This was in response to my request that the Greenbook forecast be conditioned on the market’s federal funds rate assumption rather than the Greenbook assumption. It’s a very good memo, and I think that it explores the issues in a very fine fashion. I’ll just repeat my summary that I think it presents a case for my position.
I want to pursue that same issue in the context of the current period by thinking about where the economy is going to be at the time of our June meeting. Let’s suppose that the Greenbook forecast comes true between now and then. What we would be looking at in the June meeting is five months of data on payroll employment with gains averaging 200,000 a month. That is a million more jobs—5 x 200,000. So we’d have a million more jobs, some depreciation of the dollar, and the prospect that by the end of the year the gap will be almost entirely closed. Yet we have a forecast that is built on the assumption of no response in the federal funds rate before roughly a year from now. Now, obviously, the market’s funds rate forecast has moved back and forth. The December employment number itself made quite a difference in the market’s view. But if we get a series of monthly increases in payroll employment averaging 200,000, quite frankly I find it hard to believe that the market is not going to be forecasting some policy response. I think that scenario fits in nicely with the subject of the Stockton and Wilcox memorandum, and I would like you to respond to that.