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

Thank you, Mr. Chairman. I’ve been trying to think of a term that best describes our District’s economy and the best I can come up with is “treading water.” I don’t have a sense that the economy is sinking, but I don’t see much forward momentum either.

Our latest monthly surveys on activity in the manufacturing, retailing, and nonretail service sectors in our District were conducted in mid-to-late April. They are not complete yet, but we have most of the results, and they indicate that both manufacturing and retailing are quite soft currently. Part of the weakness in retailing may have to do with the unusually cool and wet spring weather we’ve been having in our area. The results from the nonretail service sector survey—which covers trucking companies, business service firms, much of the tourist industry, and so forth—are a little better. They suggest a bit of firming in some of these industries, as I think I mentioned on the last conference call. The tourist industry along the coast, for example, seems to be doing better than might have been anticipated. But again, other than a couple of exceptions like that, there’s not a lot of forward momentum.

These more or less stationary conditions in our region I think mainly reflect both household and business attitudes about the near-term outlook. I would describe those attitudes as skeptical or still mixed, with a fair amount of lingering pessimism despite the early and successful conclusion of the war. A lot of people in our area seem to think that the sluggishness in activity is due primarily to the remaining slack in the economy that was created by the reversal of the boom of the late ’90s. They figure that it cannot easily be corrected by low interest rates or tax cuts but just has to be worked through—for lack of a better phrase—however long that takes. One bright side of this is that attitudes about the outlook could improve quite rapidly if people get a sense that this working-through process is nearing completion. In that regard, any upward bounce in activity that eventually does result from the successful completion of the war—and despite the lack of clear evidence now I think we could get something like that—could be helpful if it’s taken as a sign that this process is nearly complete.

Most of the recent data suggest that the national economy is also treading water. By all accounts real GDP continues to grow moderately; but hours worked are still contracting, and the output gap appears to be widening further. In this context, to me the most striking recent development is the behavior of core inflation—a point a lot of other people have commented on already. I think the Greenbook put it very well, David, noting that in the last few months core inflation has entered a range that, given the measurement bias, really approaches zero inflation. A deceleration of inflation would have been regarded as desirable in the past; a lot of us thought that. But as the Chairman aptly put it last week, today substantial further disinflation would be an unwelcome development. I thought that remark was something of watershed, Mr. Chairman, because it confirmed very nicely that we truly are conducting monetary policy in an environment of price stability now, with risks on both sides of the coin going forward. Specifically, just as we faced the risk of rising inflation momentum in the past—and undoubtedly will again in the future—we now also face a meaningful risk that disinflation may acquire momentum and create deflation and a zero bound problem, with adverse consequences for the economy and for monetary policy.

With this in mind, the crucial question today, as I see it, is whether the recent further actual disinflation indicates that the risk of growing disinflationary momentum has now reached the point where we should act to preempt it. I’ve struggled a great deal with that question, and the deflation exercise in the Greenbook didn’t raise my comfort level a whole lot, David. I think it’s an exceptionally close call. But on balance, recent developments suggest to me that we’re not quite at the point where we need to act. As others have noted, the real funds rate is at or near zero and has been in the vicinity of zero for some time. Oil prices are falling, the stock market seems to be strengthening, profits appear to be rising again, credit spreads are continuing to improve, and the Greenbook is projecting substantial additional fiscal stimulus in coming quarters. Given these developments, I think we can prudently wait a little longer before acting and try to get a clearer idea of whether the economy is going to get a postwar boost or not. I don’t think we really know the answer to that yet. Waiting would also have the advantage of ensuring that we won’t undercut any revived optimism that the end of war might stimulate in the near term.

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