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

Mr. Chairman, I’d characterize the Tenth District’s economy as quite healthy right now. As you know, the Tenth District has benefited perhaps disproportionately from the rise in energy prices over the past few years, and this is providing considerable stimulus to the local and state economies in the District. We are also seeing strong manufacturing activity driven by exports of District products. Although the housing markets across the District can be characterized as soft, we have no reports of serious declines in prices anywhere in the region. Retail sales, excluding autos, also are holding up pretty well for us. The other soft spot for us is agriculture, and that is tied pretty much to the drought that we continue to experience.

Regarding the national economy, the economic information received since the last meeting confirms a further slowing of economic activity this quarter. Moreover, weakness in housing and auto production suggests that the fourth quarter could be a little bit weaker as well. At the same time, we have recently experienced the sizable and largely unexpected declines in energy prices that we have talked about here, which, if maintained, could provide some stimulus over the balance of the year to offset some of that weaker information. Currently, I expect growth to slow to a range of 2 percent to 2½ percent in the second half of the year and to rebound to above 2½ percent or to 3 percent next year. Generally speaking, I am more optimistic than the Greenbook, especially with regard to housing and consumer spending, and I’m not nearly as pessimistic as the Greenbook on potential output.

As to housing, we are in fact, as all have noted, squeezing out of that sector the speculative excesses that developed with the low interest rates of recent years—and doing so is unavoidable if we want to correct the sector. The adjustment process has obviously been painful for some, and it has not yet run its course. However, we perhaps see ourselves getting a little closer to the bottom than we might think right now, and that’s related to the fact that credit remains available at reasonable rates for most homebuyers, as suggested by the recent information on mortgage applications. So, yes, it is painful, and yes, we are going through it; but I don’t think it is necessarily long lasting in terms of the consumer’s position.

For the consumer more generally, the situation is obviously mixed. On the one hand, consumption will likely receive less stimulus going forward from the withdrawal of home equity, and with slower house-price appreciation, wealth effects will likely be lower as well. On the other hand, higher labor compensation and lower energy bills should provide support to the consumer in terms of confidence and the ability to spend. Overall, I continue to believe that there are somewhat more downside risks than upside risks to the outlook over the next quarters, but I think we are moving in a fairly consistent way as far as GDP growth goes.

Finally, let me provide my perspective on the inflation outlook. My overall views on inflation have not changed materially since the last meeting. I continue to expect core PCE inflation to moderate from about 2.3 percent this year to 2.1 percent next year on the course we have right now. The big negative on inflation, of course, is the higher trajectory for labor costs, which has been mentioned. Although the recent revisions to compensation are perhaps somewhat unsettling, such concerns are partly offset by the recent more-favorable monthly inflation numbers and by the significant fall in the prices of oil, gasoline, and natural gas in recent weeks. Although the recent inflation data have not caused me to alter my inflation outlook, I am in one sense more confident in the forecast of moderation than I was a month ago or so. On balance, as we look at all this, I agree that we still have some upside risks to inflation that we have to remain aware of as we look to the policy discussion ahead. Thank you.

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