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

Let me begin by summarizing my broad view. The Eleventh District is showing some signs of stabilizing with modest job growth recently, which is better than the continued job losses at the national level. The real economy continues to soften at the national level, but consumer sentiment has improved. Spreads have narrowed, profits have turned up, oil prices have declined, and the stock market has rebounded. Looking only at the real economy, further easing seems warranted, but the timing might be bad now with the financial markets signaling that a rebound may be coming soon without additional stimulus. Moreover, the markets are not expecting further easing today, so the reaction to a surprise could well be perverse. Market participants might believe that the Fed knows something that they don’t.

Turning back to the Eleventh District, the economy appears to have bottomed out and is showing early and, I hope, sustainable signs of expanding at a sluggish pace. Texas has experienced positive employment growth over the last two quarters, which is better than the nation’s loss of jobs, as I indicated earlier. Job growth was at a 0.7 percent annual rate. Over the last two quarters, job gains have been concentrated in construction, financial services, education and health services and in the government sector. Despite very high energy prices over most of that period, the energy sector has been shedding jobs at a rapid clip. Though Texas has had positive job growth, our unemployment rate has risen sharply and is nearly a percentage point above the national rate.

A few bright spots are beginning to emerge, though. Our high-tech industry may finally be showing signs of life. Job losses there have slowed as profitability and orders are showing signs of improvement. On the positive side, drilling for natural gas has continued to register gains now that the energy industry is more confident that strong natural gas prices are not going to go away soon. On the bad news side, the demand for gas is outstripping the ability to bring on new production, and gas prices now are expected to remain well above historical norms for several years. Oil prices are expected to fall further, but energy prices overall will not fall proportionately because natural gas and oil prices are expected to be decoupled over the next few years. Another bright spot comes from the temporary employment industry in our area, which has experienced a job surge at an annual rate just under 12 percent in the first quarter, in contrast to what Michael just reported for the bigger picture. Finally, our Beige Book contacts report that retail, auto, and restaurant sales have begun to revive after being depressed during the war with Iraq.

On the negative side, the downsizing of airline operations is continuing, and further employment reductions are expected. The wage reductions of roughly 25 percent that airline employees are experiencing are adding to deflationary pressures in the high-tech sector as is the District.

Turning to the national economy, I’m inclined to agree that the staff forecast for the second half of the year is the most likely outcome. It has been six months since we’ve lowered rates but the real fed funds rate is where it was before the last rate cut. Monetary policy is less stimulative, and the economy is probably less sensitive to any Fed stimulus than it was a year ago. Although federal government stimulus is expected to increase in the near future, the political process may provide less stimulus than we’ve been anticipating. Further delayed clarity on exactly what will be contained in the fiscal package means that any spending that is sensitive to the tax code will likely continue to be deferred. In short, we may be getting a lot less stimulus from both monetary and fiscal policy than we think. In addition, the state and local fiscal situation only reinforces this conclusion.

As I look at the other downside risks to the economy, I’m increasingly concerned about the economy underperforming the Greenbook forecast. The outlook for economic growth in the rest of the world has been continually revised down for months on end. Also, while business balance sheets have undergone considerable repair, there’s a way to go before balance sheets are in line with the economic realities of the last couple of years. That applies to the broad swath of businesses, not just to the industries such as airlines and telecom that are undergoing enormous structural adjustments.

So overall I see the risks to the forecast as lying primarily on the downside. Given how low inflation has fallen and the possibility of a shortfall from current economic forecasts, I could support an easing in monetary policy at this meeting. But as I said earlier, financial markets are signaling better times ahead, and an easing today could unsettle the markets. So I think waiting is in order. I feel the risks are weighted to the downside, but I’d rather not say that by reintroducing the bias statement at today’s meeting.

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