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

Yes. And where we saw it most clearly was when it came time to look at the contribution of those numbers to GDP. In the past, there were those of us, such as myself, who were somewhat of a Cassandra regarding the external deficit, but we were talking tenths of a percentage point one way or another in terms of the effect on GDP. The notion that the effect would get swamped by the unanticipated ups and downs that would come along in the forecast period was always present, and the external sector didn’t seem to be creating a situation that would strike financial market participants as unmanageable.

This time, as we worked our way through preliminary runs of the forecast, the negative contribution from the external sector got up to be almost 1 percentage point of GDP. Well, we finally settled on something a bit smaller for 2006. But 1 percentage point of GDP gets one’s attention; in fact, ⅔ percentage point of GDP gets my attention. So the reason that this seemed an opportune time to call extra attention to that point is that, when we first extend the forecast horizon, as we have now into 2006, it gives us a longer time period over which these kinds of forces are having their effect. This is a very inertial process, so one has to look ahead more than just a few quarters to see its consequences.

We don’t know much else about 2006, so we don’t have information that would lead us to say, “Oh, a U.S. recession is going to cause imports to fall,” or “A crisis in Asia is going to cause capital inflows to be particularly high.” We don’t know what kinds of other random events are going to occur in 2006. All we’re seeing is this long-lasting fundamental process, and we’re seeing it very clearly. Surely, the numbers we’re forecasting right now for 2006 will not actually happen; I fully appreciate that. But they will be embedded in what does happen, and this is an opportunity to see them more clearly before the outlook gets complicated by other developments.

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