President Poole, if we went back to June of last year and had this conversation, you would have said suppose we had forecast for the second half of the year what actually transpired. If the story was 6 percent GDP growth in the second half of last year, do you think the markets would possibly have forecast us not to be tightening until late 2004? That might have sounded far-fetched last June, but in fact that is exactly where we are right now.
There has been considerable convergence between our forecast and the market’s forecast. I take that to be in part because market participants have been surprised as well at the apparent capacity of this economy to grow without generating significant pressures on resource utilization and without generating significant pressures on price inflation. In fact, we view our forecast— that we could get to the middle of this year without tightening—as not unreasonable because, if we see some pickup in payroll employment and continued strong growth, we’re still going to be looking at an inflation situation that looks incredibly benign. Despite the fact that the dollar has gone down, the pass-through of that into import prices has been relatively modest, as we discussed on Monday at the pre-FOMC briefing. The indirect effects of the jump in energy prices that we’ve seen appear to us to be moderate, and they were quite modest previously. We’re seeing very little sign of pressures on the labor cost side either in nominal compensation or in unit labor costs, obviously, with the strength in productivity. So, we don’t think the funds rate path we have assumed is unreasonable; and in essence, at this point the difference between our path and the market’s path is about 50 basis points by the end of 2005. We think the market will continue to be surprised by a combination of strong growth in aggregate demand but with that being matched by considerable strength in aggregate supply. We’re expecting a continuation of the kind of convergence that we’ve seen over the last six months in their expectations toward ours.
Having said that, there’s tremendous uncertainty about how the markets will react to the data, whether or not our forecast will be right, or whether the market’s view of underlying economic developments will be correct. So, we feel pretty comfortable that we are putting on the table an outlook that is not far-fetched and in fact could be quite reasonable. And I take the behavior of financial markets over the last six months as some small evidence in support of our position and approach.