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

In terms of the rationale for increasing potential going back over history, some of that, as I think I mentioned, was just that actual productivity performance has been better than the last time we reviewed this in the summer, and we are taking that on board. That is part of the motivation. Another part of the motivation is what we perceive is a somewhat growing tension between the way we saw labor market slack developing and the way we were looking at slack in terms of the product side through the output gap. We had arrived at a point this round where those tensions had increased over time, and this revision mitigates some of that tension, so those two things are in better alignment with each other. We also were taking the opportunity, when we opened up, to look at some other technical factors we used that get involved in going from, say, the nonfarm business sector to GDP, that sort of thing, and those also pushed us in the direction of being a bit more optimistic on growth going back. So we did view it, if you look at it in terms of product markets, as that there was more slack now than we had previously been thinking and that there was also more slack in the labor market—but that was from the actual data that came in. Going forward, we have more slack. We have more slack just in the labor market because we have revised up the unemployment rate. With that, and taking on board these assumptions of potential output, we have more slack on the output side.

Now, one question would be, to address your second question, how would things have changed if we hadn’t taken that on board? Well, going forward, we would have written down a lower GDP forecast because what we are really saying here is that it is not that households and firms have changed their perceptions; this is just us, the poor econometricians, trying to infer what is out there in the real world. So the poor econometricians have inferred that potential output is growing stronger. We have to look at it and say, “Well, so the prospects going forward for permanent incomes, corporate earnings, and that sort of thing, will be stronger, and that implies basically a one-for-one ratcheting up.” If we had said, “Well, no, potential output growth going forward won’t be stronger,” we would have revised down the GDP growth rate with it, so there wouldn’t have been any change in the output gap from that. That would have been shifting one for one. It wouldn’t have changed our sense of what resource utilization would be going forward.

Keyboard shortcuts

j previous speech k next speech