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

Thank you, Mr. Chairman. The Second District economy has shown scattered signs of improvement since my last report. But generally most sectors can still be characterized as weak. Employment and labor force indicators have been mixed with little change overall, as labor markets have remained slack. Manufacturers note some improvement in business conditions in recent weeks and are increasingly optimistic about the near-term outlook. Retailers reports that sales remained below plan in March but picked up somewhat in early April. Based on two separate surveys, consumer confidence has improved moderately since the last report. Housing permits weakened in the first quarter as the slowdown in single-family construction more than offset increases in apartment construction. Sales of existing single-family homes and apartments slowed noticeably, though selling prices have remained firm except at the high end of the market. Demand for office space in the New York City area continued to slacken in the first quarter, and District banks reported increased demand for home mortgages and steady-to-lower delinquency rates.

I find myself so in agreement with Governor Kohn’s remarks that I would just like to add some very small, almost footnotes to them. On the geopolitical uncertainty, I’ve argued at previous meetings that the Middle East is basically an unstable place and, therefore, that the geopolitical uncertainty is likely to continue but will be different. As for the likelihood of Iraq stabilizing into a model democracy, it could well happen; but if it does, it will happen slowly and there will be many bumps along the road. The possibility of instability in some of Iraq’s neighboring countries is quite high, and therefore I think it is likely that we will live in an environment of continuing geopolitical uncertainty. What one doesn’t know is whether the American people and those in other nations will react the way they did to terrorism—that is, to accept it as a fact of life and learn to live a reasonably normal life with normal economic reactions despite that reality.

As for risk aversion, I think it is likely to continue. But risk aversion is a psychological condition and is rather similar to an oversold trading position. If half a dozen of the most respected business executives in America suddenly turn openly optimistic, I think the possibility of others following is quite high. Whether that will happen, I don’t know. But the nature of the American society is that one would expect that to happen, with the timing being difficult to guess.

I think the main thing we have to cope with today is the reality of the marketplace. After a period of substantial volatility in the equity market, the recent upturn in the market impresses me as something other than just an extra bit of volatility. It has at least the makings of a breakout, but it is a rather unstable and very uncertain one. In the debt markets, as has been discussed, spreads have narrowed, but they’re still broad by historical standards, and that too is a rather tentative movement. The dollar weakness has continued; today the euro is at about 113.50. I think we have to be careful about the move into the euro as the currency of choice, with growing speculative long positions in the euro. That could turn into something that would not be very pretty to watch—that is, a dollar that is weakening far beyond what the macroeconomic fundamentals would indicate.

But last and perhaps far more important, there is absolutely no sense in the marketplace that we are going to change policy today. Even though a week ago I thought that changing policy today would have quite a lot to say for it, I believe it would be very, very dangerous to surprise the market in light of the precariousness of its recent strengthening. I think the immediate reaction of market observers would be to ask, What does the Fed know that we don’t know? The answer to that is “nothing.” So it seems to me that the prudent central banker would think very seriously and decide that policy should stay where it is. Thank you.

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