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

Thank you, Mr. Chairman. Well, I’m last in this line, and I’ll try to be brief so that we can get to dinner soon. I do see signs of stabilization in the housing market, and the way to think of it in terms of spillovers is that we do expect some spillovers through the natural effect of weaker housing on aggregate demand and on wealth. But we’re not seeing anything out of the ordinary or a persistent pattern, and that gives me more confidence that nothing really bad is going to happen here. My view is that the risks to the downside have decreased substantially. Also, the tone of the recent data actually indicates that what is happening concerning aggregate demand is stronger than we would have expected. As a result, I’m a bit more optimistic than the Greenbook in terms of what is going to happen next year with aggregate demand. Actually, I see, if anything, a little more risk to the upside, so I slant a bit in that direction.

The inflation numbers have been very good recently, and one view is that they are just temporary blips in the data. I tend to be a little more sanguine here because I think that there are good reasons for inflation to gravitate toward what are solidly anchored inflation expectations. That has been very important in terms of the cycle and is one reason that I’m a little more optimistic than the Greenbook on inflation. I do think that inflation expectations are strongly grounded around 2 percent on the PCE deflator. As a result, I expect us to go to 2 percent inflation over the next year and then stay there but not go below there. I don’t actually like to think of this in terms of “persistence.” It is one reason that I’m unwilling to think that things will get better than that. But I do think that we will likely have a more benign path of inflation than we might have thought earlier.

Even if you think that there’s a more benign path to inflation, which I’m willing to consider though we’re not sure about it, it is still true that aggregate demand has blipped up recently. That is an indication that the neutral real interest rate has moved up, which is very much reflected in the Greenbook assessment. That’s important because, even if you’re happy about what’s happening with inflation, you have to be more worried about the fact that the economy is going to be stronger. That does have some implications for the way we think about policy going forward. Thank you, Mr. Chairman.

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