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

Let me add two points to the discussion. The first is on fiscal policy. This is going to be a very key week with respect to fiscal policy because the tax writing committees of both the House and the Senate meet this week. It seems to many that the momentum has shifted to the House, in part because the House committee chairman has exhibited perhaps the strongest thought leadership and maybe the most sagacious political leadership as well. I must say that he’s also dealing with the most friendly and accommodative budget restraints.

The Senate probably will meet also and may make an effort to cram the President’s dividend exclusion proposal into the legislation in some way within the limitations of their budget restraints. It seems likely that, instead of the President’s proposal with respect to dividends, they may come out with a cap on the tax rate on dividends and a drop in the tax rate on capital gains. Many in the Congress will find that more palatable than the dividend exclusion, just in terms of the ability to explain what they are doing. That would also then clear the way for the acceleration of the previously enacted tax cuts. I might note that last Wednesday the Chairman, in response to questions by the House Banking Committee, made a real effort to try to distinguish between tax cuts that stimulate capital spending and tax cuts that stimulate consumption. But I would say that we don’t see any of that discussion being reflected in the deliberations on either side.

In trying to read the political tea leaves, it seems as if people have a sense that the White House would be willing to accept a tax package with any number north of $350 billion—and if it could be north of $450 billion, that would be all the better. But we will know more a week from now with respect to tax policy than we know today.

My other point relates to the banking industry, where interestingly there is little change from what I reported at the last two meetings. We saw throughout all of 2002 a gradual decline in asset quality, but in 2003 it has remained stable. On the consumer side, there has been no postwar bounce, in part because there was no wartime decline of any significant extent in the consumer area. We are hearing anecdotally—from members of our Federal Advisory Council at its meeting last Friday and from a number of other people—the first hints of plans for expansion or indications that business people think the time might be right to expand. It seems to me likely that this is another area where there’s a difference between the data we can measure and the anecdotal information we are picking up, which is ex parte the numbers we can read.

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