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

Let me first comment specifically on our consumption forecast and the larger question that we raised. Dave may want to add some comments. With regard to our consumption forecast, as I had mentioned and as we suggested by the alternative simulation that we showed in Part 1 of the Greenbook, clearly the unexplained strength that we’ve been seeing in consumption spending in the second, third, and fourth quarters is an upside risk to the forecast. We’ve carried some of that through into 2007, as we noted in the Greenbook and I noted in my briefing, and we think that it will eventually correct. We base that forecast just on the historical patterns in the data. In the past when spending had gotten out of line with what we think of as being the fundamentals for consumption, it eventually corrected over time. There are a couple of possibilities. One is that we’ve got the timing wrong and that the correction is going to take longer, in which case there would be more consumption. Another possibility—and this goes back to the point Bill made—is that we could be wrong with regard to income growth. That might be revised up, and we will find that a lot more income growth is out there. Now, taking our forecast rather than the alternative simulations at face value—yes, we are slower than the FOMC. I suspect that part of the reason may be that the staff has a lower estimate of potential output growth than most members of the Committee probably have in their minds; we can’t know for sure, but I suspect that it probably goes a good way toward explaining the difference.

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