Thank you, Mr. Chairman. First, I want to thank the staff for including chart 6 in the Bluebook. As several of us suggested last time, it’s a good addition to have for every meeting.
Since August, policy has been on hold for us to assess the inflation situation and the growth outlook, and at this point I think we would continue the period of assessment until the situation is clarified further or something changes. Today I would go with alternative B. Listening to the discussion, I still come down for the wording in alternative B. I would go with exhibit 5, which is the Christmas-colored version, and I would delete “than anticipated.” I think it does read better that way. Don, in answer to your question, I think the markets would read this as being slightly weaker than history. So I think that’s appropriate. I can see the argument for alternative C: It is much cleaner, and it relates directly to what we said last time, with a slight modification. However, there has been a slight weakness in the data, and I think it’s reality, and we should recognize it. In terms of whether “weaker” is weaker than “subdued”—actually the words are “somewhat more subdued” and “slightly weaker.” [Laughter] On that basis, I’m comfortable with “slightly weaker.” However, stepping back during this period, I think it is useful to consider the kind of information that would lead us to change the policy rate, as several people have talked about here. When we assess the inflation situation, although members of this Committee may have different views of price stability, I think there’s a clear consensus that core inflation has been too high. In our decision to pause, too, there’s a consensus that we can be patient, at least for now, about the time frame for core inflation to fall. The question is, “How patient?” We expect that inflation will gradually come down, but the corollary to this is that core inflation should not noticeably deteriorate over the near term. In the medium term, we should be more clearly on a path to lower inflation. Of course, steady progress would be best, but what we all want is at least to be on the path. The implication is that we must be willing to firm policy if core inflation increases in the near term or the medium term or if it fails to be on a clear trend toward price stability over the longer term.
When we look at the growth side for the longer term, I think the consensus view is that we want to carefully monitor growth and resource slack, being mindful of the downside economic risk that we talked about and the Chairman summarized. We talked about the bimodal economy, but we also must remember that sustainable growth rates are likely lower. The Greenbook talks about 2½ percent, a lower number than what we’ve been accustomed to in recent years, and the implication is that we could be facing increasing resource pressure at GDP growth rates that were previously viewed as below potential.
So the bottom line is no change in policy today. Inflation risk still predominates. I’m nervous about the expected slow improvement in inflation, but I admit that the jury is still out on whether it’s a problem. The economic fundamentals still suggest a return to potential growth rates by the end of ’07, but we have to be mindful of the adverse changes in the growth outlook as well.