I believe Bill’s point is that it guarantees a return to the investor.

Apparently the ability of the Department of Education not to make good on the guarantee is very rarely exercised.

President Lacker, it’s a complicated security, but it’s wrapped by a guarantee that ultimately the Department of Education will make good on to the tune of 97 cents on the dollar. There’s one little detail that is causing another piece of friction in the market, and that ...

We’re certainly aware of that. To my eye the numbers look astonishingly negative. For foreclosures, we have 2.5 million foreclosures this year and another 2 million foreclosures next year. We have a very bleak landscape built into the projection.

I don’t know what the story is with regard to permits that you’re mentioning. I do know that the cancellation rate of new home sales has declined a bit. Previously we were emphasizing that the high level of cancellations that the builders were experiencing was actually causing the ...

I don’t know what the OFHEO does to capture the quality of automobile that comes in the driveway. [Laughter] I suspect that there’s no adjustment for that.

We expect starts to stabilize next year, and that will be followed by a pretty considerable period of several quarters with house prices finally stabilizing. But we think that builders will look ahead and see that they’ve cut their additions to supply by enough to make even more rapid ...

I would just augment Bill’s comment with two other observations. There’s plenty of probability mass out in the tail. I think it actually is two-sided risk. We illustrated one side of that risk in our “severe financial stress” scenario. The other point I would make is that our ...

I don’t think so.

I guess I would push back on the premise that we don’t have a pretty significant adjustment in house prices built into our baseline. We have house prices as measured by OFHEO declining 7 percent this year and another 5 percent in 2009, and I wouldn’t anticipate any ...

The reason is that it operates like a classic supply shock, which presents monetary policy with just simply a less pleasant policy menu to choose from; and in the context of that costly sectoral reallocation, the economy is running closer to its productive capacity. Let’s see. I lost my ...

No. One of the facts that we learn from microeconomic data about, for example, job flows is that there is always a huge, astonishing amount of churn—job destruction and job creation—just astonishing; and that’s true even in normal macroeconomic times. So the background radiation level is not ...

May I just augment my earlier answer? I spoke about the nonresidential building sector. Another factor taking down overall nonresidential spending is that the lower energy price trajectory reduces our expectation for drilling and mining expenditures, which have also fallen.

Yes.

We don’t quite understand why this sector seems to have resembled the cartoon character that keeps running along when we think there shouldn’t be any support underneath it. [Laughter] We are staunchly negative about the second half for this sector, and that view is informed by the precipitous ...

By our highly imperfect measure of margins, which we see through the filter of the national income and product accounts, margins at this point are somewhat above the average over the past 30 years, and we have them coming down for the nonfarm business sector. We have them coming down ...

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 ...

I would make two remarks regarding that. First, quantitatively, in fact, the output gap doesn’t play a very large role in shifting our projection of inflation. If one does a sort of retrospective decomposition of the factors that were generating inflation over the past ten, fifteen, or twenty years ...

It relies on a variety of considerations, but ultimately I would say it relies on inflation performance. One way that we have of assessing whether our gauges of resource utilization are moving off track is to look back and see whether our inflation models that incorporate those measures of resource ...

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 ...

Excuse me. The core PCE price index for the first quarter was revised up, exactly as we had been expecting on the basis of the PPI revision. Thank you.

Thank you, Mr. Chairman. The BEA published this morning their so-called final estimate of GDP for the first quarter. Top line came in slightly lower than we had been expecting in the Greenbook—0.7 percent compared with the 1 percent that we had been expecting. There were small misses ...

Yes.

In my conversations with some of the TIPS analysts on our staff, they suggested, as consistent with your statement, that 2003 was, roughly speaking, the period in their view in which the TIPS market emerged into the modern era with some tighter pricing.

Yes, that is right.

Well, there is a picture in the lower right panel of chart 1 in the Bluebook.

I think we view the current constellation of expectations measures as not providing much impetus either upward or downward on inflation—it is just not going to be an important factor shaping the contour of inflation in our view.

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 ...

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 ...

The spending side of the national income and product accounts is really the unspoken implication.

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 ...

Thank you, Mr. Chairman. Just very briefly, these data came in, in most respects, pretty close to our expectation. I would note that the productivity figures for the second quarter are built on the output data that were incorporated in last week’s advance GDP number. We expect nonfarm business ...

May I just briefly mention the staff view? Our research on structural labor force participation is laid out in a Brookings paper that is just about due for release by folks who are our labor specialists. That paper sets out in considerable detail our work in this area.

Slowly.

Oh, have we seen anything like this outside of a recession? I don’t know the answer to that. I would mention, however, how strong residential investment was through the recession and how well sustained it was and how we all remarked on the strength with which that sector persisted ...

Now, let’s see. I can’t read my own notes. The second question is?

Yes; indeed, faster than spending, and that’s how we generate the upward motion of the personal saving rate.

Let me take those concerns in turn. First, with regard to the speed of adjustment of consumption to potential GDP—perhaps it is ironic, but our assumption is that we are the most ignorant ones in this little morality play; that households and businesses have been aware of the slower ...

The predominant factor in generating those strikingly low employment gains is our projection for trend labor force participation over the projection period. With the aging of the workforce, we think that the trend is now turning decidedly downward, not for cyclical reasons, not because the labor market presents atypically unappealing ...

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 ...

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 ...

Now that I’ve had a chance to take a breath—another factor that obviously is critical is the behavior of inflation expectations. As you know, the Survey of Professional Forecasters long-term measure has been flat, immovable, at 2½ percent. The University of Michigan survey—which we show in the ...

Broadly, I don’t disagree that the acceleration in consumer prices is broadly based. It is sensitive to sample period. Michael Kiley’s briefing yesterday to the Board touched on some of the same issues and presented an exhibit that displayed the median CPI as constructed by the Federal Reserve ...

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 ...

I’m not sure I’d use the word “agnostic.” We think that both the output gap and the unemployment rate gap are pretty small. Given how flat the Phillips curve is, we think they’re very slight influences on the performance of inflation over the remainder of this year ...

As I mentioned earlier, the predominant thing that’s causing core PCE to decelerate next year compared with this year is the flattening out of energy prices. Resource utilization is a tiny influence at this point.

We’ve had an error in Okun’s law in the levels relationship between the output gap and the unemployment rate gap. The predominant explanation for what you’re talking about is that we have the relationship between the output gap and the difference between the unemployment rate and the ...

Yes.

A substantial part of the pickup since then by our calculation is due to the energy-price pass-through. My recollection is that it’s on the order of 0.6 or 0.7 percentage point.

There are many ways to do this accounting. But on one accounting, the falloff that we have in core inflation in 2007 relative to 2006 is due entirely to the cessation of the indirect effect of energy prices passing through into the core. If you look at the top right ...