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

Thank you, Mr. Chairman. The Fifth District’s economy has grown at a somewhat faster pace in recent weeks, reflecting a solid uptick in manufacturing. Preliminary results from our September survey are showing increases in all manufacturing measures, with a particularly strong performance of shipments and new orders. The six-months-ahead outlook measures are also coming in broadly stronger. Growth in the District services sector continues at a moderate pace. Retail sales remain somewhat sluggish, however, held down by soft big-ticket sales, which we understand were mainly in auto and building materials. The residential real estate market shows signs of further cooling, especially in Maryland and Northern Virginia. As has been the case for several months, however, real estate activity varies widely across the District, with the Carolinas, which were less affected by the boom, reporting continued strength.

Labor market conditions remain taut, with job growth generally reported to be solid. Complaints that skilled workers are hard to find continue to be heard, and survey evidence suggests continued wage pressures. Recent reports regarding District price pressures generally tilt toward the firm side on balance. Early reports for September for the manufacturing sector show a notable acceleration in both current prices paid and current prices received and large increases in six-months-ahead expectations for both. Reports on service-sector prices are more mixed. Our respondents from the retail sector report moderation in current price trends but see more-rapid six-months-ahead price gains than they did last month. Our other service-sector firms report no change in current price trends but expect some moderation in coming months.

Regarding the national economy, since our last meeting we have received largely positive news pertaining to the outlook for consumer spending. There was a sizable upward revision to the current level of labor income, which improves the outlook for real disposable income growth. Lower energy prices should provide an additional, though one-time, boost to consumer spending. So on net I find myself, again, a bit more optimistic than the Greenbook on consumption.

The housing data certainly have been weaker than anticipated, and I now expect a somewhat steeper decline, as does the Greenbook. Forecasting this housing adjustment is particularly difficult because, as President Minehan pointed out, we have only one or two episodes for comparison in the post-Reg Q regime, and as David Wilcox pointed out, they don’t seem to closely resemble our current situation. I find this Greenbook’s more pessimistic outlook for housing itself plausible, but I’m still fairly skeptical of large indirect spillover effects on employment or consumption. For overall activity, I expect real GDP growth to be somewhat below trend, especially this quarter, but above the Greenbook through the end of next year.

My views on the inflation situation have not changed much since our last meeting. The lower reading on July’s core PCE was encouraging, and the easing of energy prices is clearly providing some relief on headline inflation. However, July’s lower numbers were not particularly broad based, and the August CPI report shows a significant rebound in core inflation, as President Fisher noted. While labor compensation numbers have been hard to interpret, they also appear to point in the direction of greater price pressures, which I take it to be the staff’s view. The downward movement in TIPS inflation compensation since the last meeting has been quite striking—more than 30 basis points at the five-year horizon. I’ve made a lot of comments on TIPS inflation compensation spreads in past meetings, and it’s not clear that this downward movement signals much of an improvement in the outlook for core inflation in the near term. I pointed out earlier that the Bluebook shows that the fall in near-term inflation compensation has occurred mainly at a three-month or four-month horizon. Compensation for the period running from October/November this year to the same period next year has hardly fallen at all, and this to me suggests no significant change in the rate at which the public expects core inflation to moderate over the next year or two. Moreover, one-year-forward expected inflation rates five and ten years out have not fallen much, so I do not view the recent fall in TIPS inflation compensation as terribly comforting. Overall, regarding inflation, I’m quite apprehensive about waiting for core inflation to decline as slowly as it does in the Greenbook or about letting a new reduced-form model do our work for us.

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