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

Thank you, Mr. Chairman. Maybe I should speak faster! In this round, the reports from our Seventh District contacts were unusually varied. Many were quite upbeat; others were reminiscent of last year, when uncertainty over the strength of the expansion caused firms to delay investment and hiring. Hence, while I think we’ve moved out of the soft patch, we do not yet have a clear sense of how robust conditions are going to be. On the upside, some industries continue to do very well. These include printing, magazine advertising, paper packaging, and a wide variety of heavy machinery producers. Indeed, industry reps at this month’s International Manufacturing Technology Show in Chicago said that business was as good as it has been since 1998. In contrast, producers of consumer goods were more subdued. As you know, automakers are now less bullish and are increasingly concerned about their inventories. They plan to offer even higher incentives and to be very conservative about production. Reports on consumer spending were also mixed.

Reports on hiring reflected the varied levels of optimism across sectors. Many manufacturers outside the automobile sector are adding hourly workers to their payrolls. But in line with Dave Stockton’s comments, we’re once again hearing from our directors and other contacts that some businesses are uncertain enough about the strength of demand that they’re reluctant to add workers. The large temporary-help firms we spoke with said that year-over-year growth in billable hours had eased slightly, but they attributed at least part of the softness to transitory factors such as the hurricanes. Furthermore, one of them reported that wage gains had moved a bit higher across the board.

Nonetheless, the inflation outlook remains subdued. Of course, some input costs are still quite high. In response, some of our contacts are changing their purchasing strategies. Many users of steel, for example, think prices will come down substantially, so they’re not building inventories at the current high prices. And many are switching from long-term fixed-priced contracts to ones that guarantee future supply but with the cost linked to the price prevailing at the time of delivery. Downstream, most firms have been unable to pass higher costs on to consumers.

Turning to the national outlook, last time the two big questions facing us were whether inflation had picked up and whether the soft patch was temporary. We now feel better about inflation, and as I noted at the outset, we seem to have emerged from the soft patch, but we don’t have a clear picture of how big the improvement will be. Job growth has not yet shown the kinds of gains that one would expect if growth were running above potential, and I am concerned that during the intermeeting period we heard renewed talk about increased uncertainty making businesses hesitant to hire and to spend. There’s a chance that this risk aversion will become embedded and take us into a more extended period of subpar growth. But there are reasons to be optimistic. Financial markets are not pricing in heightened risk, productivity trends and accommodative monetary policy are supporting growth, and quite a few of my contacts are very upbeat about their businesses.

On balance, we think that the mixed signals mean that the economy is growing only modestly faster than potential. Our forecast is for the output gap to remain sizable for some time and for inflation to stay under control. The question going forward is, How quickly should we remove the current high degree of policy accommodation? We still have a long way to go before the funds rate reaches neutral, so I don’t see any reason to deviate at this meeting from our plan to remove policy accommodation at a measured pace. But if we see signs of persistent sluggishness in the economy, then we might want to pause at some time in the future.

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