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

Mr. Chairman, last time I reported a sense that the international economy was hot, that our domestic economy was cold, and that the regional economy of the Eleventh District was just about right. I concluded my comments by saying that we were in treacherous waters in terms of the U.S. economy, navigating between the Scylla of inflation and the Charybdis of a slowdown in growth. Like President Yellen, I don’t have much change to report, but I do want to comment in very brief order on a couple of aspects that my two predecessors commented on.

As far as the international economy is concerned, we see continued expectations for higher growth and a different mindset beginning to set in. You saw that, I believe, in the French elections. Even Italian consumer and business confidence is at a ten-year high, or six-year high depending on which measurement you use. You also see it reflected in various measures of port congestion, charter rates for ships, and profit contributions to U.S. multinationals. By the way, the contacts that we talk to, Bill, are making a real effort to ferret it out and have a sense that there should be more push or oomph from abroad than they are getting domestically. You still have to prune those reports carefully. You see it in commodity prices. The bottom line from the standpoint of the Dallas Fed is that we’re seeing a tightening of capacity utilization in the rest of the world, which is somewhat vexing for U.S. operators because it limits our firms’ abilities to cut costs by shipping production abroad. Nonetheless, the rest of the world economy remains hot.

I have just a couple of comments about the United States. When I talk to the rails, the airlines, the express delivery logistic companies, the middle-income consumption sectors such as retailers, or those that sell into those sectors, I am hearing increasing reports of weaker demand and lower expectations than I was hearing at the last meeting in all but one sector, which is the entertainment sector. Advertising revenues for the networks continue to stay high, and by the way, visits to theme parks are at a record high, driven largely by wealthy foreigners who are finding them to be a tremendous bargain. On the housing front, I have been bearish—more bearish than anybody at this table. I remain so, and like President Yellen and, I believe, President Moskow, I am more concerned than I was before. We can go through the numbers, but I think it is best expressed by the CEO of one of the five big builders, who said that in March he was arguing internally with his board that the headlines were worse than reality and now reality is worse than the headlines. There is significant inventory, and the qualification of buyers is becoming a very vexing issue. I suspect that this situation has yet to run its course. I am also hearing continued reports, despite layoffs and a slowing economy, of continued tightness of highly skilled labor and continued price pressure on that front. Finally in terms of the domestic economy, we are benefiting from a weaker dollar in terms of tourism flows and also the high-end retailers, most of which are in President Geithner’s District and one—Neiman Marcus—in my own District. Other than that, I have nothing to add on the U.S. economy.

I want to talk about inflation for a minute. The data—whether core PCE or overall, core CPI, or even the trimmed mean, which we focus on in Dallas—seem to be indicating a tempering of pressures. So we have some meat on the bones of our expectation, or I should say our hope, that some deceleration of inflation pressures would manifest itself. But in talking to my business contacts, I would say—if you will forgive a terrible reversal of biblical scripture—that, though the flesh may be willing, the spirit is weak. What I mean is that even though they would like to believe the numbers, in terms of their own behavioral patterns and the way they are positioning their management, they feel enormous threats to their margins coming from slow volume growth and coming from increasing cost pressures in that they allocate tasks globally. And their first reaction is to see how they could change the pricing structure domestically. Chemicals are reporting that a 3 to 5 percent price action that was taken at the beginning of the year is sticking. My contact from a large producer of food products said that they are shifting their overall model away from focusing on unit-volume expansion to pricing, and even a ubiquitous brand like Starbucks is moving away from the number of transactions to figure out how to price more aggressively or to restructure the size of their containers, as are many food product producers. The large consumer paper products reported that they were budgeting zero percent price inflation at the beginning of the year and have redone their budget to price at 3 to 4 percent. If I had to pick a word, Mr. Chairman, in terms of the mood of our companies regarding the U.S. economy, I would say that it’s somewhat dyspeptic. It’s not a very pleasant mood. They feel a little indigestion because of the margin pressure that they’re getting and limited relief in terms of what they’re able to pull out in volume expansion.

I am in an unusual position of coming from what I believe, reading the Beige Book and looking at the data, is a District that continues to significantly outperform the rest of the economy, although we have slowed somewhat; yet when you look at the histograms, I have the lowest forecast for GDP for this year. So I am the most pessimistic at the table in terms of short-term economic growth, and on the inflation front I would just resort to a Ronald Reaganism, which is that we need to trust but verify. In short, I would not be surprised to see disappointing growth in the second quarter, much more disappointing than in the Greenbook’s forecast, nor would I be surprised to see higher core PCE inflation sustaining itself than I am hearing from some of my colleagues and from the staff. Thank you, Mr. Chairman.

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