Thank you, Mr. Chairman. In reviewing developments so far in 2004, it’s useful to characterize the economy as having faced a medium-sized aggregate supply shock during the first half of this year. This composite shock comprised various effects associated with the decline in the dollar, the increase in broad indexes of commodity prices, and the especially sharp rise in energy prices. The mixture of the supply shock and the ongoing cyclical expansion made the economic data particularly hard to interpret this spring. This Committee was generally more willing than outside forecasters or market participants to link macroeconomic developments to the influences in this composite aggregate supply shock, particularly the energy cost component. We argued on that basis that both the rise in inflation earlier this year and the soft patch in economic activity in June were likely to prove transitory. Both of these forecasts have worked out pretty well, supporting the view that shocks to aggregate supply were indeed the principal reason that inflation in the first half was higher and growth lower than had been expected.
Arguably, at this point, the effects of the supply shock may be, to a substantial degree, behind us. The dollar has been roughly stable all year, and the rise in import prices accordingly has decelerated. Broad indexes of commodity prices peaked in March. Oil prices are still rising, and their volatility as well as their level may have a damping effect on the economy. However, about three-quarters of the increase in near futures crude oil prices since late last year had already occurred by last May, and refinery margins have fallen. The waning effects of the supply shock can be seen directly in the moderation of core inflation and the rebound in spending in the third quarter, as we’ve already noted. Of course, further rises in oil prices or declines in the dollar are always possible. If no such development occurs, however, the ebbing of the supply shock will afford us increasingly greater clarity about the underlying strength of this expansion.
My own very tentative assessment is that the recovery at this stage is proceeding at a pace that is solid but somewhat less vigorous than we had hoped or expected. In particular, expansion at the current pace seems unlikely to create new inflationary pressures. Looking forward, the jobs data will be crucial. If job growth continues at the pace of the past few months, I think we would have grounds for concern about both business confidence and the prospects for household spending.
Overall, I think our strategy of removing accommodation at a measured pace has worked out well, not only in providing support to the economy and avoiding nasty surprises in financial markets but also in allowing us time to assess ongoing developments. I support our current plan of measured withdrawal of emergency stimulus. We surely can raise the funds rate today without doing damage to the recovery. I also see no need to change the basic framework of our statement. As we go forward, however, we should remain flexible in slowing or speeding up the process as dictated by incoming data. Financial markets are well prepared for this type of flexibility, and I believe it fits well with our declared strategy of removing accommodation at a measured but not mechanistic pace. Thank you.