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

To answer the latter question: If we really threw away the information in the nonfarm business compensation that is taken from the national income accounts and focused solely on the ECI, we’d have a lower inflation forecast. In our overall price inflation projection, we use a variety of models. I talked about this a little earlier in the year when we got that big upward surprise. We have some models that just say, “Don’t pay any attention to the labor market data: They’re all so bad and they have so little predictive content for prices that you’re better off just circumventing them altogether.” Now, we have never felt comfortable that the right thing to do was to give zero weight to the labor market side of things; so in the projection we have looked at some of the models that incorporate those effects and used the ECI in some models and compensation per hour in others. Again, if you went totally with the nonfarm business compensation per hour in those models, you’d probably be at or maybe slightly above our current forecast. So I think there’s a lot of uncertainty here.

One of the things that we wanted to signal was that there are huge amounts of uncertainty about what the NAIRU and potential output are. We show a simulation with a lower NAIRU. In constructing our forecast, we have to take a stand because we have to show you a forecast that is moving an economy back toward equilibrium. Sitting in your chair, however, you would obviously want to view this from a risk-management perspective and understand that our ability to be very precise there is quite weak. The recent compensation data put back on the table the possibility that we’re getting a signal from the labor market that not as much pressure is coming from the labor cost side as we had earlier thought.

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