Thank you, Mr. Chairman. The economic indicators, as others have said, have been variable in the last few months. But on net they show continued expansion, though at a slower pace than in the second half of last year and the beginning of this year. And as Governor Ferguson just mentioned, recent surveys show that business attitudes, both at large companies and small businesses, while still positive, are a little less optimistic than they were last quarter.
I’d like to use a couple of anecdotes to throw on the table a few more hypothetical explanations for what may be happening here. One is that CEOs, even in meetings with stock analysts, sometimes are mentioning that their management teams have shifted their focus since June, when the final rules came out for Sarbanes–Oxley, to implementing audit adaptations and internal controls by year-end in order to be compliant with that legislation. Those activities take time that management normally would use to make decisions on business expansion. They don’t know what to expect with regard to their ability to comply with Sarbanes–Oxley, and we’re already beginning to see in some 10Q warnings by some companies that they may not be totally compliant by year-end. The reputation risk here is very significant for these companies.
Second, another interesting development—and I will cite the same Duke survey that Governor Ferguson did—is that while CFOs of large companies are expecting GDP growth to moderate to only 2.8 percent in the next twelve months, they still are anticipating earnings growth at their own companies of 13.4 percent on average. This gets back to a comment I’ve made in the past, which is that, in talking to CFOs, I realize that they still live in nominal worlds. And one of their reasons for caution in both spending and hiring is their concern about how they can deliver double-digit earnings growth to the Street when they see modest sales and very moderate inflation in the months ahead. The only way to get that bottom-line growth is to control expenses.
The other comment I’d like to make is that, overall, companies are stronger. One of the indicators I look at is the pattern of changes in corporate debt ratings. Worldwide, this will be the first year since 1998 that we’ve seen more debt ratings rise from below investment grade up to investment grade than we’ve seen go down from investment grade to below it. It has taken six years for that to happen, and it’s one of the reasons we’ve seen credit spreads come in.
The latest inflation data continue to show that inflation is moderating from the rates recorded in the spring—again with health care a notable exception. That moderating rate of inflation is one of the things that make me feel that the expansion is likely to continue, though at a modest pace. Therefore, I feel that the position we have taken—that policy accommodation can likely be removed at a measured pace—is still the appropriate signal to send to the market. That signal, I think, has helped to extend the expansion because it has helped the long-term debt market. As several of you have already noted, long-term debt rates have come down even though we’ve been raising the funds rate. And I think our credibility, as we move along this path, will keep capital within easy access and affordable to companies when they do have the confidence to make additional business investment.