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

Thanks, Mr. Chairman. I see the economy evolving very much along the lines of the past couple of Greenbooks, particularly the ones since I’ve been here. The staff is to be very highly commended: They pointed out that outcomes were going to be weaker than other forecasters thought, and they really did get it right. Now, I have promised Dave that I wouldn’t jump on him when they get it wrong, and today I’ll be nice in the other direction. I think their forecast has been very useful in terms of the numbers.

In fact, I think we’re seeing the economy evolve very much along the lines that we discussed at the past couple of meetings. There really is not all that much new. I think there’s a smidgen more weakness on the real side, but it doesn’t alter my basic view that the economy is evolving along the lines of having slightly below potential GDP growth. I don’t see any indications that we will have big spillovers into other sectors from weak housing and motor vehicles. In that sense, there’s a slight concern about a little weakness, but the right word is I guess a “smidgen,” not a whole lot.

I see that inflation pressures are also very similar to what they were at the time of our last meeting. Inflation is likely to decelerate to somewhere around 2½ percent in the core CPI and 2 percent in the core PCE. Part of the reason I believe those numbers is that the nature of the output paths we’ve talked about is consistent with them, but I also think that we have anchored inflation expectations around those levels. I don’t like to use the word “persistence” the way other people do. I think of mean reversion to expected inflation—and very likely that’s where inflation will be heading, given the paths that we see in terms of the economy and the forecast from the Greenbook. I see the risks to forecast inflation as fairly balanced. The good news is that compensation is not as scary as it was. But the bad news is that the labor markets are very tight, and we’re just not quite sure what the implications of that are going to be. So my view is that we have a bit greater uncertainty, not a whole lot, so that we need to be very vigilant on inflation because it is too high, labor markets are tight, and there is still some question about how quick the mean reversion to expected inflation will be. We also need to be vigilant about real output. There is a bit more certain information coming in, so I think we have to watch both inflation and output.

The last thing to mention is the yield curve. I did some of the research on yield curves in recessions, and I do not think that the yield curve is providing much information at this time, exactly for the reasons that Governor Kroszner and others have discussed. I think there are special reasons that the term premium is extremely low. There is always that nice little table of the yield curve and recession probabilities, but you notice that I haven’t mentioned it, and I’m not going to mention it in the future. [Laughter] Thank you very much.

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