Transcripts of the monetary policymaking body of the Federal Reserve from 2002–2008.

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 1½ 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?

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