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

Thank you, Mr. Chairman. Overall, the Tenth District economy continues to expand at a moderate pace. Activity has slowed somewhat, but our region is still probably doing a little better than the nation as a whole. One area in which we may be doing a bit better is housing, even though we have slowed just as everyone else has. Our surveys show that the inventories of unsold homes, although elevated, are less than they are in other regions of the country and that they have not accelerated much since last summer. Our real estate contacts have indicated to us that they think inventories will be coming down over the next few months because the slowing in construction is bringing them back into line. It will take some time, however.

On the manufacturing side also, we have a bit more positive information in the region than perhaps nationwide. While we have had a slowdown in areas related to housing and autos, the areas related to oil and gas, railroads, commercial offices, and high-tech equipment in the District are generally noting strong and even increasing demand, and we’re expecting those businesses to expand their operations accordingly. Some of our machinists and machine manufacturing organizations have actually seen some fairly strong growth, and their six-month outlook is also strong, especially in the export sector. Energy activity has remained strong in the District, despite some declines in our mountain region, where costs of drilling are higher, and that has caused some reduction in rig count. Other areas in the Oklahoma panhandle and so forth are really going quite strong.

Consumer spending remains solid, and early holiday returns have generally been quite positive. Mall managers in the District’s cities reported solid traffic after Thanksgiving, and we’re off to a very good start for the December holidays. Labor markets also remain fairly good in the region, and as others have reported, our demand for skilled labor is really quite good, and finding individuals to fill positions is difficult right now. However, a couple of pieces of anecdotal information offset that a bit. In the past couple of months, the temporary hiring area has had a slowdown in their sales growth, which surprised the chairman of our board of directors to some degree—I don’t know whether he mentioned this last week when he was here. Also, a couple of major trucking firms, while not saying that business is bad or anything like that, are saying that business is noticeably slower than it has been in other such holiday periods. Whether or not it’s packaging they’re not willing to say, but they are saying that it sure is slower.

On the national outlook, I don’t have any real disagreements with the Greenbook in that we see growth to be below potential. What potential is may be a question. However, we do see growth below potential but returning gradually over 2007 into 2008. Obvious risks to that forecast are, on the downside, housing and, on the upside, perhaps some strength in foreign demand. We have seen the latter, as I mentioned, in our manufacturing sector, and I think it may bring some strength to the economy as we look ahead.

On the inflation front, our outlook is for inflation to come down gradually—we continue to think that monetary policy is slightly restrictive—and, with that, inflation numbers. For example, core CPI inflation would come down from 2.8 percent to 2.5 percent in ’07 and perhaps to 2.3 percent in ’08; the core PCE would average around 2 percent over 2007 and 2008, falling from 2.1 to 1.9. Those are obviously rough estimates, but they are showing the trend. The risks, of course, are in what happens to energy. On the other side, frankly, is what happens to the dollar because, if that continues to go down, it would create some upside inflationary pressures that we’d have to think about and deal with as we go forward. So with that, I will stop and wait for the policy discussion for the rest of my comments. Thank you.

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