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

Thank you, Mr. Chairman. Developments in the Second District seem to be tracking those in the nation as a whole. We are strong where the national economy is strong. The Empire survey shows very high levels of business confidence, orders, shipments, and most things we measure, but the slope of the increase has flattened. Employment is still soft, perhaps a bit softer than it has been nationally. In our neighborhood, however, inflation seems to be running somewhat ahead of the national numbers, and our survey shows further increases in prices received and paid as well as higher expectations for both six months out.

Developments in the national economy since our last meeting support growing comfort in the outlook. The expansion seems more broad-based, with strength continuing in household spending and housing, and capital spending growing at reasonably rapid rates. Exports are performing well, consumer and business confidence are at quite high levels, and business caution has receded. The increased confidence in the sustainability of the expansion seems justified. Although we have a somewhat softer outlook for growth than the central tendency of the forecasts around this table, we share the general expectation that the payroll number should begin to show more rapid growth. The fall in claims, increasing part-time employment, and surveys of enterprise plans support this view. With demand growth strong, it would be surprising if we did not see more-rapid growth in hiring. Inflation, of course, is still very low. It is hard to find evidence yet of a change to the trajectory of a gradual downward drift in the rate of increase in core inflation.

Looking outside the United States, demand looks stronger and the news is generally encouraging. Still, the major economies are growing at rates substantially short of the U.S. pace. Policy in Europe and Japan may be getting better, but it doesn’t look too impressive when judged against the scale of the structural challenges. Fundamentals in emerging-market economies have improved, although perhaps not to the extent implied by the very low spreads to Treasuries. The broad consensus in favor of open trade policies seems more fragile these days despite the strength and breadth of the global recovery.

Overall, we believe that the U.S. economy is likely to continue to expand at a pace somewhat above our estimate of potential growth and will do so for the next several quarters. We believe that the range of uncertainty around this outlook has narrowed, but the probability of a stronger outcome may now exceed that of a weaker outcome, and this is a good thing. We expect inflation to stay low. There is some chance that inflation will decelerate further in the near term, but we can afford to be less worried about this risk given the apparent strength in demand. We now face a rising, if still small, probability that inflation will find its floor and begin to move modestly higher. The critical question, of course, is whether this will happen even if the apparent slack in the economy is absorbed only gradually.

This is a reasonably encouraging outlook, but it is probably healthy to acknowledge the sources of uncertainty and risk. The sources of uncertainty and risk are not new, but they are compelling still. The apparent strength of productivity growth supports the view that the microeconomic fundamentals of the U.S. economy are exceptionally strong relative both to its recent path and to the performance of other major economies. There is a lot, though, that we do not know about these dynamics and what they mean for employment and inflation, given our forecast for growth, and what in turn the implications of these dynamics are and how soon it will be appropriate for us to adjust policy. Caution here argues for giving ourselves more flexibility than our statement now provides, with a possibility that we may need to move sooner than we had thought and than the market now expects.

The scale of the broader imbalances in the economy—the low level of private savings, the substantial deterioration of the structural fiscal position, and the size of the external imbalance—remains a source of considerable risk. Even if the long-run sustainable level of U.S. growth is higher than conventionally thought, the factors necessary to bring these imbalances down to more comfortable levels are not now in place, and they do not appear to be in prospect. The fact that the dollar decline has been so benign should not be too reassuring, given the forces at work to slow it and to support official foreign demand for U.S. fixed-income assets and given the extent of the further adjustment in the dollar that may still be required. These risks don’t alter the balance for monetary policy now, but they may suggest that we need to be more attentive to the downside of giving the markets too much confidence that policy will remain on hold indefinitely.

And finally, of course, financial conditions are now very accommodative. Asset markets, credit spreads, risk premiums, and measures of volatility have all moved a long way toward a very benign view of the world. These factors make the fundamentals look better than they probably are. They make us more vulnerable to the buildup of distortions in financial markets that can only be unwound with some drama. They amplify the force provided by our already exceptionally accommodative policy stance. This merits attention, and at the margin it probably also reinforces the case for recalibrating our signal a bit to position us more comfortably to deal with the possibility that we may see a case for moving policy before the end of the year. This is not a call to arms or a call to action. This is meant just to be a case—to borrow yesterday’s formulation—for a gentle, gradual evolution [laughter] in how we frame the forward-looking signal in our statement. Thank you.

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