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

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 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.

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