you can see from the first two rows of the table at the top, we now assume that potential output growth will hold steady at about 2� percent per year over the forecast period, about � percentage point per year higher from 2007 to 2009 than we had assumed in the April Greenbook. This upward revision is split roughly equally between structural productivity growth (lines 3 and 4) and trend hours (lines 5 and 6). The middle two panels provide the reasoning for our change. The left panel shows the difference between actual productivity growth (the black line) and a simulation from our standard model (the green line) using the pace of structural productivity growth that we had assumed in April. As you can see, labor productivity growth in recent quarters has been stronger than the model would have expected given the deceleration in economic activity. As shown in the inset box, a purely statistical model based on a Kalman filter would have responded to the recent data by raising its estimate of structural productivity growth 0.2 percentage point. Because we place less weight on data that have not yet been through an annual revision, we generally tend to revise our own estimate by less than the amount suggested by such models; moreover, the Kalman filter model does not take into account the steep rise in energy prices, which we think might subtract a bit from structural productivity growth in coming years. Nevertheless, we did think it appropriate to nudge up our productivity growth trend a little. The green line in the middle right panel shows a similar model simulation for the labor force participation rate, again using our previously estimated trend. Here, too, the incoming data have been a little higher than the model would have expected. One can think of potential explanations for this--for example, it may be that strains on household budgets associated with rising costs of food and energy have increased labor force participation among secondary earners, an influence not captured by the model. We are not ready to back away from our basic story that demographics will continue to put downward pressure on the participation rate over time, but we did slightly raise our assumed trend in response to the recent data. The key elements of the labor market forecast are shown in the bottom panels. As indicated to the left, nonfarm payroll employment (the black line) is projected to decline about 40,000 per month through the rest of this year. As the economy improves in 2009, we expect payrolls to start rising again, although at a pace below our estimate of trend employment growth (the green line) for most of the year. As shown in the inset box in the bottom right panel, we expect the unemployment rate to drop back in June from its suspiciously high May reading, which would leave the average jobless rate in the second quarter at 5.3 percent. However, with employment declines projected to continue for a while longer, we expect the unemployment rate to drift up to 5.7 percent by early next year and remain near that level through the end of 2009. Exhibit 11 presents the near-term inflation outlook. As you can see in the top left panel, the recent data on consumer prices have come in a little lower than we had expected at the time of the April Greenbook. As shown on line 3, core PCE prices rose only 0.1 percent in April, and based on the latest CPI and PPI readings, we expect an increase of 0.2 percent in May. As a result, we have marked down our estimate of core PCE inflation in the second quarter by 0.3 percentage point, to an annual rate of 2 percent. Total PCE prices (line 1) have risen at a substantially faster pace than core prices; but here, too, the current-quarter forecast is a little lower than in our previous projection, both because of the lower core inflation and because the sharp increases in oil prices have been slow to feed through to finished energy prices. Despite this recent news, we expect inflation to rise sharply over the next few months. In part, this reflects our judgment that core prices were held down in the first half by some factors that will not persist into the second half. In addition, as shown to the right, we expect increases in food and energy prices to push up the twelve-month change in the total PCE price index more than 1 percentage point over the next several months, to about 4� percent. The remaining panels of the exhibit focus on the projection for energy and food prices. As shown by the black line in the middle left panel, rising crude oil prices have pushed up retail gasoline prices sharply so far this year. Even so, margins are still relatively low, and we expect further sizable increases in pump prices in coming months. Spot prices for natural gas (the red line) have also risen noticeably, reflecting its substitutability with crude oil. Meanwhile, prices for crops, plotted in black at the right, have moved well above the levels at the time of the April Greenbook, mainly in response to the severe flooding in the Midwest. The higher prices for grains have also pushed up livestock prices (the blue line), although recent increases in supply have tempered this rise somewhat. In both cases, futures prices indicate that market participants expect these prices to flatten out at about their current levels. The bottom two panels show our forecast for overall consumer food and energy prices. Based on current futures prices, we expect energy price inflation to move yet higher next quarter before slowing to a pace close to zero in 2009. We expect food prices to show a similar--albeit less pronounced--pattern, with the fourquarter change peaking at about 5 percent this quarter and then decelerating to a pace of 2� percent next year. The upper panels of your next exhibit examine the implications of the recent increases in energy and other commodity prices for core inflation. The first thing to note is that these increases are showing through to producers' costs. As indicated in the top left panel, the producer price index for core intermediate materials (the black line) has accelerated yet again and was up more than 7 percent over the past twelve months, with especially large increases for metal products and energy-intensive materials. Likewise, the diffusion index for prices paid from the Institute for Supply Management's manufacturing survey (the red line) has climbed steadily since late last year. As Nathan noted, rising commodity prices have been an important source of the sizable increases in import prices shown to the right. In addition, higher energy prices have boosted the costs of shipping goods from manufacturers to wholesalers and retailers. As you can see in the middle left panel, the PPIs for both trucking and rail transport have accelerated sharply over the past year or so. Obviously, a key question is the extent to which these higher costs will be passed through to core consumer prices. The panel to the right provides rough estimates of the size of these pass-throughs from our suite of econometric models, with the effect of energy prices on core PCE inflation shown by the blue bars and the combined effects of import prices and other commodity prices indicated by the red bars. As you can see, these effects add more than 0.6 percentage point to our forecast of core inflation this year. With energy and import prices expected to decelerate, the contribution of these factors to core inflation steps down to � percentage point next year. In contrast to the evidence of greater cost pressures from commodity prices, we've seen no signs of acceleration in labor costs. The bottom left panel plots the three main measures of labor compensation that we follow. None of them suggests that employers have experienced a step-up in the pace of compensation growth; and given the weaker labor market in our projection, we don't think that workers will do much better over the next year and a half either. Accordingly, we expect the rise in trend unit labor costs, shown in the table to the right, to hold steady at about 2 percent per year over the projection period. In putting together our forecast, we've also had to make some decisions about how to interpret the recent data on inflation expectations--the subject of your final exhibit. As shown in the top left panel, some measures of short-run inflation expectations have jumped sharply in response to the run-up in energy and food prices this year. In particular, the Reuters-Michigan measure of one-year-ahead expectations (the blue line) rose above 5 percent in May and remained high in the preliminary June survey. Meanwhile, as shown to the right, indicators of long-run inflation expectations have ranged from roughly unchanged to higher since late April. As I already noted, the recent compensation data do not suggest that higher inflation expectations have started to push up wage increases. However, on balance, we view the data as consistent with a slight updrift in the underlying long-run inflation expectations that drive actual inflation, and we have carried this updrift into the projection period. All told, we expect core PCE inflation (line 3 of the middle left table) to step up to a 2� percent annual rate in the second half of this year, pushed up by the effects of higher input costs and the increase in inflation expectations. In 2009, core inflation is projected to step back down to 2� percent, as the effects of decelerating energy and import prices and a wider unemployment gap offset a small further updrift in expected inflation. We have taken only a small signal from the apparent deterioration in expected inflation, but we view the possibility that inflation expectations will become unmoored in response to the persistently high rate of headline inflation as a risk to our forecast. Accordingly, as indicated in the box to the right, we included in the Greenbook an alternative simulation that assumes that long-run inflation expectations move up � percentage point relative to baseline in the third quarter. Consistent with our usual practice, monetary policy in this simulation is assumed to respond according to the estimated Taylor rule. Both wages and prices are affected by these higher inflation expectations, and as you can see by the green line in the middle panel at the bottom, core inflation rises to 2.6 percent in 2009, almost � percentage point higher than baseline. Monetary policy responds in this simulation by raising the federal funds rate more than in the baseline forecast. As a result of this additional tightening, the unemployment rate declines a bit more slowly, and core inflation moderates to about 2� percent in 2012. Brian will now continue the presentation. " FinancialCrisisReport--573 One key issue discussed in the memorandum was whether, by assuming the role of liquidation agent, Goldman would trigger registration and disclosure obligations under the Investment Advisers Act of 1940. The CDO Origination Desk wrote: “We have discussed Goldman’s role as Liquidation Agent internally with Tim Saunders [counsel in Goldman’s legal department] and externally with outside counsel, Wilmer Cutler. One concern about that role was whether Goldman would be viewed as an Investment Advisor. We specifically crafted Goldman’s role in Hout Bay 1 and in this case to eliminate both internal and external counsel’s concern about Goldman being treated as an Investment Advisor. The main factors that made Tim Saunders and Wilmer Cutler comfortable that Goldman will not be treated as an Investment Advisor were: - Goldman’s role is Liquidation Agent and not Collateral Manager. Goldman is engaged by the CDO to liquidate Credit Risk Assets and will receive an ongoing Liquidation Agent Fee for such services; - Goldman does not determine whether an asset is a Credit Risk Asset. Such determination is made by the CDO based on specific rules . . . ; - Goldman must liquidate such Credit Risk Assets within 12 months of such determination and the price received on such liquidation must be in the context of a three-bid process; - Goldman does not receive additional compensation and or control of the CDO for acting as a Liquidation Agent. ... We will build a provision in the deal documents to allow Goldman to resign as Liquidation Agent if appropriate notice is given and a replacement Liquidation Agent is in place.” 2568 This memorandum indicates that, from its inception, the liquidation agent function was designed as a narrow, ministerial role, in part to avoid the legal obligations applicable under federal law to investment advisers. The memorandum also indicated that “Credit Risk Assets” would be identified through objective criteria. For example, in the CDO under review, the memorandum stated that Credit Risk Assets would be defined as “[a]ny asset that is downgraded by Moody’s or S&P below Ba2” and “[a]ny asset that is defaulted.” 2569 Credit Rating Downgrades. One year later, on July 19, 2007, after Mr. Ostrem had left Goldman and Mr. Lehman had assumed responsibility for all Goldman-originated CDOs, he held a conference call with members of the CDO team and Goldman in-house legal counsel Tim Saunders, 2568 2569 Id. Id. to discuss how to carry out Goldman’s CDO liquidation agent responsibilities. The prior week, Moody’s and S&P had suddenly downgraded hundreds of RMBS and CDO securities in the first of many mass downgrades. Those downgrades suddenly caused a number of assets in Goldman’s CDOs to qualify as Credit Risk Assets that had to be liquidated. CHRG-111hhrg56776--278 Mr. Nichols," Congressman Foster, I think it was a perfect storm of activities, activities, conditions, behaviors, failures, in a lot of places. So like Chairman Bernanke pointed to two or three different factors, I even think it's broader than that. Certainly, the industry played a role in terms of internal controls and risk management; lack of mortgage origination standards; the role of credit rating agencies; even our trade imbalance, a lot of money coming in for yield, interest rate policy. There was a perfect storm of failures. People were overleveraged. Some Americans bit off more than they could chew. It was really--I don't think you could just point to one thing that led to the housing bubble. There were a lot of accelerates and a lot of contributors to it, but it's a dozen different factors all intertwined, in my humble opinion. " FOMC20081216meeting--59 57,MR. MEYER.," Thank you, Brian. By way of background, the Greenbook and many private forecasters project a sizable drop in real GDP from mid-2008 to mid2009, followed by sluggish growth into 2010, even with short-term interest rates barely above zero and with substantial fiscal stimulus. The Board staff and the median forecaster in the December Blue Chip survey predict that unemployment will peak around 8.25 percent in 2010. The Greenbook forecast shows core PCE inflation dropping below 1 percent in 2010; many private forecasters envision similar disinflation. Moreover, responses to a special question in the latest Blue Chip survey indicate that private forecasters see a sizable risk of deflation, and stochastic simulations of FRB/US that take the Greenbook forecast as the baseline suggest a roughly 1-in-4 chance that the core PCE price index will decline over one or more of the next five years. In short, forecasts generally suggest that additional stimulus would be desirable. With the target federal funds rate at 1 percent and the effective rate significantly lower, the Committee has little scope for using conventional monetary policy to stimulate the economy. As a practical matter, the System's large liquidity-providing operations and the Treasury's decision to scale back the supplementary financing program make it likely that the effective federal funds rate will remain quite low into the new year. Even so, the Committee could choose to apply some additional stimulus by reducing its target federal funds rate and pushing the effective funds rate closer to zero. The research literature strongly suggests that a central bank should quickly cut its target rate to zero when it faces a substantial probability that conventional monetary policy will, in a few quarters, be constrained by the zero lower bound on nominal interest rates. But as discussed in several of the notes you received on December 5, driving short-term interest rates to zero would have costs as well as benefits. Zero or near-zero rates cause a high volume of fails in the Treasury securities market, leading to decreased liquidity in that market and potentially in other fixed-income markets. And if short-term rates remain very close to zero, some money market funds probably will close. Such costs may argue against cutting the target funds rate to zero and driving the effective rate closer to zero. Whether or not the Committee chooses to cut its target rate to zero, policymakers may find it helpful to expand the use of nonstandard monetary tools. In the current environment, using such tools has two potential benefits. First, they may help the Federal Reserve achieve better expected outcomes on both parts of the dual mandate. Second, nonstandard tools could help mitigate the risk of an even more negative outcome. It may prove useful to group nonstandard tools into four broad categories and treat each category in turn. The first category is simple quantitative easing. This approach uses conventional open market operations such as buying short-term government debt and conducting repurchase agreements to raise excess reserves in the banking system to a level well beyond that required to drive short-term interbank rates to zero. The objective is to spur bank lending by ensuring that banks have ample funding at very low cost. The Japanese experience suggests that greatly expanding excess reserves, per se, has limited success in spurring bank lending, and thus has modest macroeconomic effects, when banks and borrowers have weak balance sheets. The second category of nonstandard policy tools is targeted open-market purchases of longer-term securities. The objective here would be to reduce term spreads or credit spreads and thus reduce the longer-term interest rates that are relevant for many investment decisions. The Committee could, for example, direct the Desk to buy a large amount of longer-term Treasuries. The Bank of Japan bought sizable quantities of Japanese government bonds; its purchases are thought to have lowered yields. The available evidence for the United States suggests that adding $50 billion of longer-term Treasury securities to the SOMA portfolio (a bit less than 1 percent of publicly held Treasury debt) probably would lower yields on such securities somewhere between 2 and 10 basis points; a substantially bigger purchase could have a disproportionately larger effect as longer-term Treasuries became scarce. Of course, what matters for the macroeconomy is the effect on private agents' borrowing costs and wealth. Those effects are difficult to predict. Corporate bond yields should decline with Treasury bond yields, though perhaps less if supply effects are the main reason Treasury yields fall. But corporate bond yields could decline more than yields on Treasuries if the Committee's action reduces investors' concerns about downside risks and thus reduces credit risk premiums. Such a boost to confidence could also lift stock prices and household wealth. Another possibility is to instruct the Desk to buy a large quantity of GSE debt and mortgage-backed securities to reduce their yields and thus drive down mortgage rates. As Bill noted, markets reacted positively to the November 25 announcement that the Federal Reserve will buy $100 billion of GSE debt and up to $500 billion of agency-backed MBS; yields on 10-year GSE debt and option-adjusted MBS yields fell about 60 basis points that day, and the spread over 10-year Treasury yields narrowed about 40 basis points. Quoted rates on conventional conforming mortgages declined a similar amount in subsequent days. The magnitude of the announcement effect, which is consistent with estimates from the research literature, suggests that additional targeted purchases of agency debt and MBS could provide further macroeconomic stimulus. The third major category of nonstandard tools encompasses special liquidity and lending facilities. The Board could choose to expand current facilities or create new ones. Special liquidity facilities for banks and other financial firms are intended to help them meet their customers' needs for credit by providing a reliable source of funding even if the markets in which those lenders usually raise funds are disrupted or if their depositors withdraw funds. Indeed, these facilities seem to be meeting these needs effectively. The Term Auction Facility, or TAF, is one example; the AssetBacked Commercial Paper Money Market Mutual Fund Lending Facility, or AMLF, is another. Liquidity facilities may also support specific funding markets. The idea is that such markets are more likely to function if borrowers are confident that they will be able to issue and roll over debt and if lenders are assured that they will be able to fund purchases of debt instruments or reduce their holdings of such instruments when necessary. The Commercial Paper Funding Facility, or CPFF, is an example of this sort of program. Although the commercial paper market has not returned to normal, the CPFF has been helpful in supporting overall credit flows and reducing some credit spreads. Direct discount window lending to creditworthy nonfinancial firms is another potential tool for supporting economic activity. The Federal Reserve Act allows such lending, on a secured basis, if the borrower is unable to obtain adequate credit from banking institutions during unusual and exigent circumstances. Significant further expansion of the System's lending programs would raise a host of issues. New facilities that lend directly to individuals, partnerships, or corporations would have to meet the requirements in section 13(3) of the Federal Reserve Act. The Reserve Banks would take on more credit risk unless the Treasury or other parties took substantial first-loss positions. Moral hazard would become a larger issue. The resulting increase in reserve balances would further complicate the implementation of monetary policy unless the FOMC were willing to accept a federal funds rate of essentially zero. Developing satisfactory exit strategies would be challenging. And the practical burdens of designing and operating a sizable number of new liquidity facilities would be substantial. Even so, some expansion might prove useful if credit conditions do not improve. Communication and commitment strategies are the fourth and final category of nonstandard policy tools. In current circumstances, the Committee might use such strategies in an effort to lower market expectations of future short-term interest rates and thus reduce long-term rates, or it might wish to prevent expectations of deflation from taking hold. I will mention three strategies that the Committee might pursue. First, research suggests that it would be helpful for the Committee to be explicit about its longer-term goals, particularly about its goal for inflation. Foreign experience supports the theoretical prediction that an explicit and credible inflation objective helps anchor longer-run inflation expectations and thus can help prevent a downward drift in expected inflation and an upward drift in real interest rates during a protracted period of high unemployment and slowing inflation. That is, an explicit longer-run inflation target can prevent the public from thinking that the Federal Reserve will allow inflation to remain persistently below rates that the Committee has previously said are desirable. The Committee has discussed the pros and cons of a numerical objective for inflation several times. You may wish to consider whether the significant risk of deflation and the near certainty that the zero lower bound will constrain conventional monetary policy have changed the cost�benefit calculus. Second, the Committee could announce that it will seek to run a somewhat higher rate of inflation for a number of years than it will seek in the long run. Such a promise, if deemed credible, would stimulate real activity by raising inflation expectations and reducing medium- and long-term real interest rates. Researchers have proposed several approaches for dealing with the zero lower bound that would operate in this fashion, including targeting a slowly rising price level. These approaches would be a significant departure from historical practice, and so their pros and cons would need to be evaluated carefully. Third, research suggests that it would be helpful for the Committee to provide more-explicit information about its views on the likely future path of the federal funds rate. Suppose, for example, that the Committee concludes that it most likely will need to keep the federal funds rate close to zero for some time to spur an economic recovery and to prevent a persistent decline in inflation. In the current environment, an announcement to that effect might lead market participants to expect the funds rate to remain near zero for a longer time than they now think likely; the announcement might also lead to an increase in expected inflation. Those changes in expectations would lower nominal and real bond yields, providing some stimulus to economic activity. Theory suggests that it would be important to make clear that the Committee's current view about the likely future path of policy is conditional on current information and the current outlook and to spell out how the actual policy path would depend on a range of possible future outcomes. Communicating this conditionality could be difficult. The bottom line from the staff's analysis is that unconventional monetary policy tools can be useful complements to well-designed fiscal stimulus and to steps to recapitalize and strengthen the financial system. Additional purchases of longer-term securities, expansion of targeted lending facilities, and explicit statements of policymakers' goals and intentions all seem likely to be useful when conventional monetary policy is constrained by the zero lower bound on nominal interest rates. Our limited experience with these tools makes it difficult to estimate the amount of macroeconomic stimulus that would be generated by each and thus makes it difficult to calibrate their application. If the Committee and the Board choose to make greater use of nonstandard tools now or in the near future, it may be appropriate to deal with the uncertainty by using the tools in combination. Finally, the Bank of Japan's experience suggests that nonstandard tools are more likely to be effective if they are used aggressively. I'll now turn back to Brian. " FOMC20080430meeting--184 182,MS. YELLEN.," Thank you, Mr. Chairman. I favor alternative B with the wording that has been proposed. But I do appreciate that there is a case for alternative C as well, and I understand and appreciate the arguments that have been made in favor of it. On the pure economic merits, I definitely support a 25 basis point cut. As I noted in my comments on the economic situation, it appears that the economy has stalled and may have fallen into a recession. I share the same concerns as Governor Kohn and President Stern. My forecast is close to the Greenbook. I think a further easing in financial conditions is needed to counter the credit crunch, and I believe that a cut in the federal funds rate will be efficacious in easing financial conditions. Although the real federal funds rate is accommodative by any usual measure of it, I completely agree with Governor Kohn's discussion of this topic. This is a situation in which spreads have increased so much and credit availability has diminished so much that looking at the real federal funds rate is just a very misleading way of assessing the overall tightness of financial conditions. I consider them, on balance, to be notably tighter than they were in the beginning of August. I don't agree that further cuts in the federal funds rate will be ineffective in helping us achieve our employment goal or counterproductive to the attainment of price stability over the medium term. Given that a 25 basis point cut is what the markets are now anticipating--it is built in--I would not expect this action, coupled with the language in alternative B, to touch off further declines in the dollar or to exacerbate inflationary expectations. That said, I did see arguments in favor of alternative C as well. I can see some advantage in doing a little less today than markets are expecting as long as we reaffirm that we do retain the flexibility to respond quickly to further negative news with additional cuts. A case that could be made for pausing is that we will soon get information relating to GDP in the second quarter and get a better read on just how serious the downturn is. With respect to market and inflationary psychology, I also can see a case for doing less than markets expect. It is true that some measures of inflation expectations have edged up a bit, and I would agree with President Fisher that perhaps a pause would counter any impression that we have become more tolerant of inflation in the long run. But I don't think we have become more tolerant of inflation in the long run, and I did see today's reading on the employment cost index as further confirmation that at this point nothing is built into labor markets that suggests that we are developing a wage�price spiral of the type that was of such concern and really propelling the problems in the 1970s. On the other hand, I agree with President Plosser, too. Wages aren't a leading indicator. We have to watch inflationary expectations. So I don't think that is definitive. Nevertheless, I do find it quite reassuring that nothing is going on there at this point. I think doing nothing today might mitigate the risk of a flight from dollar assets, which could exacerbate financial turmoil. So there are arguments in favor of alternative C, and I recognize them. But, on balance, I believe that the stronger case is for B. " FOMC20050920meeting--80 78,MR. SANTOMERO.," Thank you, Mr. Chairman. The Third District economy continues to expand at a moderate pace. Consumer spending for general merchandise has edged up. Retailers report that back-to-school shopping got off to a slow start in August, but attributed it to exceptionally warm weather, which hindered the sale of fall merchandise. Auto sales have been brisk, with dealers in the region reporting continuing high rates of sales in August, except for large SUVs. Employment is rising steadily in the region, albeit at a somewhat slower pace than in the nation. While the regional unemployment rate ticked up in July from its second-quarter level, it remains lower than the national rate. Housing markets remained strong in the District, with sales continuing at a high rate. Price appreciation continues at a steady pace, but several of our contacts noted that higher-priced homes appear to be taking longer to sell now than earlier this year. The nonresidential market continues to improve, with construction contracts up and office leasing active. The demand for commercial space continues to expand at a slow but steady pace in Philadelphia. Although vacancy rates remain high, we have seen positive net absorption of office space for seven consecutive quarters. Rental rates remain steady. Recent manufacturing activity in the District has been softer than we saw earlier this year. The index of general activity in the manufacturing survey rebounded in August but fell September 20, 2005 42 of 117 District this month. The downward trend in our index since the beginning of the year is echoed by a number of the regional manufacturing indexes as well as the national purchasing managers’ index. There was also a significant drop in the respondents’ expectations about future activity. There were still more firms expecting an increase in activity over the next six months than expecting a decline, but the percentage of respondents expecting a decline doubled in September. I should point out, however, that the survey was taken in the days early after the Katrina event, and that likely had something to do with the large drop. We’ll have to look forward to the next couple of months. Perhaps the most notable and troubling information from our latest survey is the significant increase in price indexes. The prices paid index showed its strongest increase since 1973 and is at its highest level since January. The index for prices received also moved higher. Expectations about future prices were also considerably higher this month. Concerns about inflation are not limited to our manufacturers. While the economic impact of the hurricane has been slight in our District—and our business contacts expect further improvement in our regional economy—the loss of petroleum products and production in the facilities in the Gulf of Mexico has prompted a sharp rise in inflation concerns in many of our firms. Turning to the national outlook, as the Greenbook noted, incoming data on the national economy pre-Katrina indicated that the expansion was continuing on a solid footing, with GDP growth slightly higher than potential. Labor markets continued to improve, with little or no slack September 20, 2005 43 of 117 prices. While there was some softening in the most recent orders and shipments data, this reflected the usual month-to-month volatility, and business spending remained healthy. Higher energy prices were showing through to headline inflation, but so far had little impact on core inflation. If Katrina hadn’t happened, it is my view that a decision to continue our strategy to remove monetary policy accommodation would have been relatively easy. But Katrina did happen. The hurricane is a human tragedy, as was noted, and it has changed the near-term outlook for the economy. I commend the Greenbook staff for the careful discussion and analysis of the potential effects on both growth and inflation. I acknowledge that there is a wider band of uncertainty around the forecasts than there had been. However, as a baseline forecast, I think the Greenbook has it largely right. Certainly, Katrina will have a substantial impact on the Gulf of Mexico’s regional economy for many months to come. It also has a potentially wider national scope than other natural disasters. Because of the disruption in the energy and shipping sectors, it will have ramifications for the rest of the economy. The destruction of the physical wealth and oil infrastructure and the disruption in economic activity will temporarily reduce the growth of the national economy and add to inflation over the near term. Monthly data over the next couple of months are going to be weaker than we’d like to see, and our headline inflation numbers are going to be higher than we would like. But these effects are likely temporary. The cleanup has already begun, as was noted, and rebuilding efforts funded by public and private spending will add to baseline growth September 20, 2005 44 of 117 As the energy infrastructure is rebuilt and the energy markets stabilize, much of the run- up of inflation should reverse as well. Of course, a longer-run negative impact is not out of the realm of possibility, but I think we will see a reversal of the sharp run-up in oil and gasoline prices after the hurricane season. That, along with the good economic prospects, the good progress going forward to get the oil and refinery capacity back on line, and the improvement in governmental response after a troublesome beginning will all help mitigate these longer-run impacts. The relevant policy options for us to consider at this point are whether to continue removing policy accommodation or to take a pause. I would argue that the prudent course of action today is to remain on our previous path, i.e., to continue to move rates up gradually. There are ample fundamental reasons for such a policy action. “We are at a whisker from potential output,” to quote a recent comment by President Yellen. I like that comment—“a whisker.” [Laughter] And I continue to be concerned about inflationary pressures. The higher energy prices we saw even before Katrina add to the concern. And we now have a significant increase in the amount of fiscal stimulus in the pipeline, as was discussed, which has the potential to keep pressure on inflation elevated for some time, even after energy price increases subside. I would also note the apparent increase in near-term inflation expectations. The recently released University of Michigan Survey, discussed earlier and in our briefing documents, shows a fairly hefty increase in both short- and medium-term expectations of inflation—a fact worthy of our September 20, 2005 45 of 117 Finally, I believe that continuing to reduce policy accommodation would be the best way to underscore to both the markets and the public our belief that Katrina will not change the underlying economic fundamentals and that the negative impact on growth will be temporary. Markets generally expect a rate increase today, so I believe that move would not be disruptive. By contrast, pausing today will do little to improve the temporary effects on growth of Katrina, which is largely a supply shock. And if we do pause today on the grounds that Katrina has made the short-run economic outlook uncertain, I think it will be very difficult for us to resume raising rates in the short term. Economic data coming in over the next couple of months on production, employment, and consumer spending are likely to be weak because of hurricane effects. Trying to craft a statement to explain why we are raising rates in the midst of weak data, after pausing now, would be a daunting task. So if we pause today, I think we have to consider that we will be on hold for a while, perhaps even as long as to the beginning of next year. In my mind, this poses an unacceptable risk that we will find ourselves behind the curve. Thank you, Mr. Chairman." FOMC20071031meeting--75 73,VICE CHAIRMAN GEITHNER.," As the Chairman said at the Economic Club of New York, it is likely to emerge stronger. I think the outlook looks about the way it did in September. Just a few quick points. Financial market conditions are substantially better than during the peak of the panic in mid-August; but the improvement, as many of you said, is still quite limited and uneven. Sentiment is still quite fragile, and I think we still seem likely to face a protracted period of adjustment ahead as the markets work through the substantial array of challenges remaining. Growth in the United States and in the world economy in my view seems likely to slow— more here, of course, than elsewhere. Here, even though the nonhousing, non-auto parts of the U.S. economy don’t yet show significant evidence of a considerable slowdown of actual or expected demand, I think that still seems likely. In our central scenario, though, housing construction weakens further. Housing demand slows further because of the tightening of credit conditions. Prices fall further. Consumer spending slows a bit, and businesses react by scaling back growth in hiring and investment, and this produces several quarters of growth modestly below trend. I think that growth outside the United States is likely to slow a bit. It will slow toward potential, if not all the way to potential, in those economies that have been growing above potential. Although the world is larger in relative terms and somewhat less vulnerable to a U.S. slowdown than it once was, it seems to me very unlikely that domestic demand in the rest of the world will accelerate as domestic demand slows in the United States. So the risks to this outlook for U.S. growth still seem to lie to the downside. The magnitude of the downside risks may be slightly less than in September, but they remain substantial. I think the main source of this downside risk to growth is the interaction between expectations of recession probability and the credit market dynamics. Each feeds the other. As the outlook for housing deteriorates and the recession probability stays elevated, financial institutions and investors stay cautious. That caution, in turn, slows the pace of recovery in markets—in asset-backed, securitization, and structured-credit markets—and in credit growth more broadly. As expectations adjust to anticipate a longer, more-substantial period of impairment in markets, then recession probability at least potentially increases. I think that the underlying inflation numbers and the measures we use to capture underlying inflation do not suggest any meaningful acceleration in underlying inflation, and we still expect the core PCE to run at a rate below 2 percent over the forecast period. In some ways, though, the inflation outlook now feels a bit worse. It feels worse because of the modest rise in breakevens that we saw following our last meeting and because of sentiment in markets around gold, commodity and energy prices, and the dollar. The fact that breakevens at long horizons have risen or failed to fall as monetary policy expectations have shifted down is not the most comforting pattern out there. So I think we need to be very careful not to encourage any sense in markets that we’re indifferent to those potential risks. Having said that, I think the risks to that inflation forecast are roughly balanced. The range of tools we have for measuring equilibrium combined with what you see in financial market expectations suggests that monetary policy, to assess the real short-term interest rate, is at or above most estimates of neutral and, therefore, is still exerting some modest restraint on growth. The expectations now built into markets imply too much easing over the next eighteen months, more than I think we’re likely to have to do. But I think the appropriate path of monetary policy lies under the Greenbook’s assumption. Thank you." CHRG-110shrg50410--145 CHRISTOPHER COX At an April 3, 2008 hearing, you told me that if market manipulation or insider trading played a role in the rapid demise of Bear Stearns, ``The rumors surrounding the activity you described are too big to miss, and our Enforcement Division is very active for a number of reasons.'' While I understand that this is a law enforcement issue, I hope this matter will be resolved promptly.Q.1. Would you care to update the Committee on any proceedings the SEC is undertaking in this situation?A.1. On July 13, the Commission announced that the SEC and other securities regulators are conducting sweep examinations aimed at the prevention of the intentional spreading of false information intended to manipulate securities prices. The examinations are being conducted by the SEC's Office of Compliance Inspections and Examinations, as well as the Financial Industry Regulatory Authority, Inc. and New York Stock Exchange Regulation, Inc. The sweeps include both broker-dealers and hedge fund advisers. And on April 24, the Commission brought its first-ever case of securities fraud and market manipulation for intentionally spreading false rumors.Q.2. With your recent actions to limit certain types of short selling on major financial firms, do you believe that types of short selling may have played a role in distorting the market over the past few weeks? Did it possibly play a role in the demise of Bear Stearns leading up to its March 2008 merger with JP Morgan Chase?A.2. The Commission's staff is currently preparing a detailed analysis of the events surrounding the distressed sale of Bear Stearns to JPMorgan Chase. That analysis is looking at the full range offactors including the role played by market rumors, novations in the over-the-counter derivatives markets, short sales, and general conditions in the credit markets. That study has not yet reached any conclusions." CHRG-111shrg382--36 Mr. Sobel," So the---- Senator Bayh. I know they were searching for a mission. With the recent crisis, they have been resuscitated. God willing, that is a temporary state of affairs. So I am just wondering what role they might play in all this at the end of the day. " CHRG-111hhrg74855--88 Mr. Upton," Mr. Wellinghoff, I know that you have not been chairman of FERC for all that long but if you look back to when we gave FERC the authority in the Energy Policy Act of '05, are there things that FERC might have done differently in terms of the role that they have played? " CHRG-111shrg57321--103 Mr. Kolchinsky," I have seen the recent reports on the SEC complaint. Senator Levin. And have you also seen reports that Paulson played a role in selecting referenced assets for the ABACUS CDO that he expected to perform poorly? " CHRG-110hhrg46591--87 The Chairman," Thank you. It did strike me as we talked about silver bullets that it would have been very appropriate to have given it to the Chairman of the Federal Reserve who played the role last year of the ``Lone Ranger,'' so he might have been appropriately armed. The gentleman from North Carolina. " CHRG-111shrg57322--349 Mr. Sparks," Well, Goldman Sachs--Senator, I just want to make sure you understand mechanically how that type of deal worked. Senator Tester. Are you saying Paulson did not have any role in this at all? " CHRG-111shrg382--16 Mr. Tarullo," Senator, excuse me. I think the Commissioner is excessively modest here. Her role in trying to move some of these questions forward---- Senator Bayh. That is unusual in Washington, D.C. [Laughter.] " fcic_final_report_full--537 Further investigation of this issue is necessary, including on the role of the bank regulators, in order to determine what effect, if any, the merger-related commitments to make CRA loans might have had on the number of NTMs in the U.S. financial system before the financial crisis. CHRG-111hhrg48674--214 Mr. Price," Another item that you said was one of your roles in these challenges was to stimulate credit markets where they have broken down. Other than the interest rate decrease, which is as low as it can go now, and the injecting of capital, what else can be done there? " FOMC20070131meeting--156 154,MR. BARRON.," Thank you, Mr. Chairman. I thought I’d focus a little more today in my comments on the State of Florida as it relates to the housing sector. We’ve heard a lot more positive comments in just the past few minutes about housing. So let me offer a contrarian view, if you will. Florida accounts for about 41 percent of our District employment and 6 percent of overall U.S. employment. As for housing, Florida represented 8 percent of U.S. home sales in 2005 and 6 percent in 2006 as sales and construction continued to decline. To put these numbers in perspective, single-family existing home sales in Florida have dropped 40 percent since January 2005 versus an 11 percent decline in the United States as a whole. Anecdotal reports are that builders are continuing to work down existing inventory and are not starting new projects. In most areas of the state, starts have fallen even more than sales, which should lessen the run-up in housing inventory over the immediate future. Permit issuance for single-family homes is down 54 percent in Florida since January 2005 compared with 28 percent in the nation as a whole. There are certain encouraging signs from reports noting, as mentioned earlier, that buyer traffic is better in some areas, and several of the building contacts that we spoke with expect or, perhaps I would note more accurately, are hopeful that new home sales will improve by the second quarter of 2007. Home prices have declined modestly but remain well above the levels implied by the pre- 2003 trends in most areas. This places housing affordability at a relatively low level by historical standards. As I noted at previous meetings, the demand in coastal markets is being constrained by the steep rise in homeownership insurance that has caused monthly housing costs to rise sharply, even as house prices moderate. We’ve heard reports that in markets where prices accelerated the most in recent years, such as south Florida, employers are struggling to recruit staff because of the high housing costs, with some firms electing to leave south Florida and others beginning to convert corporate owned land to corporate housing just so that they can recruit employees. As I reported at our last meeting, the decline in housing activity continues to have a negative effect on housing- related sectors specifically in the South because of our concentration in the carpet and other related industries. Housing-related employment is no longer a net contributor to year-over-year employment growth in the United States, even though overall job growth has remained very firm. District banks reported that credit quality has softened but remains at very strong levels. However, banks are beginning to be a bit more vocal in expressing concern with regard to the possibility that builders will face financial problems in the coming months. In addition, banks express concern about the number of speculative condominium projects in south Florida. District banks have lower earnings targets for 2007, and the expectation is that bank merger and acquisition activity and layoffs will increase in the coming year. Some banks are even putting out the “for sale” sign in the hope of cashing out now, noting that things could get ugly over the next two years in some areas. Outside the housing sector, indicators of economic performance in the District were mixed. Reports on holiday-related sales were on the positive side, whereas tourism remains relatively mixed across the District. Reports from the manufacturing sector were also mixed, with a weakness in the housing-related industries offset to some extent by the expanding activity in industries related to defense and energy. For the U.S. economy as a whole, the drag from housing that we experienced over the second half of 2006 does not appear at this time to pose a serious threat to the overall economy, although some forecasters anticipate below-trend real GDP growth for the end of 2006 and the first quarter of 2007. Most would say that this situation is temporary and would anticipate that real GDP growth will rebound and be close to the trend rate of 3 percent for the rest of 2007. Our staff projections of real GDP growth have had about the same tone as those of the external forecasters. Our staff believes real GDP growth will be sustained in 2007 by job creation that should match the experience that we’ve seen in 2006. Measured core inflation was well in excess of 2 percent at the end of 2006. The staff forecast is that core inflation will continue to hover just above 2 percent for all of 2007. The expectation is that price growth in services will continue to dominate core inflation going forward. In my comments I’ve focused a bit more on housing. I would just close by noting that my continued concern would be the lack of impetus to drive down inflation over the long term. Thank you." CHRG-111shrg56376--117 PREPARED STATEMENT OF SENATOR TIM JOHNSON Thank you Chairman Dodd for holding today's hearing. As we all know, the regulatory structure overseeing U.S. financial markets has proven unable to keep pace with innovative, but risky, financial products; this has had disastrous consequences. Congress is now faced with the task of looking at the role and effectiveness of the current regulators and fashioning a more responsive system. To date, it appears one of the Committee's biggest challenges will be to create legislation that better protects consumers. I very much look forward to hearing from today's panels of current and former regulators to see if they believe a new agency is needed to better protect consumers, or if consumer protection should remain a function of the prudential regulator. I am also interested in hearing from the regulators their views on ways to make the regulatory system more effective. For example, does it make sense to eliminate any of the bank charters to streamline the system? Last, I would also like to know from the witnesses if they believe the regulatory gaps that caused our current crisis would be filled by the Administration's regulatory restructuring proposal. We must get this right, and the proposal we craft must target the most pressing problems in our financial regulatory system. As this Committee works through many issues to fashion what I hope will be a bipartisan proposal that creates an updated system of good, effective regulations that balance consumer protection and allow for sustainable economic growth, I will continue to advocate for increases in transparency, accountability, and consumer protection. ______ FOMC20061212meeting--71 69,MR. LACKER.," Thank you, Mr. Chairman. Economic activity continued to expand moderately in our District in November. Manufacturing shipments and new orders bucked the national trend and rebounded last month following an October dip. Revenues and hiring slowed a bit in the service sector but continued to expand moderately. Retail was a bright spot: Stores reported an uptick in sales and customer traffic for November, including the Thanksgiving weekend. Our store contacts were generally optimistic about sales prospects for the coming holiday season. Fifth District housing activity continues to soften on the whole, although there are areas that have seen much less, if any, of a slowdown. We’re not hearing any reports of cutbacks in capital expenditures, and commercial real estate markets appear to remain fairly strong in our District. Reports on price pressures were mixed in November but remained at elevated levels. At the national level, an essential question seems to be how long the current weakness will persist. To a large extent this question centers on the housing market, and it’s still hard to pin down the outlook with much certainty. The special survey on homebuilders paints a picture that varies widely across the country. Construction activity is falling at a rapid clip in many regions, but many housing markets are still fairly stable. Nationally, there are some indicators suggesting that housing demand has stabilized at a low level. Sales of new homes have been fluctuating around an annual rate of 1 million since July, and purchase mortgage applications have been fairly flat since then as well. But the national data also show a sizable overhang of housing inventory that will continue to depress new building activity going forward. If—and, like David, I recognize this is a big “if”—the demand for housing holds up at current levels—and favorable fundamentals such as moderate mortgage rates and continued real income gains should help—then the adjustment process is simply a matter of working inventories down. This is consistent with the Greenbook’s estimate that residential investment will no longer subtract from real GDP growth after the first half of next year. The strength in nonresidential construction has until recently offset the decline in residential. Most recent reports show nonresidential construction spending and employment falling in recent months, although I’m struck by the fact that there are hardly any references in the Beige Book to deterioration in commercial construction and we aren’t hearing such reports from our contacts either. So I’m not sure how much to mark down the nonresidential outlook just now. As David said, consumer spending keeps chugging along at about 3 percent despite weakening auto sales. This is notable because one way the housing downturn could spread to the remainder of the economy is through a wealth effect. So far I’m not persuaded by this gloomy view, and I think there are good reasons to doubt it. Household net worth looks pretty strong, and equities continue to advance. The other leading candidate for a spillover channel is the labor market, but so far the weakness in construction and real-estate-related employment has not been large enough to offset the broader strength in employment. I remain skeptical of a housing-induced step-down in consumption growth. Business investment continues to be a source of strength. The Greenbook notes the possibility of negative accelerator effects, but the other fundamentals still look good. Profitability is high, and cost of capital is low. Moreover, financial markets are not showing signs of impending business weakness or investment slowdown. In sum, it looks as though the current weakness is likely to be relatively transitory, and after the housing market correction plays out, we should return to near-trend growth. There are risks to this outlook, to be sure, but this is what looks most likely to me right now. The recent news on inflation has been disappointing yet again. It is now quite difficult to discern any moderating trend in core PCE inflation over the past several months. You have to be really careful in selecting how many periods you average over, and I have serious doubts about the forces that are described as slowing inflation over the forecast period. First, the recent fall in energy prices is now behind us by a couple of months, and prices are beginning to rise again. If the Greenbook forecast is correct and in 2007 crude oil prices rise somewhat above their current level of $62 per barrel, then we have seen all we are going to see of the abatement of the effects of higher energy prices on core inflation, speaking to President Plosser’s point. Second, since the odds seem to favor a further depreciation of the dollar, I think import prices are unlikely to help ease inflation much. Third, as we’ve discussed at previous meetings, the projected increase in unemployment is not likely to have much of an effect on inflation, over the forecast period at least. On top of all this, inflation expectations appear to be anchored between 2 and 2¼ percent right now, and they’re likely to exert a gravitational pull counteracting any moderation of inflation. Thank you." FOMC20060328meeting--107 105,MS. MINEHAN.," Next meeting, okay. [Laughter] We’ve had a wide range of contacts in New England since our last meeting, so what I’m going to do is try to summarize five or six different things that came out as a result of this range of contacts. The first point is basically driven by the data. New England continues to grow more slowly than the nation. Actually, employment growth year over year is about a third of the pace of the nation as a whole—sort of normal, in a way. New England tends to have a slower-growing population and labor force than the rest of the nation. But the recent pace of job growth is decidedly slower than the long-run average. Nonetheless, regional businesses seem to be broadly participating in the growth of the overall economy, and even the pace of losses in manufacturing jobs seems to be slowing. Indeed, merchandise exports for the region were quite strong despite continuing manufacturing job losses, suggesting that regional manufacturers have figured out a way to enjoy some productivity growth and to keep their output relatively high. Almost all contacts have been quite upbeat about sales and revenue expectations for this year. Most state corporate tax collections have been booming, and retail sales and state sales tax revenues are at or above budget almost everywhere except Rhode Island. Rhode Island seems to be going through a kind of flattening of growth. I’m not exactly sure why. At a recent conference of regionwide Realtors, optimism was expressed by heads of state Realtor groups that, so far, home sales and prices, although they are certainly moderating, have held up fairly well. And that’s even considering the fact that in the fourth quarter of last year, sales in the Northeast, unlike for the nation, declined for both new and existing homes. But ’06 was viewed by this group as proceeding fairly well. There is some evidence of tight labor markets for certain skilled jobs. We have in one of our advisory groups a CEO of a software firm that does software and consulting services oriented toward recruitment for Global 2000 customers. She reported that their clients around the world are having difficulty hiring health care, technology, finance, and professional-level sales personnel. So she was seeing some real uptick in labor market tightness at the high end. And I must say that when you look at commercial vacancy rates, which have declined for Class A downtown and suburban space, not just in Boston but elsewhere, you seem to get the impression that maybe businesses haven’t started to hire yet but they do have plans to hire and they do have plans to hire at the high end. Finally, local measures of price growth remain quite contained, though headline CPI data indicate that the region has suffered more than the nation from high energy and utility costs, even with the quite mild winter. In assessing the reaction of contacts about cost increases, we heard a bit less complaining this time around. Maybe people have just given up complaining, or perhaps they have found ways—and I think this is probably more true than not—to offset high commodity and energy costs through rising productivity. The picture for the nation is even better than it is for New England. We, like the Greenbook authors, have been a bit surprised and pleased at the strength of the incoming data after the bump in the fourth quarter. David mentioned all the good reasons to be pleased—strong employment, solid consumer spending, not much evidence yet of a large drag from housing, solid business investment and production, very favorable financing conditions, faster growth than the rest of the world, and through it all, moderating headline and rather flat core inflation, whether you look at the CPI or the PCE, reflecting a leveling-out of energy prices and continued strong productivity growth. True, some luck has been involved, particularly the rather temperate winter weather in the Northeast, with its good news for overall energy and electricity costs. And the drop in new home sales may be a harbinger of worse to come. But the first quarter is over, and it was stronger than we expected, even allowing for a bounceback from Q4. Looking ahead, we agree with the general trajectory of the Greenbook forecast, as we have for some time. However, we have penciled in a somewhat greater effect in ’06 on growth from the expected falloff in housing—that is, an actual small decline in residential investment in every quarter this year and a related effect on consumption from a flattening of the growth in household wealth. So our GDP forecast for ’06 is somewhere between three- and four-tenths lower than the Greenbook’s, though ’07 is just about the same. We also see a smaller uptick in core inflation this year, largely because we see labor markets as having a bit more capacity than does the Greenbook, which we believe accounts for some of the moderation in wage and salary growth, at least by some measures. It may be splitting hairs to mention what in the end are small differences between Boston’s forecast and the Greenbook’s. After all, we don’t have the same number of resources in Boston focusing on making a forecast as you do here for the Greenbook. But I think we are at a point where small differences in outlook really do affect how each of us sees the policy choices. Now, what are the risks around this benign, if not rosy, outlook? Will they continue to revolve around growth that is higher than expected, prompted by a continuation of consumer strength—if, for example, housing takes less of a bite out of growth than we expect—and by financial conditions that could remain more stimulative as well? Indeed, when we look both at where we’ve been off in evaluating the outlook over the past couple of years and at our own Boston forecast, the surprises have mostly been the result of rising household wealth and a related set of very favorable financial market conditions. If these conditions continue, greater inflationary pressure than we expect could well result, given where we are in terms of resource utilization. And of course, new energy shocks are possible, given the possible geopolitical unrest and tight supply conditions. Alternatively, looking at risks on the other side, a greater-than-expected slowdown in housing, with a related larger pickup in saving rates, could put an unexpected damper on growth. Absent new energy shocks, this would act to moderate both growth and inflationary pressures more than expected. So we see housing as integral to both upside risks and downside risks. As I see it right now, the risks to the forecast appear relatively well balanced, maybe a touch to the side of inflation. That’s mostly because we’ve had a lot of recent experiences with surprises on the upside relative to growth, with rising energy and commodity prices, and overall resource capacity is hard to be very precise about. However, I really don’t see large upside inflation risks, mostly because of what we’ve seen in terms of ongoing productivity growth. It remains solid, and it continues to act as a powerful buffer. Indeed, despite the temporary drop-off in Q4, I have not seen or heard anything from my contacts that suggests the underlying business drive to be ever more productive will slow, or slow anytime soon. So although my assessment of risks has a small upside tilt and I am concerned about how expensive being very wrong on the inflation side would be, I don’t see the situation as significantly unbalanced." CHRG-110shrg50414--130 Chairman Dodd," Thank you, Senator Hagel. Very much. We turn now to Senator Carper. Senator Carper. Thank you very much. First of all, a question for Chairman Cox, if I could. I have been out of the hearing for a while chairing a hearing on the census. The census has had its share of problems in the last year or two as well, and I think we are getting that resolved. I told the Director of the Census if we can finish getting the census ready, we might bring him in and help address this issue, and he offered his assistance. A question for Chairman Cox. We talked a little bit earlier this week about short selling and the role that that has played in getting us into the jam that we are in today. And I know you have not just some thoughts but have taken a number of steps. Just a little bit of a Short Selling 101 for us, and what role do you believe it is playing, it has played in getting us to where we are today? " FOMC20070321meeting--169 167,MR. FISHER.," Well, Mr. Chairman, yesterday I indicated concern for the downside, even though I come from a District that is running a pretty warm economy. My soundings with business leaders and my interpretation of what I heard around the table yesterday lead me to conclude that we are perhaps one revision or one shock, including possibly a financial market shock or a credit crunch shock, away from a recession. I’m in favor of alternative B. I’m still concerned about inflationary pressures. I’m impressed by Tom Hoenig’s arguments on how powerful ethanol and other forces are in our society, but I think that’s adequately reflected in the last section. That is, if things changed and we had stronger economic data and, in my case, stronger verisimilitude, if not similitude, from the private sector, then it leaves the space to tighten because the last section is a balanced statement. I want to comment on what President Moskow and President Minehan pointed out about the second section. That’s the key point I’d like to dwell on—I think it’s wise to make a full stop after the word “quarters.” “Still favorable” implies doubt, and I don’t think that’s a wise thing for us to imply. Second, we do repeat ourselves on housing. Third, we can’t say with certainty that there is a gradual waning of the correction in the housing market; we don’t know. So, again, I would strongly recommend that you have a full stop after the word “quarters.” Finally, I will play my role of a broken record to suggest once again that we insert the word “global” before “resource utilization” so that we don’t continue to further the belief that we are oriented toward a closed economy. Those would be my recommendations, Mr. Chairman." CHRG-111shrg57322--122 Mr. Sparks," Senator, at the time things happened in the market and were accepted in the market that in hindsight look very different than they did at the time in the market. Senator Kaufman. I got two things out of these hearings. One, nobody did anything wrong, this was a natural disaster, like a hurricane hit. The mortgage market fell, and nobody knew it, and nobody forecasted it. And the second thing is that these things were just something that happened. Basically, I am just saying if you did some research into this--and I am sure had people in your organization--they were coming in. These loans were pouring into your--you were sucking them in, in order to sell them and make money, which is entirely acceptable. Just a little bit of research into how these things were being funded--by the way, let me ask you: Did you ever have any concern during 2006 and 2007 that there were an awful lot of home mortgage loans being securitized? "