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

Thank you, Mr. Chairman. The economy from the perspective of the Fourth District isn’t materially different from the way I heard Dave describe national conditions. Manufacturers in the District generally report modest but steady growth. In particular, metals producers and their suppliers report strong orders and production. My business contacts are telling me that capital investment is a bit soft, but it should not at this point pose a serious problem for the overall economy.

I’ve had several meetings with homebuilders throughout my District in the past few weeks, and they confirmed some of the information that we see in the national data—sales are still very anemic, and the inventory of unsold homes remains quite high. They also shared some information that is not easy to pull from the national indicators. For example, sales of starter and lower-end homes are particularly slow, in part because lending standards have been significantly tightened. This means that there has been a shift in the composition of homes sold toward the upper end of the price spectrum, causing the reported sales-price data to be a little inflated. The builders I spoke with assure me that price discounts are occurring and that the discounts have been substantial. Likewise, I am told that appraisers are increasingly being asked by lenders to do whatever possible to appraise the properties relative to current market conditions and to discount price information from the historical comparables. My contacts are also saying that the expectation that home prices are going to fall further has been keeping some buyers on the sidelines for now. I also hear that, when possible, residential contractors are shifting resources to nonresidential projects. Some nationally publicly traded home construction companies are completing houses and selling them for a loss in some markets just so that they can exit those markets more quickly. What I take away from my conversations with homebuilders and lenders is that the national data may not yet fully have caught up with the poor conditions in the residential construction sector and, further, those closest to the markets are betting that any semblance of a recovery is still a long way off.

This information had an influence on the economic projections that I submitted for today’s meeting. Like the Greenbook, which as a consequence of more weakness in residential construction has shaved an additional 0.5 percentage point off GDP growth in the latter half of this year, I have marked down my expectations for growth in 2007. My projection sees a little more growth relative to what I see in the Greenbook as we move into 2008 and 2009, although I do see slower economic growth as an obvious risk to my outlook. I’m especially concerned about the possibility of some spillover from the housing sector to the business investment outlook.

My inflation projection calls for a slightly more optimistic trend in core PCE than what I see in the Greenbook. I had difficulty endorsing a three-year projection that doesn’t assume that our policies are going to be positioned so that we eventually bring core PCE inflation back below 2 percent, if only just below. So my inflation projection represents my interpretation of appropriate monetary policy—namely one that will bring core PCE in under 2 percent. My economic projection is, therefore, based on a federal funds rate path that is very similar to the Greenbook baseline, a constant path over the projection period; but I have assumed a slightly more optimistic price path for oil. Given Karen’s comments this morning, I am a little more comfortable with that assumption. I also have slightly more potential than the Greenbook does. So with these two assumptions, I do have a slightly lower path for inflation than the Greenbook does. Obviously, these assumptions are not made with great conviction, and inflation may continue to track just north of 2 percent. If it does, we do risk conditioning expectations to this level, and that is an outcome that I would not welcome.

I had an opportunity just a few weeks ago to spend a day with Paul Volcker, who visited Cleveland. On the subject of inflation, he reminded me that in his experience big inflations start out as a tolerance of modest inflations. Once inflation expectations drag their anchor a little, it’s difficult and costly to get them re-anchored; and this, I think, remains the biggest risk that we face as a Committee. Thank you, Mr. Chairman.

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