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

Thank you, Mr. Chairman. I concur with the view that we face a very serious situation. In most respects I agree with the Greenbook baseline projection, with the reasoning that the Board staff used to arrive at the projection, and with their view that the risks to growth are to the downside. Like the Greenbook projection, my projection is heavily influenced by judgments that we are bringing to the projection from forces that are not captured by our models. The magnitude of the judgmental adjustment has become strikingly large, as we talked about earlier, and I realize that, if one wanted to be a skeptic about the Greenbook baseline, one would have to look no further than these assumptions and question their significant influence on the outlook.

But I am not a skeptic. During the past few weeks, in our Bank we have stepped up our contacts with business people from large, medium, and smaller businesses, bankers, and local government officials. We have been asking them to tell us not so much what they think and feel but what has actually happened to their order books, production runs, and account receivables and what actions they are taking as a result. It suffices to say that the feedback about the environment was overwhelmingly negative. Respondents say that their situation has gone either from good to bad or from bad to worse, and I want to share just two anecdotes that I think capture the essence of what we are facing—one of them from a business perspective and the other from a consumer perspective. One of my directors is the CEO of a company that produces and sells forklift trucks all over the world. He reported last week that his sales are down and orders have fallen off dramatically, and he expects to be announcing some layoffs soon. But what was making a greater impression on him is the fact that orders for the forklift parts have fallen off as well, and this tells him that the warehouse operators have cut back on the use of trucks that they already own. My second story concerns the owner of a body shop that is located in a solid, middle class community. He told us that he was doing record business all year until last month, when business just went dead. He said it is not that people suddenly don’t need auto repairs, but in fact, they are collecting the insurance money and not fixing their cars. They want the cash and they don’t want to pay out the deductible.

Stories like these convince me that the Greenbook baseline is on the right track. I do part company with the Greenbook in one respect—namely, the longer-term inflation outlook. I think it is quite likely that we are going to experience some costly reallocation of resources across some sectors of the economy. Finance and construction are two obvious examples. Going forward, I think there is reason to think that fewer workers and less capital are going to be employed in these sectors. The costly adjustment is going to be characterized by slower productivity growth, higher trend unit labor costs, and a smaller output gap than would otherwise occur, leading to somewhat less disinflation in the outyears in my projection. Nevertheless, with output and inflation expected to decline sharply over the coming quarters, I think it is essential for us to be thinking about the zero bound in conducting monetary policy in a low inflation environment, and I will address the magnitude, timing, and communication aspects of our monetary policy in tomorrow’s go-round. Thank you, Mr. Chairman.

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