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

Many of you know I have an upbeat personality—some might actually say loud—but certainly upbeat. The way I look at the forecast and the situation with the economy is quite positive in the sense that what we’re seeing, really, is a return to normalcy and a more balanced economy. The excesses in the housing sector seem to be unwinding in an acceptable way, so I think it is quite reasonable in terms of the Greenbook forecast to think that the spillover here is not going to be a big problem because we’re actually moving resources from a sector that had too much going into it, into sectors that need to have more resources at the present time. So in that sense, I’m actually quite positive. The other thing that I am quite comfortable with in the Greenbook forecast—though, clearly, there’s uncertainty—is that we’re going to see a decelerating core inflation rate. Furthermore, when we look at inflation expectations, they seem to be very well contained and seem also to have responded well to the pause at the last meeting.

However, I should say that, although we’ve seen that inflation expectations are well anchored, there’s a question about whether they’re anchored at quite the right level. They seem to be anchored somewhere around 2½ percent on the CPI, and that is probably with a differential between the CPI and the PCE of about ½ percentage point, or 50 basis points. It still seems to be somewhat on the high side in terms of what many people on the Committee have expressed is their comfort zone. So I think that is a concern. There is a significant probability that things may not turn out so rosy on the output front—we should have a concern that things could go somewhat wrong in terms of the housing sector. If that happened, we might see much lower output growth. There is a reasonable probability of recession. It’s mentioned in the Greenbook. I think your numbers are quite reasonable. So in that context, we could actually have lower output, a wider output gap, and some actual deceleration of inflation. I agreed very much with the conclusion that you came to because it’s reasonable to think that the long-run inflation we’re moving to is around 2 percent unless we get one of the scenarios with a lot more softness. That the deceleration is not going to go much below the Greenbook forecast of around 2 percent by 2008 does cause me a bit of concern.

I’m not sure that I would describe the risks as unbalanced. For me, in terms of a forecast, probably I would be comfortable saying they’re balanced. However, I think inflation is too high in the forecast and, in that context, does require much more vigilance. Of course, that will be reflected in the discussion later today. Thank you.

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